The outline of India’s Insolvency and Bankruptcy Code (IBC) has long been demarcated by an innate stiffness between the inevitability to preserve distraught companies and the necessity to safeguard the interests of creditors. This contradiction is often cited as the ‘Chakravyuha Challenge’— a structural paradox by which the economy eases a company’s entry into the system but forms formidable formal fences when it wishes to exit.

From the Sick Industrial Companies Act, which demonstrated a debtor-in-possession model and had been plagued by promoter misuse, to the creditor-in-control model of the IBC, the historical flight of such laws reflects an incessant effort to improve the balance. Though the IBC aimed at providing time-bound resolutions, it has fallen short due to protracted litigation and procedural lapses. In light of this, the 2026 Amendment to the IBC presents the Creditor-Initiated Insolvency Resolution Process (CIIRP), a hybrid apparatus attempting to espouse debtor-in-possession topographies with the creditor-in-control model. Nevertheless, the amendment’s restrictive framework bounds initiation rights to only a fine class of financial creditors belonging to “notified financial institutions”, thereby inviting constitutional contests and economic ineptitude.

Swift yet stringent alternative

The CIIRP is a clever attempt to address financial crisis without the value-destroying disruption of typical liquidation proceedings by allowing the current management to maintain control over activities under the supervision of a resolution specialist. In order to reduce judicial intervention and procedural delays, the IBC established the CIIRP procedure by adding Sections 54C to 54P.

Significantly, the change is a legislative response to the ruling in Vidarbha Industries. The National Company Law Tribunal (NCLT) was formerly given discretionary authority via the interpretation of “may” in Section 7(5)(a), which permitted it to postpone or reject admission even in cases where debt and default were proven. This has now been replaced by the required “shall” via the 2026 amendment, thereby compelling the NCLT to accept cases based on information utility records. As a less disruptive restructuring instrument, the CIIRP is an appealing, if exclusive, resort for creditors because corporate debtors experiencing transitory liquidity crises suddenly lack the breathing room to fight initiation.

However, by limiting the ability to start the CIIRP only for “notified financial institutions,” the Act creates an arbitrary hierarchy within the class of financial creditors. Although the distinction between financial and operational creditors was previously maintained in Swiss Ribbons via the “intelligible differentia” standard of Article 14, this sub-classification is essentially different. The government’s argument that “notified” institutions have special knowledge is out of date; sophisticated investors with the ability to perform in-depth restructuring analysis can be found in today’s financial markets. The Act runs the danger of being overturned as arbitrary since it does not explain why these excluded parties are less able to promote resolutions that maximise value.

Operational and smaller financial creditors are significantly disenfranchised under the current arrangement as they are already at the bottom of the repayment priority list. Smaller creditors may be forced to the sidelines of restructuring talks as a result of the CIIRP’s propensity to concentrate bargaining power in the hands of notified institutions. It compels non-notified creditors to undertake the more aggressive and disruptive Corporate Insolvency Resolution Process (CIRP) just to protect their financial interests. This compromises the equity of the entire insolvency ecosystem.

The way ahead

The Indian method is mysteriously constrictive. The U.S.’ Chapter 11 and the U.K.’s Part 26A restructuring plans base their access on objective financial conditions rather than the regulatory identity of the creditor. A wide range of stakeholders can participate in the restructuring process in both the U.S. and the U.K. as long as they meet certain requirements. India’s choice to restrict initiation rights to a particular group of creditors is an anomaly that deters foreign investors from participating because they believe that the Indian market is intrinsically skewed against their asset classes. The law gives notified institutions procedural dominance, which makes Inter-Creditor Agreements less clear and informal negotiations less fair. If a lender who hasn’t been notified is put on hold, they have to file for formal CIRP to protect their capital.

There must be a “universal CIIRP” with a “default-neutral initiation rule”. This proposal does away with regulatory status and replaces it with a threshold based on financial exposure. Any financial creditor could start the process as long as they get the support of creditors holding at least 51% of the total financial debt. This takes care of constitutional issues while keeping a strong protection against one-sided, malicious filings.

By adding debtor-in-possession features, the 2026 amendment shows that the pure creditor-in-control model doesn’t keep business value. But the ‘notified institution’ criteria could hurt these gains. India can make an efficient insolvency system that benefits everyone by using a universal CIIRP model based on financial interest instead of institutional identity.

Vinay Juneja is Course Director, PG MBA and Assistant Professor (Law) at Maharashtra National Law University Mumbai. Shweta Bhuyan is a Research Assistant (Law) and PhD Scholar, Maharashtra National Law University Mumbai