Insolvency and Bankruptcy: A Comparative Guide to India’s IBC and U.S. Chapter 11 Proceedings

Insolvency and bankruptcy laws play a crucial role in shaping a nation’s economic resilience. They determine how financially distressed businesses are restructured, rehabilitated, or wound up, balancing the interests of creditors, debtors, employees, and the broader economy. Two prominent frameworks in this domain are India’s Insolvency and Bankruptcy Code, 2016 (IBC) and the Chapter 11 bankruptcy provisions of the United States Bankruptcy Code. Though both aim to address corporate distress, their legal philosophies, procedural mechanics, and outcomes differ significantly. This article offers a comparative guide to understand these systems, why they matter, how they work, and what each can learn from the other.

The Purpose and Philosophy

India’s Insolvency and Bankruptcy Code (IBC)

India’s IBC was implemented to consolidate multiple scattered insolvency laws into a single, time-bound, market-oriented framework. Prior to IBC, creditors faced lengthy litigation across fragmented statutes, leading to value erosion and low recovery rates. The IBC seeks to:

• Promote early identification of financial distress

• Enable efficient resolution or liquidation

• Maximize value for stakeholders

• Encourage creditor-driven restructuring

• Provide predictability and speed

At its core, IBC prioritizes the resolution of financially distressed enterprises, ideally through revival and restructuring rather than liquidation.

United States Chapter 11 Bankruptcy

Chapter 11 of the U.S. Bankruptcy Code emphasizes reorganization and debtor-in-possession (DIP) autonomy. It allows:

• Distressed businesses to continue operations

• Debtors to propose restructuring plans

• Creditors and stakeholders to negotiate terms

The focus is less on mandatory timelines and more on flexibility, giving debtors space to reorganize, restructure debt, sell assets, or even liquidate under court supervision.

Initiation of Proceedings: Who Can File?

IBC: Creditor-Driven Initiation

Under the IBC, insolvency resolution proceedings can be initiated by:

• Financial creditors (e.g., banks, financial institutions)

• Operational creditors (e.g., suppliers, service providers)

• Corporate debtors themselves

A minimum default of ₹1 lakh triggers eligibility for filing. Once a petition is admitted, an automatic moratorium applies halting legal actions and asset transfers.

Chapter 11: Flexible Debtor or Creditor Filings

In the U.S., any debtor (voluntary) may file for Chapter 11. In rare cases, creditors can pursue involuntary bankruptcy against debtors who fail to pay debts. Upon filing:

• Debtors typically continue to operate as Debtor in Possession (DIP)

• The bankruptcy court supervises but does not manage day-to-day operations

Unlike IBC, there is no mandatory moratorium threshold; however, the filing automatically invokes the automatic stay, halting creditor actions.

Governance During Restructuring

IBC: Committee of Creditors (CoC)

Once an insolvency application is admitted in India:

• An Interim Resolution Professional (IRP) is appointed

• IRP takes control of the company’s management

• Financial and operational information is consolidated

• A Committee of Creditors (CoC)—primarily financial creditors—is formed

The CoC drives the resolution process, evaluates restructuring plans, and approves the Resolution Plan by at least 66% (by value) consent.

Importantly, the existing board of directors loses control once proceedings commence.

Chapter 11: Debtor in Possession (DIP) and Creditors’ Committees

Under Chapter 11:

• The debtor generally remains in possession (DIP) and continues running operations

• A Creditors’ Committee is often formed, representing unsecured creditors

• The debtor retains management powers but requires court approval for major decisions

DIPs have the flexibility to reject or assume executory contracts, operate business, and propose reorganization plans. Courts exercise oversight but full control lies less with creditors compared to IBC.

Reorganization and Resolution Plans

IBC: Time-Bound Resolution

A hallmark of the IBC is strict timelines:

• 180 days for insolvency resolution, extendable by up to 90 days

• Maximum proceedings 330 days including litigation

The Resolution Professional invites plans, which must:

• Provide for payment to creditors as per priority waterfall

• Ensure compliance with law (no discrimination, equitable treatment)

• Be approved by the CoC

If no viable plan emerges within timelines, the company goes into liquidation.

