Insolvency Resolution and Corporate Restructuring in India: A Comparative Analysis of Corporate Insolvency Resolution Process (CIRP) and Pre-Packaged Insolvency Resolution Process (PPIRP)

Policy Update
Anushree Khare

BACKGROUND

As the institutional economics framework of Daron Acemoglu and James A. Robinson posits, a country fails to grow as long as it is burdened with extractive institutions that support stagnation rather than entrepreneurship. For years, India’s corporate insolvency environment has been representative of the same kind of stasis. Thus, instead of being able to exit a state of distress through expeditious bankruptcy procedures, many borrowers became trapped within an overly complex web of regulatory delays while the enterprise lost value at every turn due to the fragmentation of various recovery courts.

Before 2016, there were multiple legislative frameworks that created system-wide inefficiencies for distressed companies in India. The major components of the legal structure included:

• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) 
• The Board for Industrial and Financial Reconstruction (BIFR)

Both of which were often used by insolvent borrowers to seek extended stays of execution on their debts.

• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI)

It provided for Debt Recovery Tribunals (DRTs) that immediately became clogged with procedural challenges to recoveries.

• The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI)

It gave secured creditors the power to enforce their security interest outside the courts. 

However, SARFAESI was limited to enforcing each loan separately and it did not provide for preserving the business entity as a whole.

The BLRC (2015) used the World Bank’s “Doing Business” data to document that under the previous bankruptcy law regime it took approximately 4.3 years to liquidate insolvent corporations, resulting in an average recovery of only 25.7% of creditors’ claims (i.e., 25.7 cents on the dollar). 

Thus, the overall framework or approach was essentially one where the debtor retained control of the operation of the business until the assets had been physically depleted.

Enactment of the IBC (2016)
The enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 marked a significant legislative shift. Driven by the Bankruptcy Law Reforms Committee (BLRC), the IBC provided for a comprehensive and unified framework for addressing both corporate and individual insolvency. 

While the IBBI oversees both areas of law, the Code creates a unique set of institutional mechanisms to deal with each area. The NCLT has jurisdiction over corporate insolvency while DRT has jurisdiction over individuals and partnerships, except personal guarantors to corporate debtors under Section 60(2).

The primary goal of the IBC was stated to be not merely a vehicle for recovering debt for individual lenders, but rather a structured process for promoting entrepreneurial activity, maximizing asset values of parties to the proceeding and balancing all interests while providing for timely resolution processes for corporations.

Vulnerability of MSMEs and birth of PPIRP (2021)
Although the Corporate Insolvency Resolution Process (CIRP) established a structured and formalized mechanism for dealing with insolvent large businesses, its rigid structures ultimately caused problems for MSMEs. 

MSMEs are characterized by intense operational knowledge being held within the organization itself with limited access to external capital markets and organizational value tied directly to the active participation of promoters. As such, when MSMEs entered into CIRP, they would frequently become subject to involuntary liquidation due to lack of sufficient financial resources to complete a restructuring process.

In order to prevent these types of results from occurring for small enterprises, the Ministry of Corporate Affairs introduced an informal and semi-formal method of restructuring entitled Pre-Packaged Insolvency Resolution Processes (“PPIRP”) through an amendment to the IBC in 2021. PPIRP is intended to allow small enterprises to utilize a non-binding negotiation with creditors similar to a workout process, while at same time utilizing a court-ordered restructuring plan.

 FUNCTIONING 

The IBC’s institutional apparatus runs on two different models of operation:

•  The creditor-driven model (CIRP) 
• The debtor-driven model (PPIRP) 

Corporate Insolvency Resolution Process (CIRP)
A corporate insolvency resolution process (CIRP) begins when a payment default occurs that meets the statutory threshold ( ₹1 crore  to prevent frivolous filings). 

