When India enacted the Insolvency and Bankruptcy Code (IBC) in 2016, it was celebrated as a watershed reform. Inspired by the United Nations Commission on International Trade Law’s Legislative Guide on Insolvency Law (UNCITRAL Law), IBC promised to bring order to the chaos of insolvency proceedings in India. For the first time, India had a unified framework to deal with corporate distress, offering a structured corporate insolvency resolution process (CIRP) with a strict 270-day timeline.
The idea was simple: either resolve the insolvency within nine months or face liquidation. But for promoters, liquidation often meant the death of their company. Worse, even initiating CIRP could be suicidal, because once the process began, control shifted to the committee of creditors (CoC) and third-party bidders could oust the existing promoters. Unless a promoter wished to rid himself of a company burdened with statutory liabilities, CIRP was a dangerous gamble.
The Unequal Treatment of Creditors
IBC divides creditors into two categories: financial creditors (primarily banks and lenders) and operational creditors (suppliers, employees and government authorities). Financial creditors dominate the CoC, holding the power to decide on resolution plans and distribution of recoveries. Operational creditors, despite being critical to a company’s functioning, remain sidelined.
The recovery rates illustrate this imbalance starkly. As of March 2025, financial creditors recovered about 32.71% of their dues, while operational creditors managed just 11.82%. Before COVID-19 as of 31 May 2020, those figures were 45.37% and 25.06%, respectively. Post-COVID-19, the recovery rates of operational creditors were effectively halved, while those of financial creditors fell by 27.90%. Whether this was due to the pandemic or the promoters’ ploy to exploit inefficiencies in the IBC ecosystem, due to poor enforcement by its regulator, is a matter for further study. A major part of these so-called recoveries consists of future payments spread over three to four years, as resolution plans increasingly take the form of asset monetisation under IBC. Since such recoveries do not account for the time value of money, their real value is much lower.
Nevertheless, the figures above do not reflect the true recovery rate under IBC, because liquidation cases are excluded in the above data which will make the overall recovery rate under IBC less than 16% (realisation of nearly ₹4.69 lakh crore on total admitted claims of nearly ₹30 lakh crore), if the historic recovery rate of past liquidation cases is used to calculate the overall recovery rate for ongoing liquidation cases under IBC.
The injustice runs deeper for operational creditors. Disputed claims of operational creditors are often admitted at a notional value of ₹1 as per guidance given in UNCITRAL Law. Once resolution concludes, these claims are wiped clean under the IBC’s 'clean slate' principle. This has allowed companies to shed statutory liabilities, including government dues, through IBC. For many operational creditors, the IBC has become less a mechanism of justice than a trapdoor to oblivion.
MSMEs: The Backbone under Strain
India’s 68mn (million) micro, small, and medium enterprises (MSMEs) form the backbone of the Indian economy, contributing nearly 30% to GDP and employing over 110mn people. COVID-19 hit them hardest, triggering defaults, disrupting supply chains, and threatening livelihoods. Recognising the crisis, the government introduced the pre-packaged insolvency resolution process (pre-pack) through the Insolvency and Bankruptcy Code (Amendment) Act, 2021 (IBC 2021 Amendment).
The intent was noble: provide MSMEs with a quicker, cheaper and less disruptive alternative to CIRP. Pre-packs were designed to preserve jobs, maintain business continuity and offer value-maximising outcomes for stakeholders. By allowing promoters to negotiate a resolution plan with creditors before formal proceedings, pre-packs promised efficiency and pragmatism.
Lessons from Abroad
Globally, pre-packs have proven effective. In the United Kingdom, they are widely used to sell businesses as going concerns. Administrators can sell assets without creditor approval, except in cases involving connected parties, where safeguards ensure transparency. The rationale is pragmatic: promoters often offer the best price and their continued involvement preserves value. Pre-packs in UK have saved jobs, maximised creditor returns and allowed businesses to transition smoothly. They are regarded not as loopholes but as lifelines.
