360° UPSC Mains Analysis

Bankruptcy and insolvency is listed under Entry 9 of List III (Concurrent List) of the Seventh Schedule of the Constitution of India. This grants both the Parliament and State Legislatures the power to legislate on the subject. However, under Article 254, the central Insolvency and Bankruptcy Code, 2016, and its amendments prevail over any conflicting state laws, ensuring a uniform national framework for corporate debt resolution.

An efficient insolvency framework enhances India's attractiveness as a destination for Foreign Direct Investment (FDI) and foreign portfolio flows by offering robust creditor protection. It boosts investor confidence among global distressed asset funds and multinational lenders, improving the capital account balance. Faster resolution of domestic manufacturing firms also prevents prolonged disruptions in export-oriented supply chains.

The operationalisation of the Insolvency and Bankruptcy Code (Amendment) Act, 2026, is expected to improve the credit environment by accelerating capital reallocation and reducing the average resolution time, which rose to 764 days between April and December 2025. By prioritizing secured creditors over government dues under the Section 53 waterfall mechanism, it enhances recovery rates for banks, potentially lowering the cost of capital and reducing non-performing assets (NPAs) in the banking sector. This strengthens financial stability and supports long-term GDP growth by unlocking capital tied up in stressed assets.

The banking and financial services sector (tertiary sector) will benefit directly from higher recovery rates and faster resolution of stressed assets. Real estate and manufacturing industries (secondary sector), which historically faced prolonged insolvency proceedings, will see quicker asset turnaround and reduced value erosion. The amendment to Section 7 of the Code ensures that proof of default is sufficient for admission, preventing debtors from delaying proceedings and providing greater investment certainty for institutional lenders.

Faster resolution of insolvent firms helps preserve the 'going concern' value of distressed enterprises, thereby protecting jobs and preventing sudden layoffs. Streamlining the liquidation process ensures quicker settlement of workmen's dues and outstanding wages. Additionally, resolving corporate distress efficiently stabilizes supply chains and prevents cascading business failures that impact MSME vendors.

The earliest formal insolvency laws in India were introduced during British rule, starting with the Indian Insolvency Act, 1848, followed by the Presidency-Towns Insolvency Act, 1909 (for Bombay, Calcutta, and Madras) and the Provincial Insolvency Act, 1920 (for the rest of India). These colonial-era laws primarily focused on individual insolvency and debt recovery rather than corporate restructuring, treating default as a quasi-criminal offense. This legacy left post-independence India with a fragmented, debtor-friendly legal regime that lacked a unified mechanism for corporate rehabilitation.

Post-independence, India attempted to address corporate distress through the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), which established the Board for Industrial and Financial Reconstruction (BIFR) but suffered from severe delays. To strengthen recovery for banks, the government enacted the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Recognizing the fragmentation of these laws, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to consolidate the framework into a single, time-bound, creditor-in-control mechanism. The framework has since evolved through multiple amendments, culminating in the Insolvency and Bankruptcy Code (Amendment) Act, 2026, which enforces strict timelines like the 14-day NCLT admission deadline.

The transition from the slow, debtor-friendly BIFR mechanism under SICA, 1985, to the creditor-led SARFAESI Act, 2002, parallels the 2026 amendment's shift to prioritize secured creditors over government dues. Historically, whenever debt recovery mechanisms in India faced severe judicial backlogs—such as the delays that plagued the Debt Recovery Tribunals (DRTs) established in 1993—the legislature intervened with statutory timelines and streamlined procedures to restore creditor confidence.

While not directly a product of the freedom struggle, the colonial-era insolvency laws (such as the 1909 and 1920 Acts) reflected the British Empire's priority to protect mercantile interests in presidency ports, a system of economic drain that nationalist leaders like Dadabhai Naoroji and G.K. Gokhale criticized for stifling indigenous enterprise.

Delayed insolvency resolutions and liquidation processes directly strip workers of their livelihoods, pushing families into sudden financial precarity and compromising their dignity. For thousands of homebuyers, stalled projects mean enduring severe mental agony, paying both home loan EMIs and house rent simultaneously, which severely erodes their quality of life and financial security.

The right to shelter is recognized as an integral part of the Right to Life under Article 21 of the Constitution of India, as affirmed by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019). Additionally, Article 43 (DPSP) mandates the State to secure a living wage and decent standard of life for workers, which is compromised when corporate liquidations leave workmen's dues unpaid.

As an administrator, the primary conflict lies between economic efficiency (ensuring rapid credit recovery to maintain banking sector health) and social equity (protecting the life savings of homebuyers and the unpaid wages of low-income workers). There is also a dilemma of prioritizing corporate debt resolution over public welfare, as lowering the priority of government dues directly reduces the state's fiscal capacity to fund essential social welfare schemes.

The prioritization of secured financial creditors over government dues and operational creditors under Section 53 of the Insolvency and Bankruptcy Code, 2016, disproportionately impacts vulnerable sections like workmen, employees, and middle-class homebuyers. When real estate or manufacturing firms face liquidation, these groups risk losing their hard-earned savings, wages, and livelihood security due to their lower standing in the waterfall mechanism.