Chapter 11: Flexible and Negotiated Plans

Chapter 11 offers greater flexibility:

• No statutory deadline to finalize a plan

• Plans may include debt forgiveness, restructuring, asset sales, or cramdowns

• Cramdown allows a court to confirm a plan over dissenting classes if fairness tests are met

• Plans must satisfy best interest of creditors and feasibility criteria

The absence of strict deadlines allows complex reorganizations but can prolong uncertainty.

Treatment of Creditors and Priority

IBC’s Creditor Waterfall

IBC prescribes a structured repayment hierarchy:

1. Insolvency resolution process costs

2. Secured financial creditors

3. Workmen and employees

4. Government dues

5. Operational creditors

6. Equity shareholders

Secured creditors wield significant influence via the CoC. However, certain categories (e.g., employees) receive preferential treatment within the waterfall.

Priority in Chapter 11

In the U.S., the bankruptcy code prioritizes claims roughly as:

1. Administrative expenses

2. Secured creditors

3. Unsecured creditors

4. Subordinated debt

5. Equity holders

Chapter 11 allows cramdown mechanisms—where courts force plan approval despite dissent from certain creditor classes if fair and equitable requirements are met.

Cross-Border Insolvency

IBC and UNCITRAL Model Law

India has enacted the Cross-Border Insolvency Regulation, 2019, aligning with the UNCITRAL Model Law. This enables cooperation with foreign jurisdictions, recognition of foreign proceedings, and coordinated asset realization.

U.S. and Chapter 15

The U.S. mirrors the UNCITRAL Model via Chapter 15, facilitating recognition of foreign insolvency cases and cooperation across borders—especially significant given the global footprint of American corporations.

Key Differences: Speed, Control, and Culture

Speed vs. Flexibility:

• IBC emphasizes strict timelines to prevent asset value erosion and creditor uncertainty.

• Chapter 11 offers flexibility and depth for complex restructurings but can drag on.

Creditor Control vs. Debtor Autonomy:

• IBC places decision-making power predominantly with creditors (CoC), reducing debtor autonomy.

• Chapter 11 retains debtor control (DIP), encouraging entrepreneurial solutions but sometimes at creditors’ expense.

Cultural and Market Context:

• India’s IBC is a relatively young statute built to improve historically poor recovery metrics and judicial delays.

• The U.S. framework, decades in evolution, reflects a mature bankruptcy culture with sophisticated financial markets and judicial expertise.

Strengths and Challenges

Strengths of India’s IBC

• Time-bound process reduces uncertainty

• Improved recoveries compared to pre-IBC mechanisms

• Creditor empowerment incentivizes efficient decision-making

• Reduced litigation and clear legal structure

Challenges:

• Judicial backlog and appeals can prolong resolution in practice

• Adjudication capacity constraints at NCLT (National Company Law Tribunal)

• Operational creditors sometimes feel disadvantaged compared to financial creditors

Strengths of U.S. Chapter 11

• Flexibility allows creative, industry-specific solutions

• Debtor in possession encourages continuity of business

• Cramdown mechanisms balance interests of dissenting classes

• Mature legal infrastructure with specialized judges and advisers

Challenges:

• High cost and complexity make Chapter 11 expensive

• Lack of deadlines can extend proceedings, reducing asset value

• Potential for debtor abuse of process with aggressive extensions

Comparative Takeaways: What Each System Can Learn

What India could adopt from the U.S.:

• Greater flexibility in plan formulation and execution

• Refined cramdown-like provisions to expedite approval

• Enhanced DIP governance under select circumstances

What the U.S. might learn from India:

• Importance of strict timelines to reduce value erosion

• Empowering creditors to drive speedy resolutions

• Streamlining appeals to avoid delays

Conclusion

India’s IBC and U.S. Chapter 11 represent two sophisticated approaches to the age-old challenge of corporate insolvency. While both aim to balance stakeholders’ rights and economic efficiency, their philosophies diverge: India’s creditor-centric, time-bound resolution versus the U.S.’s debtor autonomy and flexible restructuring. Each system reflects its economic and legal culture but also offers lessons that can enrich global insolvency practices.

As markets globalize and economic shocks become more frequent, effective insolvency frameworks are essential for sustainable business ecosystems. Understanding the dynamics, strengths, and limitations of IBC and Chapter 11 is critical for policymakers, legal practitioners, financial institutions, and corporate leaders navigating distress in an interconnected world.