Resolving Corporate Distress: A Comprehensive Study of Insolvency and Winding Up Laws in India
- YourLawArticle
- Apr 16
- 4 min read
Authored by : Kanak Agarwala & Jeetdan Garvi, B.A.LL.B, Birla Global University
Abstract
Corporate insolvency and winding up are crucial aspects of commercial law that ensure financial discipline, investor confidence, and economic stability within a country. The increasing complexity of corporate structures and rising cases of corporate defaults have placed insolvency frameworks under the spotlight globally. In India, the evolution from the outdated winding-up mechanisms under the Companies Act, 1956, [1]to the modern, time-bound process introduced by the [2]Insolvency and Bankruptcy Code, 2016 (IBC), reflects the country’s attempt to align with global best practices while addressing its unique economic challenges.
Corporate insolvency primarily deals with a situation where a company is unable to pay its debts and seeks either resolution or liquidation under legal supervision. Winding up, though often used interchangeably with insolvency, has a broader scope. It includes voluntary closure of solvent companies, as well as compulsory closure ordered by courts or tribunals.[3] Historically, Indian corporate law treated insolvency and winding up as closely related, but distinct mechanisms. The IBC has since brought coherence and consistency, integrated fragmented laws and set up a structured mechanism for corporate insolvency resolution and liquidation.
The IBC introduced a creditor-in-control model, shifting away from the earlier debtor-in-possession framework. It mandates the formation of a Committee of Creditors (CoC), comprised mainly of financial creditors, to determine the future of the distressed corporate debtor. The Code provides for time-bound resolution (180 to 330 days), failing which liquidation follows. This model is expected to foster quick recovery of debts, preserve asset value, and protect the interests of stakeholders including operational creditors, employees, and government authorities.
The Code’s legal machinery includes the National Company Law Tribunal (NCLT) as the adjudicating authority for corporate insolvency proceedings. The Insolvency and Bankruptcy Board of India (IBBI), functioning as the regulator, oversees insolvency professionals, information utilities, and maintains discipline within the ecosystem. Judicial interpretation by Indian courts has also played a central role in shaping the insolvency landscape, especially through decisions such as [4]Swiss Ribbons v. Union of India, [5]Innoventive Industries v. ICICI Bank, and Essar Steel v. ArcelorMittal, which clarified legislative intent, upheld creditor primacy, and set standards for resolution and liquidation.
However, the IBC has not been without challenges. Procedural delays, value erosion of assets during resolution, and the lack of timely disposal by tribunals have raised concerns. [6]Moreover, the over-reliance on financial creditors, with limited voice for operational creditors and other stakeholders, has led to debate regarding the fairness of the system. The pandemic added further pressure, prompting temporary suspensions of filings and the emergence of pre-packaged insolvency frameworks for MSMEs.
Real-world applications of the IBC framework illustrate both its strengths and weaknesses. The insolvency case of Essar Steel India Ltd. [7]was a landmark for establishing creditor supremacy, with the Supreme Court reinforcing the primacy of the Committee of Creditors in approving resolution plans. The resolution fetched ₹42,000 crore from ArcelorMittal, setting a positive precedent. However, the case also exposed the delays caused by prolonged litigation and inter-creditor disagreements. Similarly, the Jet Airways insolvency case reflected the difficulties of reviving financially distressed companies with complex cross-border operations and competing creditor claims. The DHFL insolvency showed that the IBC could be successfully applied to large non-banking financial companies (NBFCs), paving the way for financial sector reforms. In contrast, the IL&FS crisis necessitated government intervention due to its systemic impact, underlining the limitations of judicially driven insolvency in cases of public interest and financial contagion.
Winding up under the Companies Act, 2013 still exists as a parallel process but has become secondary to the IBC mechanism. The Act provides for winding up by the Tribunal in cases of fraud, default, or if it is just and equitable to do so. Voluntary winding up is also permitted when a company decides to close its operations despite being solvent. However, in practice, most creditor-driven winding up petitions now follow the IBC route due to its time-bound structure and procedural efficiency. The Companies Act’s winding up provisions, therefore, play a residual role and are mostly invoked in non-debt related closures or where the corporate debtor is not covered by IBC (such as certain categories of companies under special statutes).
Comparatively, jurisdictions like the United Kingdom and the United States have distinct insolvency and bankruptcy regimes with established case law and institutional support. The UK model emphasizes administration and voluntary arrangements, while the U.S. Chapter 11 process is debtor-friendly and aimed at corporate restructuring. The Indian IBC attempts to balance creditor and debtor rights but leans toward a creditor-in-control model. The integration of the UNCITRAL Model Law on Cross-Border Insolvency remains a work in progress in India, though its adoption has been proposed.
Ultimately, corporate insolvency and winding up laws in India are a work in evolution. The IBC has undoubtedly transformed the insolvency ecosystem by instilling creditor discipline, reducing NPAs, and improving India's ranking in the Ease of Doing Business Index. Yet, continued reforms are necessary to address delays, improve stakeholder participation, strengthen insolvency professionals, and ensure balanced outcomes. This research paper critically analyses the development of the legal framework governing insolvency and winding up in India, explains its functioning through case laws and real-life examples, and proposes recommendations for improving the process to better serve the economy and the public interest.
Keywords: Insolvency and Bankruptcy Code (IBC), Corporate Insolvency, Winding Up, Committee of Creditors (CoC), Financial Restructuring
[1] Companies Act, No. 1 of 1956, Acts of Parliament, 1956 (India) (repealed).
[2] Insolvency and Bankruptcy Code, No. 31 of 2016, Acts of Parliament, 2016 (India).
[3] Companies Act, §§ 271–272, No. 18 of 2013, Acts of Parliament, 2013 (India).
[4] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17
[5] Innoventive Indus. Ltd. v. ICICI Bank, (2018) 1 SCC 407 .
[6] VIDHI CENTRE FOR LEGAL POLICY, https://vidhilegalpolicy.in (last visited Apr. 16, 2025).
[7] Comm. of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531.
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