CIIRP and the Creditor Hierarchy Problem under Insolvency and Bankruptcy Code Amendment Act 2026

[Chitraksh is a student at Gujarat National Law University.]

When the Insolvency and Bankruptcy Code Amendment Act 2026 (Amendment Act) received Presidential assent on 6 April 2026, it introduced India's most ambitious restructuring innovation since the parent statute: the creditor-initiated insolvency resolution process (CIIRP), housed in the newly inserted Chapter IV-A, Sections 58A to 58K of the Insolvency and Bankruptcy Code 2016 (Code). The CIIRP offers an out-of-court, debtor-in-possession pathway as an alternative to the corporate insolvency resolution process (CIRP). Its rationale is easy to appreciate: by 2026, the average CIRP had stretched to 744 days, against an original legislative target of 180. The CIIRP was Parliament's answer.

The mechanism allows a financial creditor holding at least 51% of total financial debt to appoint a resolution professional (RP), retain the corporate debtor's management in possession, and seek approval of a resolution plan within 150 days, extendable by 45 days, without triggering formal insolvency proceedings at the outset. The logic is borrowed from pre-packaged insolvency systems in the United Kingdom and the United States, where creditor-debtor negotiations are substantially concluded before any formal process commences.

The ambition is right. The eligibility architecture is not. By limiting CIIRP initiation to a subset of financial creditors that the Central Government will notify under subordinate legislation, the Amendment Act creates a two-tier class of financial creditors whose internal differentiation the Code's own constitutional foundations cannot support. This article makes three arguments. First, the notified-institution restriction is constitutionally exposed under Article 14 of the Constitution of India. Second, the CIIRP replicates the distributional asymmetry that has disadvantaged operational creditors for a decade. Third, the mechanism's structural gaps, particularly the absence of a debtor-in-possession financing framework, risk defeating its own purpose before it begins. The deferred commencement of the CIIRP's provisions is a legislative window the Insolvency and Bankruptcy Board of India (IBBI) must use to correct each of these defects.

The Article 14 Problem: A Sub-Classification Without Rational Nexus

The constitutional history of the Code is well-charted. In Swiss Ribbons Private Limited v Union of India (Swiss Ribbons), the Supreme Court upheld the distinction between financial and operational creditors based on intelligible differentia, reasoning that financial creditors are institutionally better placed to evaluate and coordinate the resolution process. Whatever its limitations, that reasoning rests on a functional distinction between two categorically different groups.

The CIIRP creates a categorically different constitutional problem. By restricting initiation rights to notified financial institutions, the Amendment Act draws a line within the class of financial creditors themselves. A foreign portfolio investor holding listed bonds of a distressed debtor, a non-banking financial company with a large term loan, or a mutual fund with substantial debenture exposure may each carry a greater economic stake in the resolution outcome than a notified scheduled commercial bank. Yet under the current framework, only the notified institution may invoke the CIIRP, regardless of relative exposure or creditor consensus.

Article 14 requires two conditions for any classification to survive scrutiny: an intelligible differentia distinguishing the group treated differently from others, and a rational nexus between that differentia and the object of the legislation. The stated object of the CIIRP is faster, cooperative restructuring that preserves enterprise value. It is constitutionally difficult to argue that a bank's status as a notified institution makes it a structurally superior vehicle for cooperative restructuring compared to a bond-market creditor or a foreign lender with equal or greater financial exposure. The notification mechanism, as currently framed, functions less as a substantive eligibility criterion and more as an administrative conferral of exclusive procedural rights. Constitutional challenges on this ground have already been anticipated, and without notification criteria anchored to objective, exposure-based thresholds, judicial review is a foreseeable consequence.

The Operational Creditor Exclusion: A Paradox in the Mechanism's Own Logic

Operational creditors are excluded from CIIRP initiation entirely. The exclusion may appear consistent with Swiss Ribbons at first glance, but it generates a paradox specific to this mechanism. The CIIRP is designed to enable resolution before stress becomes systemic. Operational creditors, particularly micro, small, and medium enterprise suppliers, are typically the earliest to detect that stress: invoice payment delays precede formal default on financial debt by weeks, sometimes months. Denying these creditors access to the CIIRP wastes precisely the early-warning information the mechanism depends on.

More critically, the CIRP has historically delivered negligible recoveries for operational creditors, who occupy the residual end of the distribution waterfall. Channelling them back into the adversarial CIRP means that the mechanism positioned as a more equitable alternative to the CIRP replicates, for the very creditors most exposed to its failings, the same distributional logic that has disadvantaged them since 2016. A mechanism cannot credibly claim to improve upon the CIRP while preserving its most contested asymmetry.

The DIP Financing Lacuna and the Conversion Trap

Two structural gaps compound the eligibility problem. First, the CIIRP contains no statutory Debtor-in-Possession financing framework. Under Chapter 11 of the United States Bankruptcy Code, DIP lenders receive super-priority over pre-existing creditors, providing the distressed entity with the liquidity runway necessary to implement a resolution plan while remaining operational. The Amendment Act provides no equivalent protection: any lender extending credit during the CIIRP's 150-day window faces legally uncertain priority. The companies most likely to need the CIIRP are therefore also the least likely to attract willing post-commencement lenders, which would limit the mechanism in practice to large, asset-heavy debtors with adequate internal liquidity, precisely those who need it least.

Second, the conversion trigger creates a perverse incentive structure. Under the Amendment Act, non-cooperation by the corporate debtor's management converts the CIIRP into a standard CIRP automatically. A promoter-managed debtor that finds the notified institution's restructuring terms unfavourable has every incentive to delay cooperation within the 150-day window, force conversion, and then engage the familiar withdrawal negotiations available under the revised Section 12A of the Code. The CIIRP was designed to reduce procedural delay. Its conversion mechanism may, in contested situations, simply add one more procedural stage before the same delays resume.

What the IBBI Must Address Before Commencement

The CIIRP provisions will come into force on a date the Central Government appoints by notification under Section 1(2) of the Amendment Act. This deferred commencement is not merely administrative: it is a corrective window. Three regulatory interventions are necessary before the CIIRP goes live.

First, notification criteria for eligible CIIRP initiators must be framed by reference to objective, exposure-based thresholds rather than institutional category. Any financial creditor holding 51% or more of a corporate debtor's total financial debt, regardless of institutional type, should qualify. Second, IBBI regulations under the CIIRP must introduce a DIP Financing framework that provides statutory priority protection for credit extended during the CIIRP window, directly analogous to the super-priority regime in Chapter 11. Third, the conversion trigger must be redefined to distinguish genuine non-cooperation from a dominant creditor's strategic deployment of the conversion mechanism against other creditors' interests.

Conclusion

The CIIRP is India's most structurally innovative insolvency reform since the Code itself. It is also, as enacted, constitutionally exposed in its eligibility architecture, distributional in its asymmetry toward operational creditors, and practically vulnerable in the absence of DIP Financing protections.

During the Lok Sabha debate on the Amendment Act, Finance Minister Nirmala Sitharaman stated that "the IBC was never intended to be a debt-recovery tool". That intent is most imperilled by the provision enacted in the same breath to advance it. A notification mechanism that grants exclusive procedural rights to a closed category of institutions does not make the Code a cooperative restructuring statute. It makes it a cooperative restructuring statute for some creditors.

The IBBI has, in the deferred commencement window, a rare opportunity to get this right before a single CIIRP is filed. The mechanism is worth building. It must first be built for all creditors.