India’s Stumbling Experiment
India’s experience has been far less encouraging. As of September 2025, only 16 pre-pack applications had been admitted, with resolution plans approved in 10 cases. Five remain pending, including two unresolved for more than 22 months.
The bottleneck lies in Section 54-K of IBC. It requires that a base resolution plan submitted by an MSME (base plan) must not impair operational creditors’ claims. In practice, this means MSMEs must promise 100% repayment to operational creditors. If they fail, the process shifts to open bidding, where external applicants can compete with the promoter’s plan.
For promoters, this is a high-stakes gamble: either pay operational creditors in full or risk losing control of their company. Given India’s mortgage-heavy lending system, banks are reluctant to accept haircuts while unsecured creditors are paid in full. This makes CoC approval for MSME’s base plan nearly impossible.
The result is predictable: few MSMEs attempt pre-packs and fewer still succeed. What was meant to be a lifeline has become a labyrinth.
The Structural Flaw
The flaw lies in the design. By mandating full repayment to operational creditors, the law creates a paradox. Operational creditors, who typically recover little under CIRP, are suddenly guaranteed full repayment under pre-packs. But this comes at the expense of financial creditors, who must take deeper haircuts. Unsurprisingly, banks resist.
The irony is striking: in CIRP, operational creditors are marginalised, while in pre-packs they are overprotected. The pendulum swings from injustice to impracticality, leaving MSMEs stranded in the middle.
Suggested Reforms
If pre-packs are to succeed in India, the following reforms are essential:
• Avoid open bidding. If creditors reject a base plan, the pre-pack should close rather than morph into CIRP with open bidding. Otherwise, promoters face the same existential risk that pre-packs were designed to avoid.
• Operational creditors must have a voice. Instead of mandating full repayment, separate meetings could allow them to approve reasonable haircuts. Faced with the choice between partial recovery and total loss, most would accept a fair compromise if persuaded by the promoters of the MSME. Alternatively, as in a normal CIRP, the CoC should decide on distribution by performing its fiduciary duties, as recognised by the Delhi High Court in 'Kunwer Sachdev vs IDBI Bank'.
• Strengthen transparency. Safeguards against abuse, such as independent valuation and creditor oversight like in the UK, can ensure fairness without undermining efficiency.
The Bigger Picture
India’s insolvency framework is still evolving, but the regulator has been reluctant to learn from past data which shows no improvement in IBC's performance. IBC was a bold experiment, and like all experiments, it has revealed both strengths and weaknesses. CIRP has brought discipline to insolvency proceedings, but its rigid timelines and creditor hierarchies have created distortions. Pre-packs were introduced to correct those distortions, but their design flaws have limited their impact.
The challenge is to strike a balance: protect creditors without strangling businesses, preserve jobs without undermining financial discipline and empower promoters without enabling abuse.
It is an admitted fact that litigation by promoters under IBC is the main reason for delays and poor recoveries. This is mainly because the regulator has failed to enforce IBC’s provisions against promoters’ illegal acts and violations under Sections 68 to 77-A of the IBC.
Thus, it is time to correct the structural flaws in pre-packs provisions of IBC to allow MSMEs to access pre-packs (once the above changes are made in pre-packs under IBC) as intended by IBC 2021 Amendment, which could improve recovery rates under IBC and reduce litigation and delays, while incentivising promoters to offer better value to the creditors.
Conclusion
Pre-packs were introduced as a lifeline for MSMEs, but their design has left them stranded between potential and risk. By insisting on full repayment to operational creditors, the law has created a paradox: the very mechanism meant to save small businesses may instead push them toward liquidation or loss of control.
India’s insolvency framework must evolve to balance creditor rights with business survival. Without pragmatic reform, pre-packs risk becoming not a revival scheme but a suicidal gamble.
(Jitender Kumar Jain is a Mumbai-based advocate with over two decades of practice in corporate and commercial laws, including insolvency law.)
