"ED Flags IBC Fraud, Collusive Haircuts as Priority Enforcement Areas"
Haircut
the difference between a creditor's admitted claim and the amount actually recovered through a resolution plan
Section 29A
IBC provision barring defaulting promoters and related parties from bidding for their own company during insolvency
The Insolvency and Bankruptcy Code (IBC), 2016 was a landmark reform in India's credit ecosystem. Before its enactment, lenders had to navigate a fragmented set of recovery mechanisms: Debt Recovery Tribunals (DRTs), SARFAESI Act proceedings, and Lok Adalats. Each had low recovery rates and long timelines. The IBC consolidated these into a single, time-bound framework. It created the National Company Law Tribunal (NCLT) as the adjudicating authority and established the Insolvency and Bankruptcy Board of India (IBBI) as the regulator.
The Code operates on a clear hierarchy: resolution is preferred over liquidation, and liquidation is preferred over indefinite debt-limbo. This reflects a deliberate policy choice, keeping productive assets alive is better for the economy than breaking them up for scrap value. The Committee of Creditors (CoC), composed of financial creditors, holds the central decision-making power in any resolution process. It approves or rejects resolution plans. A parallel mechanism, the Inter-Creditor Agreement (ICA) framework, allows consortium lenders to coordinate outside formal insolvency proceedings for faster resolution of stressed assets of ₹50 crore or more, both the ICA and the CoC reflect the same underlying logic: coordinated creditor action produces better outcomes than fragmented individual recovery efforts.
Over the years, the IBC has been amended multiple times to address procedural gaps, expand creditor definitions, and refine timelines. The Standing Committee on Finance conducted a comprehensive review of the IBC, bringing renewed attention to the recovery question. Despite its design strengths, the Code has developed serious vulnerabilities: collusive resolution plans, manipulation of the CoC, and the misuse of statutory immunity provisions to escape criminal prosecution.
A haircut in insolvency refers to the gap between what a creditor is owed (the admitted claim) and what the creditor actually receives through the resolution plan. If a bank is owed ₹100 crore and receives ₹30 crore, the haircut is 70%. The IBC process begins when a creditor approaches the NCLT to initiate insolvency proceedings. At least two registered valuers determine two key figures: the fair value (estimated value of assets in their current condition) and the liquidation value (what assets would fetch in a forced sale). Resolution plans must offer creditors at least the liquidation value. Critics argue this systematically undervalues stressed assets because enterprise value, what the business is worth as a going concern, is typically higher than liquidation value.
Section 29A of the IBC is a critical safeguard. It prohibits defaulting promoters, wilful defaulters, and connected or related parties from bidding for their own company during insolvency. The provision was introduced specifically to prevent the original promoters, who caused the default, from re-acquiring the same assets at a steep discount through the resolution process. …
What was the purpose of the Inter-Creditor Agreement signed by the Indian banks and financial institutions recently?
Which of the following best describes the purpose of Section 29A of the Insolvency and Bankruptcy Code, 2016?
Consider the following statements regarding the Insolvency and Bankruptcy Code (IBC), 2016:
1.Section 29A prohibits defaulting promoters and wilful defaulters from submitting a resolution plan for their own company.
2.Section 14 provides immunity to a company's assets after a new resolution applicant takes over.
3.Section 32A provides for a moratorium on all legal proceedings once insolvency is admitted.
4.The IBBI is the regulator under the IBC, while the NCLT is the adjudicating authority.
How many of the above statements are correct?
With reference to creditor recovery under various stressed-asset resolution mechanisms in India, which of the following is the correct ascending order of average recovery rates?
1.Lok Adalats
2.Debt Recovery Tribunals (DRTs)
3.SARFAESI Act
4.Insolvency and Bankruptcy Code (IBC)
Consider the following statements regarding the Inter-Creditor Agreement (ICA) framework in India:
1.It allows consortium lenders to resolve stressed assets outside formal insolvency proceedings under the IBC.
2.It applies to stressed assets of ₹50 crore or more under consortium lending.
3.It is administered by the Insolvency and Bankruptcy Board of India (IBBI).
Which of the statements given above is/are correct?
Assertion (A): The Insolvency and Bankruptcy Code, 2016 provides that once a resolution plan is approved with a new, unrelated resolution applicant, the company's assets receive immunity from attachment under criminal law.
Reason (R): This immunity is intended to encourage genuine resolution applicants to bid for stressed companies without inheriting the legal liabilities of the previous management.
Which of the following is correct?
Want the full note, Prelims Facts & MCQ answers?
Create a free account — takes less than a minute.
Create free account