IBC AMENDMENT 2026: FINANCIAL CREDITORS GET EVEN MORE POWER AT THE COST OF OTHERS

Financial Creditors were already dominant players in comparison to other creditors under the Insolvency and Bankruptcy Code, 2016. The 2026 Amendment has made them much stronger. A company not only deals with Financial Creditors, but also with several vendors and service providers who supply goods and services. Unfortunately, the 2026 Amendment, despite being a comprehensive one, has little to offer to Operational Creditors and other stakeholders. The IBC increasingly seems to have become a tool by Financial Creditors, for Financial Creditors.

CURTAILING DISCRETION OF ADJUDICATING AUTHORITY

The discretion of the Adjudicating Authority to admit a petition under Section 7 has been significantly curtailed. If a default has occurred, the application is complete, and no disciplinary proceeding is pending against the proposed Resolution Professional, the Adjudicating Authority has to admit such petition.

The dissenting voice of the Supreme Court in Vidarbha Industries Power Limited v. Axis Bank Limited, (2022) 8 SCC 352, where the Court had interpreted the word “may” in Section 7(5)(a) as conferring discretion upon the Adjudicating Authority to admit or reject an application even after default was established, now appears to have been legislatively overruled by the 2026 Amendment.

A 14-day timeline to decide petitions under Sections 7, 9, and 10 has also been made mandatory. If such applications are not admitted within 14 days, reasons for non-admission have to be recorded in writing. However, considering the infrastructural challenges that the NCLT faces on account of limited courtrooms and shortage of Presiding Officers, the 14-day timeline may remain difficult to implement in practice.

INCREASING ROLE OF COMMITTEE OF CREDITORS IN LIQUIDATION

The control of Financial Creditors has been strengthened even in liquidation, as the Committee of Creditors has now been made the supervisory body over the liquidation process. The Stakeholders’ Consultation Committee, which was a more representative body and included Operational Creditors, may have to give way to the Committee of Creditors.

The Stakeholders’ Consultation Committee was merely a consultative body, whereas the CoC will now function as a full-fledged supervisory body. The Committee of Creditors will enjoy extensive powers over the Liquidator, including the power to replace him.

CREDITOR-INITIATED INSOLVENCY RESOLUTION PROCESS

A new type of insolvency resolution process has been introduced for a certain class of Financial Creditors, who can initiate insolvency proceedings without even approaching the NCLT at the threshold.

Fifty-one percent of the Financial Creditors can initiate insolvency proceedings against a Corporate Debtor. Without judicial or open-court supervision, the Committee of Creditors can be constituted and a Resolution Plan may be approved. Only certain reports are required to be filed before the NCLT during the process. At the fag end of the process, the Resolution Plan will require approval from the NCLT. This marks a major shift from a court-driven process to a creditor-driven process.

GOVERNMENT NO LONGER A SECURED CREDITOR

The Supreme Court in State Tax Officer v. Rainbow Papers Limited, (2023) 9 SCC 545, held that tax authorities could fall within the ambit of “secured creditors” because of statutory charge provisions under tax statutes.

Subsequent Supreme Court judgments did not fully approve this view, and the 2026 Amendment has now put a quietus to the controversy. Any charge created merely by operation of law will no longer qualify as a “secured interest.” Only a security interest created by contract will be covered under the definition of “secured interest.”

As a result, the Government can no longer claim a higher position in the waterfall mechanism above Financial Creditors.

CONCLUSION

Prior experience shows that granting more power to Financial Creditors, even at the cost of equity and broader stakeholder interests, may not necessarily yield the desired results. The establishment of Debt Recovery Tribunals (DRTs) was intended to ensure faster recovery for banks and financial institutions, but the outcomes have often fallen short of expectations. Likewise, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) empowered banks to take possession of secured assets without prior court intervention, yet it too has not substantially improved recovery rates in many cases.

The real solution lies in strengthening and streamlining the existing insolvency framework, addressing infrastructural and procedural bottlenecks, and ensuring effective implementation of the law. Frequent legislative overhauls, without first resolving systemic inefficiencies, may create only an illusion of reform – a mirage rather than meaningful progress.

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