1. Trigger & Admission:
   1. An application is filed with the relevant National Company Law Tribunal (NCLT) bench by either one of the following parties:
      1. A financial creditor (Section 7)
      2. An operational creditor (Section 9)
      3. The corporate debtor itself (Section 10)
2. Management Displacement and Moratorium:
   1. Once admitted, Section 14 places all assets of the company into a temporary moratorium where no further asset transfers, contract cancellations, or debt collection can occur.
   2. Section 17 immediately removes the current board of directors and gives the Interim Resolution Professional (IRP) operational control of the company, placing the company into a full “creditor-in-control” mode.
3. Committee of Creditors (CoC) Primacy:
   1. As per Section 21, the Committee of Creditors (CoC), which is composed solely of financial creditors, has complete operational and strategic control over the business and its activities, including approval of capital expenditures and evaluation of proposed resolutions.
4. Statutory Time Frames:
   1. Under IBC Section 12, the CIRP has to be completed in 180 days with the possibility of a one-time extension of up to 90 days by the Adjudicating Authority.
   2. All extensions are limited by judicial delay exceptions and are capped at a maximum total of 330 days.
5. Plan Sanction:
   1. A Resolution Professional (RP) solicits Expressions of Interest (EoIs) and invites external bidders to submit their own resolution plans.
   2. When a bidder submits a proposal that receives a majority vote of the Committee of Creditors (minimum 66%) and complies with Section 30(2) requirements, it is sent to the NCLT for statutory approval under Section 31.
   3. Failure to approve the plan results in mandatory liquidation under Section 33.

Pre-Packaged Insolvency Resolution Process (PPIRP)
Pre-Packaged Insolvency Resolution Process (PPIRP) is contained within chapter III-A of the IBC and only applies to MSME corporations defined under the Micro, Small and Medium enterprises Development Act 2006.

1. Eligibility & Threshold: This process is available to MSME corporations who have defaulted on amounts between ₹10 lakh and ₹1crore.
2. Dual Stage Work-Flow (Informal to Formal): Prior to filing an application to the court, each corporate debtor develops a base resolution plan (BRP) with its financial creditors. There are specific regulatory requirements regarding what information must be included in the BRP. Specifically, there must be an approval by at least 66% of unrelated financial creditors, special resolution passed by members and shareholders (or a three-fourths partners’ vote) and formal declarations made to the government describing its affairs.
3. Debtor-in-Possession with Professional Oversight: Unlike CIRP, MSME companies remain in control of day-to-day business activity and continue operating as if they were solvent during this period. This provides some protection from operational collapse.
4. Swiss Challenge Protection Mechanism: The promoter’s BRP is presented to the Committee of Creditors, should the BRP not prejudice any claims of operational creditors, the COC may approve it outright. However, should the BRP prejudice any claims of operational creditors or is otherwise inadequate, the RP shall solicit bids from third party applicants using a Swiss Challenge mechanism to determine market clearing value.
5. Accelerated Timelines: All aspects of a pre-package insolvency resolution process must be concluded within 120 days of commencement of proceedings. The submission of approved plans to the court must occur within 90 days of such commencement.

PERFORMANCE 

Over time, the IBC has fundamentally reshaped credit discipline and debtor behavior across India’s capital markets. However, the results for different firm sizes show a stark contrast.

Table 1- Comparative Assessment of Corporate Insolvency Frameworks in India: Legacy Mechanisms vs. CIRP and PPIRP 

The Deterrent Effect & Credit Discipline
The IBC’s greatest commercial success is that it has achieved its goal in terms of behavioral deterrence rather than by providing a mechanism for court-ordered restructuring. 

By prohibiting defaulting promoters from submitting resolution plans to reacquire their stressed assets under section 29A, the lenders were given a credible threat of expropriation. As such, many lenders now regularly rely on this deterrent to recover their loans before they are formally admitted to insolvency proceedings under sections 7 or 9.

The Reality of Creditor Haircuts
Although there have been numerous procedural successes, post-admission CIRP performance indicates deep economic haircuts. The cumulative data provided by IBBI (in its September 2023 report on quarterly developments) shows that financial creditors have received about 31.6% of their admitted total claims with a mean aggregate loss of almost 68% while haircuts for those in mid-size or asset light resolutions are typically between 75-85%. 

Although the IBBI reports that resolutions provide returns in excess of 160% of the calculated Liquidation Value of these entities, this result is structurally skewed. Firms entering into CIRP are often admitted long after their assets have deteriorated to salvage levels.

Asset heavy sectors (such as Steel, Infrastructure and Heavy Manufacturing) have seen CIRP successfully transfer viable productive capacity to well capitalized strategic bidders. On the other hand, sectors which include real estate, EPC contracting and service verticals, have experienced poor recovery rates and as such, many CIRPs terminate in liquidations rather than the resurrection of enterprise. 

Asset-Heavy Firms (Tangible Investments): Tangible, high-asset investments will continue to retain their primary purpose or function regardless of how long the administrative body may remain inactive. Therefore, these types of tangible assets have the ability to be acquired by strategically-minded buyers at some point in time during months of tribunal delays.  

