At the heart of insolvency law lies a paradox – the longer a process drags on, the less there is left to salvage. Under the current framework, once the Committee of Creditors (CoC) selects a successful resolution plan, it must secure final approval from the Adjudicating Authority (AA). This stage – meant to ensure compliance with the Insolvency and Bankruptcy Code, 2016 (IBC) and fairness in distribution – often becomes a bottleneck. Creditor disputes, regulatory approvals, and stakeholder objections cause delays, leading to operational uncertainty and financial erosion. As a result, Resolution Applicants (RAs) bid conservatively, factoring these risks, ultimately driving down recoveries.
To break this deadlock, the Insolvency and Bankruptcy Board of India (IBBI) has proposed a two-stage approval process (See: discussion paper of February 4, 2025). Instead of waiting for a final, all-encompassing clearance, the CoC would be empowered to request the AA to approve resolution plans in phases. In Stage 1, the financial bid and basic implementation framework would be cleared, allowing the successful RA to take control of the corporate debtor and commence execution. Stage 2 would then address inter-creditor disputes, distribution issues, and any remaining contested aspects – without delaying the takeover.
The aim is to minimize value erosion, reduce uncertainty, and encourage competitive bidding by eliminating the risks that deter serious investors. This proposal draws from decisions such as Essar Steel India Ltd. v. Satish Kumar Gupta (2019), where the Supreme Court reinforced the primacy of the CoC’s commercial wisdom, limiting judicial interference to compliance scrutiny. By allowing early execution while reserving creditor disputes for later adjudication, the IBBI seeks to ensure swifter and more efficient resolution process.
However, the critical question remains: does this reform truly streamline resolution, or does it create new risks? By splitting approval, does it effectively insulate successful RAs from post-plan liabilities while leaving creditors entangled in prolonged legal battles? In seeking efficiency, does the system risk enabling strategic bidders who might exploit post-takeover renegotiations? These concerns lie at the core of the debate on whether this proposal enhances resolution efficacy or merely shifts the problem elsewhere.
The proposal’s promise of efficiency rests on a precarious assumption – that by allowing the successful RA to take early control, value erosion will be stemmed, and resolution will be expedited. But in doing so, it creates a fundamental asymmetry. The successful RA gains operational certainty while creditors remain entangled in disputes over distribution. If the core financial bargain is left unresolved while control shifts hands, does this not risk turning the resolution process into a battle fought in halves – one side assured of its gains, the other left to fight for scraps? The creditors who determined commercial viability may find themselves sidelined in the very plan they approved.
This imbalance introduces a moral hazard. When a successful RA knows it will take over early, what stops it from bidding aggressively, factoring in the ability to renegotiate terms under more favourable conditions? If inter-creditor disputes persist post-takeover, the successful RA has no real stake in their resolution but can still benefit from delays, potentially using them to dilute commitments or adjust cash outflows.
Economist John Moore’s theory of ‘Incomplete Contracts’ explains why this is a structural risk – when agreements leave contingencies open, parties behave opportunistically. In this case, creditors, realizing they have lost leverage after ceding control, may resort to ‘holding-up’ behavior – prolonging disputes or seeking additional settlements, further distorting the resolution process.
This creates a dangerous incentive of undervaluation. If bidders anticipate future renegotiation windows, they may temper their bids upfront, leading to suboptimal price discovery. The irony is that what is meant to encourage better value realization may instead suppress it. Value maximization, IBC’s guiding principle, cannot be an afterthought to expedience.
This tension between efficiency and fairness in insolvency resolution is not uniquely Indian. The United States’ Chapter 11 framework, often lauded for its debtor-in-possession model, provides a crucial lesson that speed cannot come at the cost of legal certainty. The United Kingdom’s pre-pack administration, while efficient in transferring control, has faced scrutiny for leaving creditors in prolonged disputes over recoveries. Both models demonstrate that premature asset transfers, without resolving underlying creditor conflicts, can create value asymmetries – benefitting acquirers while sidelining those with legitimate claims.
Closer home, IBBI’s own data paints a sobering picture. As of 2024, over 65 per cent of approved resolution plans had faced post-approval litigation, leading to an average 9-12-month delay in implementation. More troublingly, in nearly 30 per cent of cases, resolution applicants sought modifications to their bids post-approval, citing unforeseen risks – an unmistakable sign of strategic bidding behavior. If the two-stage approval process inadvertently legitimizes such renegotiations, it may create a system where the highest bidder is not necessarily the most committed, but merely the most strategic.
Markets thrive on certainty, yet insolvency resolution remains a delicate balance between speed and fairness. The proposed reform aims to accelerate takeovers, but without safeguards, it risks tilting the process in favour of successful RAs at the cost of creditors. It should be seen that agreements are honoured post-bidding. Successful RAs must be bound to final distribution outcomes, preventing opportunistic renegotiations.
Data from insolvency cases indicate that nearly 60 per cent of approved plans face post-approval litigation, delaying implementation and further eroding value. Therefore, allowing successful RAs early control without clear financial obligations may reduce initial uncertainty but could aggravate downstream disputes. Therefore, a regulatory framework that ensures successful RAs adhere to financial commitments is imperative.
Further, judicial oversight cannot be sacrificed for efficiency. Expedited takeovers should not create an arbitrage opportunity where SRAs benefit while creditors remain locked in drawn-out disputes. A measured approach is needed – escrow-backed commitments, mechanisms ensuring financial discipline, and calibrated AA intervention to prevent strategic renegotiations. The IBBI’s discussion paper is a step in the right direction, but it requires refinement in consultation with all stakeholders to ensure that once a resolution plan is approved, the process is truly final. Speed is necessary, but only if it delivers certainty – not another cycle of litigation and erosion.
[The writer is an advocate practicing at Delhi High Court and Editor, Guide to the IBC (3rd Edition), Wadhwa Bros.]