Insolvency Bill proposes penalty for frivolous pleas, introduces group insolvency, creditor-initiated resolution

The Indian government has introduced the Insolvency and Bankruptcy Code (Amendment) Bill, 2025, in the Lok Sabha, proposing significant changes to the existing law. The Insolvency Bill is designed to reduce delays, maximize asset value for stakeholders, and enhance the overall effectiveness of the insolvency and bankruptcy framework.

Key proposed changes

Creditor-Initiated Insolvency Resolution Process: The Insolvency Bill introduces a new “creditor-initiated insolvency resolution process” with an out-of-court initiation mechanism. This is intended to facilitate a faster, more cost-effective resolution for genuine business failures with minimal business disruption. The government believes this will ease the burden on judicial systems and improve access to credit.

Group and Cross-Border Insolvency Frameworks: To address complex corporate structures, the new legislation proposes a “group insolvency” framework. This aims to minimize value destruction caused by fragmented proceedings and to maximize value for creditors through coordinated decision-making. Additionally, a “cross-border insolvency” framework is introduced to protect stakeholder interests in both domestic and foreign proceedings, promoting investor confidence and aligning with global best practices.

Restoration of Corporate Insolvency Resolution Process (CIRP): In a major change, the Insolvency Bill allows for the restoration of a corporate insolvency resolution process in exceptional cases. The Adjudicating Authority can restore the process upon a request from the Committee of Creditors (CoC) with at least 66% of the voting share. This measure is intended to prevent a corporate debtor from being forced into liquidation due to procedural errors or plan rejections.

Enhanced Role for the Committee of Creditors in Liquidation: The role of the Committee of Creditors is extended to the liquidation process. The CoC will now supervise the liquidator’s conduct and provide guidance on commercial matters. This is meant to ensure transparency, accountability, and the protection of all stakeholders’ interests.

Stricter Timelines for Adjudicating Authority: To reduce delays, the bill clarifies that the Adjudicating Authority must admit an application for CIRP within fourteen days if a default is established and other procedural requirements are met. If the application is not decided within this period, the authority must record the reasons for the delay in writing.

Clarification on ‘Security Interest’ and ‘Voting Share’: The amendments define “security interest” as one created by agreement between two or more parties, clarifying that it does not include interests created merely by operation of law, such as for unpaid taxes. The bill also clarifies that “voting share” will be calculated only on the basis of financial debt owed to members of the CoC who are eligible to vote.

Penalty for Frivolous Proceedings: To deter malicious actions that can delay the insolvency and bankruptcy processes, the bill introduces a penalty for initiating “frivolous or vexatious proceedings” before the Adjudicating Authority, with fines ranging from one lakh to two crore rupees.

Expanded Definition of ‘Corporate Debtor’: The bill clarifies that a corporate debtor can be a person who is the subject of a resolution or liquidation process. This expansion is designed to provide a more inclusive framework for different types of entities.

Changes to the Role of the Insolvency and Bankruptcy Board of India (IBBI): The IBBI will be empowered to impose a penalty for failure to comply with certain regulations, with the amount of the penalty linked to the value of the transaction or the professional’s income. This aims to strengthen the regulatory oversight and compliance within the insolvency ecosystem.

Provisions for Asset-Backed Financing: The bill introduces a new framework for asset-backed financing, allowing for the creation of a special purpose vehicle (SPV) by creditors. This framework will facilitate faster and more efficient recovery of dues in cases where the underlying assets are the primary source of value.

Exclusion of Certain Assets from Liquidation Estate: The bill proposes that certain assets, such as those held in trust for third parties, be excluded from the liquidation estate. This ensures that the assets of a third party are not used to satisfy the claims of the corporate debtor’s creditors.

Amendments to the Adjudicating Authority’s Powers: The Adjudicating Authority’s powers are being amended to allow it to rectify any procedural errors or omissions in the insolvency resolution plan. This will help prevent the plan from being rejected on a technicality and ensure that the process moves forward efficiently.

The new amendments aim to create a more robust and responsive insolvency regime, reflecting lessons learned from practical experience and aligning Indian law with global best practices.

Also See: IBC Act