An analysis on the impact of Insolvency and Bankruptcy code in India’s economic growth

Share & spread the love


The Insolvency and Bankruptcy Code 2016 was first introduced to the Lok Sabha in December 2015, and it was passed by both the Lok Sabha and the Rajya Sabha on May 5 and May 11, respectively. A few portions of this Act went into effect on August 5, 2016, and August 19, 2016.

The bankruptcy legislation offers a one-stop solution for dealing with economic insolvencies, which was previously a drawn-out process without an economically advantageous solution. The code’s objectives are to simplify corporate operations and safeguard the interests of small investors.

The Insolvency and Bankruptcy Code (IBC) would encourage entrepreneurship and make doing business easier. Every business, regardless of size, is susceptible to one of two failure modes. In the event of success, the business owners and all other stakeholders, including lenders of capital or creditors, benefit from it to varied degrees. The owners of financial capital will suffer the most if the company collapses, but all other stakeholders will also be affected.

In the event of failure, the system offers a simple way out, minimising pain while maximising salvage value and allowing it to be promptly put to better use. The journey of the failed firm, known as the Code Exit, was difficult, disorganised, and far-reaching. The Insolvency and Bankruptcy Code 2016 (I&B Code 2016) provides a ray of light to owners of small enterprises who are continually threatened by economic failure.

The objectives of the IBC

  • Consolidate and amend all existing insolvency laws in India.
  • To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
  • To protect the interest of creditors including stakeholders in a company.
  • To revive the company in a time-bound manner.
  • To promote entrepreneurship.
  • To get the necessary relief to the creditors and consequently increase the credit supply in the economy.
  • To work out a new and timely recovery procedure to be adopted by the banks, financial institutions or individuals.
  • To set up an Insolvency and Bankruptcy Board of India.
  • Maximization of the value of assets of corporate persons.

Impact of Insolvency and Bankruptcy Code to the Economic growth of India

The implementation of the I&B Code 2016 provides hope to distressed SMEs because it allows for the timely reorganisation and rebirth of afflicted businesses. The code functions as a rehabilitation programme for Small and Medium-Sized Enterprises.

It provides affected firms with an opportunity to resolve insolvency. Its goals as a philosophy were to encourage the spirit of economic progress and development in the country. The following are some of the important of code;

  1. Growth of the gross domestic product is favourably correlated with an effective bankruptcy system, according to a number of empirical studies. An economy’s machinery cannot function properly without sufficient investments. The GDP grows at a greater rate a higher rate of investment. It holds that investments and GDP growth have somewhat of a 4:1 connection, meaning that investments of 40% of GDP can result in 10% GDP growth. A country’s GDP will expand at a faster rate the more investment there is.
  2. “Ease of doing business” has been improved. IBC is the next step after the establishment and implementation of GST, which is regarded as one of the largest changes in the nation. India was ranked among the “top 10 improvers” by the WORLD BANK for the second time in a row. China is in third place, and India is in fifth.
  3. The Code established an Information Utilities, which is a centralised store of borrowers’ financial and credit information. Thus, through IUs, India’s credit market evolved and became more efficient.
  4. Previously, no legislation prohibited operational creditors from suing, but the Code provides that operational creditors have the right to sue in the case of a default. Thus, the code protects both domestic and international creditors, while also facilitating India’s economic transition with other countries.
  5. Since the implementation of IBC, it has become simpler for businesses to quit quickly (180+90days resolve). This would be advantageous in luring foreign investors to establish their businesses in India, which would then improve INDIA’s innovation.
  6. A nation’s relations with trade blocs like SAARC, ASEAN, NAFTA, and the EU will be successful if its economy is robust. It is because the IBC code met the aforementioned requirements that it improves INDIA’s relationships with trading blocs.
  7. Cross-Border difficulties concern Indian businesses that have obligations to foreign businesses that default on their obligations, or vice versa. IBC has been attempting to include some of the global initiatives made to combat cross-border insolvency.
  8. The number of mergers and acquisitions that took place in the nation surged dramatically during the last two years, totalling transactions worth $14.33 billion. This frenzy of mergers and acquisitions has been attributed to IBC.

The IBC  2016, and Its Behavioural Outcomes


Any lender, whether an individual or a corporation, considers the proposition of a loan from the three investing pillars of safety, liquidity, and return and then constructs the best possible combination based on those pillars. Based on the borrower’s environment and a risk assessment of the situation, the lenders make their judgement.