Service-Oriented Firms (Intangible & Working Capital Focus): On the other hand, within the service industry, retail, and real estate, value is embedded heavily into both the confidence of clients as well as the working capital cycle and goodwill related to human capital.  

Impact of Delays on Service Entities: As a result, prolonged moratoriums create an immediate reduction in an entity’s operational liquidity (i.e., cash flow), which causes a substantial loss of customers. This creates conditions that ultimately destroy the non-tangible goodwill that would allow the business to operate for the benefit of its stakeholders.

The PPIRP Underperformance Paradox
The Pre-Packaged Insolvency Resolution Process (PPIRP), which was introduced in 2021, has seen little usage. Only 34 applications have been submitted since the inception of the process, with only about a dozen accepted by an NCLT bench and fewer than ten resolution plans approved across all of India as of late 2023. 

The vast majority of Indian registered enterprises are small businesses. As such, there were high expectations among those in the institutional environment that small business owners and entrepreneurs would rapidly self-report and renegotiate their capital structure under Chapter III-A. However, informal debt restructuring for MSMEs continues via unstructured collateral enforcement pursuant to the SARFAESI Act, bilateral workouts, or business termination. 

EMERGING ISSUES 

The divergence between the statutory vision of value preservation and actual commercial outcomes stems from compounding institutional and behavioral failures.

Procedural Delays Cause Value Erosion

• The core economic principle behind the IBC was that every single day, each additional month a debtor languishes in bankruptcy causes value to degrade at an exponential rate.
• Each day, each additional week, each additional month a debtor remains in bankruptcy dissolves goodwill, generates increased costs associated with employing professionals to manage the case, and drives away customers and employees.
• The primary cause of such loss of value is the delays caused by administrative congestion at the NCLTs, as there are far fewer judges on benches than there are pending commercial cases.
• The timeframe required from when a debtor files a petition with the NCLT to receiving an admission order averages 468–650 days (approximately 15–21 months) according to Tribunal Pendency Data and IBBI, significantly exceeding the prescribed 14-day statutory timeline.
• This extended timeframe causes severe distress for the operational management of distressed corporate debtors and leads to substantial capital lock-down before restructuring can formally begin.
• Such lengthy delays provide ample opportunity for errant promoters to extract what little value remains in the entity.
• Interlocutory appeals filed by errant promoters before both the NCLAT and the Supreme Court continually breach the 330-day statutory limit, resulting in average resolution times exceeding 600 days and leaving creditors with worthless shell corporations.

Disproportionate Creditor Losses and Capital Misallocation

• The scale of creditor losses raises legitimate concerns regarding the commercial stewardship of Committees of Creditors.
• Public sector banks often prioritize immediate liquidation value or short-term cash recovery over potential equity-based restructuring plans that could generate higher risk-adjusted returns over the long term.
• The IBC has functioned mainly as a debt-structuring tool rather than a mechanism for working capital restructuring to enhance operational efficiency in rescued entities.
• Debt write-downs executed without viable operational reorganizations fail to resolve root causes (operational inefficiencies and liquidity shortages), leaving distressed businesses commercially uncompetitive.

Operational Creditor Disenfranchisement

• Under Section 30(2)(b) and Section 53’s waterfall priority model, payouts are primarily absorbed by secured creditors, resulting in minimal to no recovery for operational creditors (MSME vendors, contractors, and suppliers).
• While aggregate failure data remains limited, parliamentary standing committee reports and industry surveys confirm that large-scale receivable write-downs cause severe cash-flow contractions for small vendor businesses.
• Deprived of essential operating cash flows, thin-margin vendors face heightened risks of financial distress and insolvency themselves, compounding systemic counterparty defaults.

WAY FORWARD 

To re-establish the value-preserving purpose of the insolvency system, as originally intended, requires far-reaching legislative, structural and behavioural changes.

1. Tribunal Specialization and Digital Modernisation

 Dedicated benches to deal exclusively with IBC cases:

• Separate them from company law disputes, merger applications, and oppression-and-mismanagement petitions.

 Strict two-stage litigation timelines:

• Limit judicial discretion concerning admissions by mandating electronic debt verification via information utilities (NeSL).
• Admissions should occur automatically once confirmed default records from certified databases verify non-payment.
• Prolonged pre-admission arguments must be eliminated.

 Paperless tribunals:

• Full shift to electronic case management systems to get CIRP timelines back within the 330-day mandate.
• Rigid limitations on adjournments to prevent delays.

