Decoding the IBC Amendment Bill, 2025 - Key reforms and Implications for Stakeholders

The Insolvency and Bankruptcy Code (IBC), 2016 has been one of India’s most significant economic reforms, transforming how corporate distress and debt recovery are handled. However, nearly a decade after its enactment, persistent challenges such as delayed resolutions, conflicting judicial interpretations, and growing creditor disputes have hindered its effectiveness.

To address these gaps, the government has recently introduced the IBC Amendment Bill, 2025 in the Lok Sabha in August 2025. The proposed amendments aim to speed up resolution timelines, reduce litigation, clarify legal ambiguities, and modernize insolvency processes to align India with global best practices. The reforms are not mere cosmetic tweaks but they represent structural overhauls intended to strengthen creditor confidence, reduce delays, and ensure better value realization for all stakeholders.

Need for Amendment

Despite its successes, the IBC regime faced multiple pain points:

• Delays in case admissions and resolutions: Cases often lingered far beyond the statutory 330-day limit due to NCLT backlogs.

• Conflicting judicial rulings: Cases like Rainbow Papers which disrupted the established priority of creditors.

• Inefficiencies in asset recovery: Liquidation recoveries remained low, and piecemeal sales lacked clarity.

• Limited frameworks for complex cases: Group insolvency, cross-border disputes, and guarantor asset claims were inadequately addressed.

• Misuse of provisions: Frivolous filings and repetitive litigation often clogged the system.

The Amendment Bill seeks to plug these gaps by offering clarity where courts have diverged and introducing innovative mechanisms like creditor-led insolvency, group insolvency, and digital integration.

Key Highlights of the IBC Amendment Bill, 2025

1. Clarifying Security Interests and Government Dues

One of the most significant reforms is the explicit clarification of “security interest.” The Bill states that security interests arise only from mutual agreements and not automatically under any statute. The Hon’ble Supreme Court in the Rainbow Papers case, held that government dues (like tax arrears) could be treated as secured debts. This interpretation disrupted the waterfall mechanism under Section 53, placing government claims above other secured creditors. The amendment restores the intended order of priority, ensuring secured creditors like banks and financial institutions remain senior claimants. This move is widely welcomed by lenders and investors, as it preserves credit market stability and reduces uncertainty in recoveries.

The landmark Supreme Court decision in State Tax Officer v. Rainbow Papers Ltd. (2022) created significant confusion in the insolvency framework, especially concerning the priority of statutory dues vis-à-vis secured creditors. In this judgment, the Court held that government dues such as GST could qualify as 'secured debts' under Section 3(30) of the IBC. This interpretation effectively elevated statutory dues to the same level as contractual secured creditors, disrupting the established waterfall mechanism under Section 53 of the IBC. As a result, financial creditors faced increased uncertainty regarding recovery, and it threatened the stability of the secured credit market. The IBC Amendment Bill, 2025 addresses this ambiguity by introducing a clear explanation under Section 3(30), stating that a 'security interest' arises only from a mutual agreement between parties and cannot be automatically conferred by statutory provisions. This legislative clarification restores the original intent of the IBC, to prioritize secured creditors over government dues in the distribution of liquidation proceeds. By neutralizing the effect of the Rainbow Papers judgment, the Amendment Bill safeguards creditor rights, enhances market confidence, and ensures consistency and predictability in insolvency resolutions.

2. Group Insolvency Framework

One of the most notable features of the Bill is the introduction of a formal group insolvency framework. Under the new provisions, multiple companies belonging to the same corporate group can undergo coordinated insolvency proceedings. The group insolvency framework seeks to address the complexities of multi-entity corporate structures, minimising value erosion from fragmented proceedings and enabling creditors to benefit from coordinated decision-making. The Bill proposes that the central government may prescribe the manner and conditions for handling insolvency proceedings against two or more corporate debtors within a group. This approach prevents the loss of value that often occurs when related companies face fragmented proceedings in different tribunals, and it also ensures better coordination among creditors. The Government will be empowered to define the procedures, which could include forming a joint committee of creditors, appointing a common insolvency professional, or even hearing related cases together before a single bench. This mechanism is expected to be useful in cases such as Gensol and BluSmart, which belong to the same corporate group, by saving both costs and time. (Jurisdiction) positive and negative

3. Cross-Border Insolvency Provisions

Given the growing global footprint of Indian companies, the bill proposes a robust cross-border insolvency mechanism. These provisions aim to recognise and cooperate with foreign insolvency processes, helping recover overseas assets and protect the interests of stakeholders both inside and outside India. The cross-border insolvency provisions, for which the government will notify rules, aim to protect stakeholder interests in both domestic and foreign proceedings, boost investor confidence, and align India’s framework with international best practices. The Government may also designate dedicated benches to deal with such cases, and detailed rules will be prescribed for matters involving foreign creditors or assets abroad.

