Out-Of-Court Mechanism Proposed In Bankruptcy Law Amendment Bill
Finance Minister Nirmala Sitharaman has proposed an "out-of-court initiation mechanism" for genuine business failures in the Insolvency and Bankruptcy Code (Amendment) Bill, 2025.
The main objective behind introducing this Bill is to amend the law to improve its operation, enhance its effectiveness, clarify its original intent, and incorporate novel concepts. To incorporate these changes, new provisions have been inserted in the proposed law for the effective implementation of the Code.
The Bill categorically states that, "The proposed amendments aim to reduce delays, maximise value for all stakeholders, and improve governance of all processes under the Code. They seek to modify existing provisions to better align with the overall objectives of the Code and to introduce new provisions that follow global best practices for resolving insolvency."
For the first time, "the proposed legislation introduces a new 'creditor-initiated insolvency resolution process' with an out-of-court initiation mechanism for genuine business failures to facilitate faster and more cost-effective insolvency resolution, with minimal business disruption".
It is expected to ease the burden on the judicial systems, promote ease of doing business, and improve access to credit.
The Insolvency and Bankruptcy Code (Amendment) Bill also has a provision for two new frameworks - "group insolvency" and "cross-border insolvency".
According to the text of the proposed legislation, the group insolvency framework seeks to efficiently resolve insolvencies involving complex corporate group structures, minimising value destruction caused by fragmented proceedings and maximising value for creditors through coordinated decision-making.
"The cross-border insolvency framework seeks to lay the foundation for protecting stakeholder interests in domestic and foreign proceedings, promoting investor confidence, and aligning domestic practices with international best practices. This will also pave the way for improved recognition of Indian insolvency proceedings in other jurisdictions," the text reads.
The decision to amend The Insolvency and Bankruptcy Code, 2016 followed extensive consultation with key stakeholders. A colloquium was organized with stakeholders way back in November, 2022, followed by deliberations in the Insolvency Law Committee in January, 2023.
Later, the Government issued a discussion paper inviting public comments on the proposed changes to the Code. The key amendments proposed in the draft legislation have been included after a thorough examination of the comments received from the public and stakeholders, so as to incorporate the global best practices for resolving insolvency.
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