Context:

• India's Insolvency and Bankruptcy Code (IBC) has always struggled with a basic tension: how to give a financially distressed company a chance to recover, while also protecting the interests of those it owes money to (creditors).
• This tension is often called the "Chakravyuha Challenge" — borrowed from the Mahabharata, referring to a formation that is easy to enter but very difficult to exit.
• In India's case, it is easy for a company to enter the insolvency process, but exiting it — through resolution or recovery — has proven to be slow and complicated.
• The 2026 Amendment to the IBC introduces a new mechanism called the Creditor-Initiated Insolvency Resolution Process (CIIRP) — a hybrid model meant to fix some of these problems.
• However, the way this new process has been designed — by restricting who can use it — raises both constitutional concerns and practical problems, which this article examines.

A Brief History: From SICA to IBC

• Before the IBC, India had the Sick Industrial Companies Act (SICA), which followed a "debtor-in-possession" model — meaning the company's existing owners/promoters retained control even during insolvency proceedings.
• This model was widely misused by promoters to delay action and protect their own interests at the cost of creditors.
• The IBC, introduced later, swung to the opposite extreme — a "creditor-in-control" model, where creditors (usually banks and financial institutions) take charge of decision-making once a company defaults.
• While the IBC promised time-bound resolution, in practice it has often failed due to prolonged litigation and procedural delays.

What is CIIRP, and Why Was It Introduced?

• CIIRP is designed as a "swift yet stringent" middle path. Under this process, the existing management of the company continues to run day-to-day operations, but under the supervision of a resolution professional (an independent expert appointed to oversee the process).
• The idea is to avoid the value destruction that typically happens when a company is forced into full liquidation — where assets get sold off, often at low prices, and the business essentially shuts down.
• This new process has been added to the IBC through Sections 54C to 54P.
• Responding to a Supreme Court Ruling
  • CIIRP is also a direct response to the Supreme Court's ruling in the Vidarbha Industries case.
  • Earlier, under Section 7(5)(a) of the IBC, the word "may" gave the National Company Law Tribunal (NCLT) — the body that hears insolvency cases — discretionary power to delay or even reject a case, even when it was clear that a debt existed and had not been repaid.
  • The 2026 Amendment changes this word from "may" to "shall" — meaning the NCLT is now legally required to accept such cases once the basic facts of debt and default are established through official records.
  • This makes CIIRP a quick, less disruptive option for creditors — but, as the analysts point out, only for some creditors.

The Core Problem: Who Gets to Use CIIRP?

• A New, Arbitrary Hierarchy
  • Here is the central issue: the 2026 Amendment allows only "notified financial institutions" to initiate the CIIRP process.
  • This creates a new hierarchy within financial creditors themselves — something quite different from before.
  • Earlier, in the Swiss Ribbons case, the Supreme Court had upheld a distinction between financial creditors (like banks, who lend money) and operational creditors (like suppliers, who are owed money for goods/services) — using what is called the "intelligible differentia" test under Article 14 of the Constitution.
    • This test essentially asks: is there a reasonable, logical basis for treating two groups differently?
  • But the new distinction — separating "notified" financial institutions from other financial creditors — doesn't have the same strong justification.
  • The government's reasoning is that notified institutions have special expertise to assess and restructure distressed companies.
  • This reasoning is outdated, since today's financial markets have many sophisticated investors — private equity funds, asset reconstruction companies, and others — who are equally capable of conducting detailed restructuring analysis.
• Smaller Creditors Get Sidelined
  • Operational creditors and smaller financial creditors are already at the bottom of the repayment priority list when a company becomes insolvent — meaning they get paid last, if at all.
  • By concentrating the power to initiate CIIRP in the hands of only "notified" institutions, these smaller creditors lose their voice in restructuring discussions.
  • If they want to protect their interests, their only option is to pursue the older, more disruptive Corporate Insolvency Resolution Process (CIRP) — which is exactly the lengthy, litigation-heavy process CIIRP was meant to be an alternative to.
  • This undermines the fairness of the entire insolvency system.

How Do Other Countries Do?

• There are two major global models for comparison: the United States' Chapter 11 and the United Kingdom's Part 26A restructuring plans.
• In both these systems, the ability to participate in restructuring is based on objective financial conditions — such as how much money a creditor is owed, or the nature of their financial stake — rather than on the regulatory category or institutional identity of the creditor.
• This means a wide range of stakeholders, regardless of what "type" of entity they are, can take part as long as they meet certain financial thresholds.
• India's approach of restricting initiation rights to a specific, named category of institutions is therefore seen as an anomaly.
• This can make foreign investors wary of the Indian market, since they may perceive the system as structurally biased against certain types of investors — discouraging the very foreign capital India wants to attract into its distressed-asset and restructuring space.
• It also makes Inter-Creditor Agreements (private agreements between lenders on how to coordinate) less transparent, since "notified" institutions effectively get more bargaining power in informal negotiations too.

The Way Forward: A "Universal CIIRP"

• Experts propose a solution: a "Universal CIIRP" based on a "default-neutral initiation rule."
• Under this proposal, the criteria for who can initiate CIIRP would shift from "what type of institution are you?" to "how much financial exposure do you have?"
• Specifically, any financial creditor — regardless of whether they are a "notified" institution or not — could initiate CIIRP, as long as creditors holding at least 51% of the total financial debt support the move.
• This approach achieves two things simultaneously: it removes the constitutional vulnerability created by arbitrary classification, while still protecting against one-sided or malicious filings, since a majority of financial creditors (by value) would need to agree before the process begins.

Conclusion

• A truly efficient insolvency law must judge creditors by what they are owed, not who they are.
• By replacing institutional labels with a fair, finance-based threshold, India's CIIRP can become a genuinely inclusive, constitutionally sound, and globally credible restructuring tool — benefiting debtors, creditors, and investors alike.