4. Out of Court Insolvency Initiation

To provide a faster, less adversarial method of resolution, the Bill introduces out of court initiation of insolvency by creditors holding at least 55% of the debt. The Bill has proposed an out of court initiation mechanism for genuine business failures to facilitate faster and more cost-effective insolvency resolution, with minimal business disruption as part of a creditor-initiated insolvency resolution process (CIIRP) or the pre-packaged resolution process for large companies.

This process will be overseen by a resolution professional and can reduce both time and cost. If no resolution is achieved within 150 days (extendable by 45 days), the matter may move into the traditional in-court process. (prepackaged insolvency impact)

5. Faster Admission of Insolvency Applications

Under Sections 7, 9, and 10, the Bill mandates that the National Company Law Tribunal (NCLT) must admit or reject insolvency applications within 14 days. Previously, applications often took months to be processed, defeating IBC’s time-bound mandate. Delayed admissions caused cascading delays in forming the Committee of Creditors (CoC) and initiating resolution processes. By enforcing a strict 14-day timeline, the Bill ensures faster initiation of CIRP and promotes predictability in the insolvency process.

6. Deterring Frivolous and Vexatious Litigation

To reduce misuse of insolvency proceedings, the Bill introduces stringent penalties, New Section 64A aims to impose penalties up to ₹2 crore for filing frivolous CIRP applications. Enhanced fines under Section 235A, up to ₹5 crore or three times the loss caused, whichever is higher. These proposed amendments aim to discourages debtors from using insolvency as a delay tactic, reduce strategic filings by operational creditors seeking to pressure companies and free up judicial bandwidth at the NCLT.

7. Protecting Dissenting Creditors

Under the current framework, dissenting financial creditors sometimes held up resolution plans by seeking higher payouts, creating deadlocks. The Bill amends Section 30 to specify that dissenting creditors will receive whichever is lower:

- Their entitlement under liquidation value, or

- Their share under the approved resolution plan.

This change prevents dissenters from leveraging higher liquidation expectations to block viable plans, ensuring faster consensus within the CoC.

8. Inclusion of Personal Guarantors’ Assets

The Bill strengthens recovery prospects for lenders by explicitly allowing creditors to tap into the personal guarantors’ assets as part of the corporate resolution plan. This provision closes an earlier gap in enforcement and ensures that personal guarantees given by promoters or directors have tangible consequences. (Resolution plan of the corporate debtor?)

9. Expanded Definition for Service Providers and New Legal Terms

The definition of “service provider” under the IBC is expanded to include a wider range of professionals and entities engaged in insolvency processes, ensuring comprehensive regulation. New legal terms such as “avoidance transaction” and “fraudulent/wrongful trading” are clearly defined to standardise interpretation and enforcement.

10. Calibration of Voting Rights

To ensure fairer decision making in the Committee of Creditors (CoC), the Bill proposes that related party debt be excluded when calculating voting shares. This reduces the risk of promoters influencing creditor voting through related entities.

11. Pre-Packaged Insolvency for Large Firms

Pre-packaged insolvency is a faster, hybrid restructuring process earlier available only to MSMEs will now be accessible to larger corporations. This enables companies to negotiate and agree on a resolution plan with creditors before formally entering the insolvency process, reducing value erosion.

Conclusion

The IBC Amendment Bill 2025 is one of the most substantive reforms to the insolvency regime since the Code’s introduction in 2016. To avoid bias, the Bill has even proposed that Corporate Debtors to lose the right to nominate an Interim Resolution Professional. By addressing long-standing procedural bottlenecks, reducing litigation triggers, and introducing mechanisms for complex corporate structures and cross-border situations, the Bill promises a faster, more transparent, and creditor-friendly system. If passed in its current form, it could significantly boost recovery rates, improve investor confidence, and align India’s insolvency framework more closely with international norms.

The article was authored by Ms. Sanskruti Jinwal (Associate) and Ms. Yashodhara Burmon Roy (Principal Associate)