Actually, each of the three guns has its risks evaluated, and the interest rates are set accordingly. One of the most crucial factors is the return of the money or safety that was lent, coupled with an interest.

Operational Creditors

Credit is extended to businesses by suppliers of goods and services. When there is financial trouble, it affects the creditors as well. Enterprises in financial difficulties receive resources that have a negative impact on their financial health. In fact, there are several situations, particularly among Small and Medium Enterprises (SMEs), where nonrecovery of receivables has resulted.

In the absence of the Code, lenders had no recourse and were forced to write off the outstanding balances in the majority of cases. The Code includes unique provisions for SMEs, allowing them to file a complaint with the NCLT for overdue of one crore rupee or more.


A strong bankruptcy system is crucial because it supports the entrepreneurial economy. India has a free-market economy. The climate in which innovations flourish is one of success, which influences the flow of funding for new businesses, projects, and ideas that have the potential to generate large returns with little risk. Large risk-taking, however challenging for high returns, can occasionally result in losses.

An effective bankruptcy system supports the entrepreneur in case of failure to go through the winding-up process or the resolution in a set time frame. In countries where failure is tolerated, more entrepreneurs are coming forward with greater confidence to start their own businesses.

The effectiveness of the bankruptcy system can offer a protective umbrella to entrepreneurs and help them to overcome their fear of failure in today’s transubstantiate environment, where the fusion of many life-changing ideas is causing upheavals, the sustainability of success cannot be predicted, and the speed of failure descends like a funnel.


The code lists the enterprise’s revitalization as its first choice. Resilience brought about by a change in control and ownership, in particular, aids in saving the majority of jobs—and occasionally all the jobs—in stressed-out businesses. Binani Cement and Bhushan Steel are two examples. Even in situations where recovery is not possible, closing out is completed within the prescribed time range.

Thus, it leaves human resources, together with remaining physical and financial resources, available for use elsewhere at a profit. The likelihood of the personnel in failed businesses being unhappy is decreased during the entire process. Less suffering means a smaller impact on the economy’s overall demand as well as the financial well-being of workers.


An effective bankruptcy procedure has two clear benefits for a nation’s economy. First off, it increases the efficiency of the financial system, particularly the debt market. Pricing becomes fair and transparent, and its application is expanded to include trading in trash bonds. Second, it lessens resistance to resource mobility.


It is to be commended that the government and the lawmakers produced such well-thought-out legislation. The rescue track is effectively shut down as a result. It establishes a strict timeline for resolving the insolvency cases referred to NCLT. A terrible transformation in the loan industry and business environment will lead to improved resource use and stronger economic growth. The Code has only been in effect for three years.

While certain good effects on the behaviour of various players are obvious, the efficiency of court proceedings, the appropriateness of legal structure, the speed and efficacy of the entire spectrum of intermediary processes, and the efficiency of the enforcement system must be reinforced. Economic actors in the Indian financial market strive to game the system at every stage, as aggregate game theory looks far deeper and wider. These have the effect of lowering recoveries and raising costs.

In a few instances, values are clearly seeping through and frustrations are plain to perceive. However, the Government and IBBI are in a position of responsibility and need to take the necessary swift policy action to stop the system from being gamed. The bankruptcy mechanism is known as economic exploration. It allows the economy to bloom out of ineffective enterprises by reallocating money to more efficient uses. Unfortunately, too many valves in India have been leaking for far too long. Rent seekers have been obstructing the exploration. Fortunately, the Indian economy is well-balanced to reap the benefits of a competent, modern, and comprehensive exit strategy.

Once the system’s soundness is assured, domestic and foreign investors’ confidence will grow, significantly increasing the flow of capital and benefiting the economy’s growth. Once the soundness of the system is assured, the trust of domestic and foreign investors will improve, resulting in a significant increase in the flow of capital, which will boost the economic growth of the country.

Attention all law students!

Are you tired of missing out on internship, job opportunities and law notes?

Well, fear no more! With 45,000+ students already on board, you don't want to be left behind. Be a part of the biggest legal community around!

Join our WhatsApp Groups (Click Here) and Telegram Channel (Click Here) and get instant notifications.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.