2. Safe Harbour Protocols for Financial Creditors

 Commercial judgment protection:

• Bona fide decision shielding: Shielding bona fide decision making from later criminal liability (for “haircuts”) is accomplished using a statutory safe harbour that protects lenders from prosecution when reductions are made in good faith. 
• Preservation of Accountability: Collective decisions regarding the net present value (“NPV”) of assets will be protected through a benchmarking process, but accountability for fraud, bribery, and/or conflicts of interest can still be pursued in instances where these have been demonstrated.

 Inter-creditor restructuring committees:

• Independent oversight committees evaluating NPV maximizing returns versus gross recovery thresholds.
• Decision-making must receive protection from post factum criminal/anti-corruption investigations provided conflict-of-interest checks are done.
• Necessary to create an environment allowing for true commercial participation in PPIRP workflows.

3. Recalibrating the PPIRP Framework

 Expedited single-window admission:

• The prepack filing process has to be streamlined.
• Once approval is given by at least 66% of the financial creditors of the base plan, the court must limit its review to procedure only.
• Eliminate extensive hearings based on commercial merit/viability.

 Reducing the Swiss Challenge Mandate:

• Make it discretionary rather than mandatory for small firms (defaults less than Rs 50 lakhs).
• In situations where replacing current management could result in permanent loss of asset value, the Committee of Creditors (CoC) should be able to negotiate direct turnaround agreements with promoters without having to go through a new management search.

 Expansion beyond MSMEs:

• Gradually expand PPIRP to include non-MSME mid-sized corporate debtors engaged in service-based or human-capital-intensive activities.
• Protect sectors that experience rapid and irreversible deterioration in enterprise values when managerial authority is suspended immediately upon initiation of standard CIRP proceedings.

4. Building a Turnaround Capital and Distressed Assets Ecosystems

 Encouraging DIP financing:

• Priority and capital relief should be extended to commercial banks and AIFs that provide super-priority interim funding to companies undergoing CIRP/PPIRP.

 Secondary market for distressed assets:

• RBI & SEBI should coordinate efforts to develop a secondary market for NPLs.
• Develop specialized turnaround funds, private credit platforms, and ARCs intervening early in the corporate distress cycle prior to liquidation becoming inevitable.

References

Insolvency and Bankruptcy Board of India. (2020). Report of the sub-committee of the Insolvency Law Committee on pre-packaged insolvency resolution process. Ministry of Corporate Affairs, Government of India. https://ibbi.gov.in/uploads/resources/1608796853_sub-committee_report.pdf

Insolvency and Bankruptcy Board of India. (2023). Insolvency and bankruptcy news: The quarterly newsletter of the Insolvency and Bankruptcy Board of India (July–September 2023, Vol. 28). Government of India. https://ibbi.gov.in/uploads/whatsnew/b4ce3516920836e9ff9b1e816137bf97.pdf

Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India). https://www.indiacode.nic.in/handle/123456789/2154

Insolvency and Bankruptcy Code (Amendment) Act, 2021, No. 26, Acts of Parliament, 2021 (India). https://www.indiacode.nic.in/handle/123456789/16654

Micro, Small and Medium Enterprises Development Act, 2006, No. 27, Acts of Parliament, 2006 (India). https://www.indiacode.nic.in/handle/123456789/2017

Ministry of Finance. (2015). The report of the Bankruptcy Law Reforms Committee: Volume I: Rationale and design. Government of India. https://dea.gov.in/sites/default/files/BLRCReportVol1_04112015.pdf

Recovery of Debts Due to Banks and Financial Institutions Act, 1993, No. 51, Acts of Parliament, 1993 (India). https://www.indiacode.nic.in/handle/123456789/1974

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No. 54, Acts of Parliament, 2002 (India). https://www.indiacode.nic.in/handle/123456789/2006

Sick Industrial Companies (Special Provisions) Act, 1985, No. 1, Acts of Parliament, 1986 (India). https://www.indiacode.nic.in/handle/123456789/1826

About The Contributor

Anushree Khare is a Research & Editorial Intern at the Impact and Policy Research Institute (IMPRI). She holds a B.A. (Hons) degree in Economics with Research. Her academic and professional interests lie in the domains of finance, quantitative research, data-driven policy analysis, and business strategy.

Acknowledgement

The author extends sincere gratitude to the IMPRI team for their guidance and support along with the reviewers Ms. Khushi and Ms. Sudeepti for  their valuable feedback and insights.

Disclaimer

All views expressed in the article belong solely to the author and not necessarily to the organisation.

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