IBC 2026: The Cost of Calling Distress Counsel Late Has Gone Up

 

 

 

By Adv Sreeraj Muralidharan 

BBM, FCS, LLB, CFORA

advsreerajm@gmail.com 

For years, the Insolvency and Bankruptcy Code was discussed in India with the confidence usually reserved for legislative success stories. Time-bound process. Creditor in control. Value maximisation. Clean slate. Fresh start.

Those slogans were not entirely false. They were simply incomplete.

Anyone who has actually advised through distress, negotiated under the shadow of insolvency, or fought these matters before the Tribunal knows that the real story was messier. Admission often became crowded with collateral objections. Resolution plans were approved, but then pushed into implementation turbulence. Liquidation was frequently treated as the place where process discipline went to die. Avoidance applications were invoked with great solemnity and pursued with far less energy. Government and regulatory authorities kept finding inventive ways to behave as if a resolution plan changed less than the statute said it did. And stakeholders repeatedly tried to use the process without truly submitting to its discipline.

The Insolvency and Bankruptcy Code (Amendment) Act, 2026, appears to be Parliament’s acknowledgement that the Code can no longer live on design theory. It now wants to regulate conduct inside the process. That is the real shift.

This is why the amendment matters. Not because it adds more sections. But because it redistributes leverage, sharpens accountability, and, in some areas, creates entirely new advisory and litigation risk.

That last point is important. Much of the market will read this amendment and ask what has become easier. A more serious reading asks a better question: what has now become more dangerous to get wrong?

That is where the next generation of insolvency advisory work will lie.

Admission will become narrower. Preparation will have to become deeper.

The tightening of section 7 is not just a technical amendment. It is a warning to both sides. Parliament has made it clearer that if a default exists, the application is complete, and there is no disciplinary proceeding against the proposed resolution professional, the Adjudicating Authority is not expected to roam widely in search of other reasons to reject the matter. Information utility records are also given stronger statutory weight.

That means the admission strategy will become more document-led and less rhetorical.

For lenders, this is an advantage only if the file is clean. The era of casual documentation followed by aggressive filing is narrowing. For borrowers, the older instinct of flooding the admission stage with every grievance, negotiation history and commercial complaint will increasingly lose force unless it strikes at the statutory heart of the petition.

This is where serious advisory work will change. The best insolvency strategy will now begin much earlier than filing. It will begin with record architecture, information utility discipline, security review, board conduct, correspondence management, and an honest assessment of whether the matter should be resisted at all, or instead settled, restructured, or strategically repositioned before threshold litigation hardens.

In other words, the amendment rewards preparation and punishes improvisation.

Resolution plans will now be judged by whether they can actually carry a business forward

One of the chronic weaknesses of the earlier framework was the gap between legal approval and commercial survival. A plan could be approved and still remain vulnerable to regulatory discontinuity, licensing uncertainty, revived claims, and implementation friction.

The amendments to sections 30 and 31 are Parliament’s attempt to fix that. Dissenting financial creditors are dealt with more expressly. The Committee of Creditors must record reasons for approving the plan. The Adjudicating Authority may first approve implementation and then the manner of distribution. Most importantly, licences, permits, registrations, quotas, concessions and similar rights associated with the plan are given greater continuity protection, and pre-approval claims against the corporate debtor and its assets are more clearly extinguished unless the plan provides otherwise. Promoters, guarantors and other jointly liable persons, however, remain exposed.

This is a major commercial correction.

A distressed acquisition is not won in court. It is won in continuity. If the business cannot continue to operate after the plan, the legal approval is little more than an expensive illusion.

This is precisely why sophisticated clients will need more than filing counsel. They will need lawyers who understand how insolvency intersects with licences, sectoral regulation, government permissions, tax exposure, guarantee structures, contingent claims, and post-approval enforcement risk. The amendment makes that advisory layer more valuable, not less.

Liquidation has been converted from a passive ending into an actively governed phase

The continued role of the Committee of Creditors during liquidation is one of the most consequential structural changes in the Act. The CoC now survives into liquidation in a supervisory role, and can even replace the liquidator. The separation between the CIRP resolution professional and the liquidator is also more clearly built in.

This is not a cosmetic reform. It changes how the liquidation strategy must now be conceived.

Earlier, many stakeholders treated liquidation as the stage after the real fight. That approach is no longer tenable. Asset sales, claim treatment, litigation choices, settlement posture, guarantor asset coordination, distribution modelling and dissolution timing will now sit under closer scrutiny. Liquidators will need stronger process discipline. Creditors will need better committee behaviour. Corporate groups will need to think about liquidation not merely as a terminal consequence, but as an arena where value can still be lost or salvaged depending on who controls the narrative and who understands the mechanics.

That will also change law-firm advisory. Liquidation files can no longer be handled as administrative leftovers. They will require the same strategic attention once reserved for admission and plan approval.

Avoidance and wrongful trading have moved from ornamental pleading to real exposure

This amendment is likely to change the psychology around avoidance and wrongful trading more than any prior reform. The Code now defines avoidance transactions and fraudulent or wrongful trading more clearly, obliges the RP to act where appropriate, preserves such proceedings beyond closure of the main process, and allows creditors, members or partners to move the Adjudicating Authority where the office-holder has failed to act. In an appropriate case, the Board may even be directed to initiate disciplinary proceedings against the professional for such failure.

That is a serious development.

Promoters, directors, related parties and counterparties who earlier assumed that these were forensic side notes may have to reassess. Equally, lenders and committees that treated these proceedings as optional weapons may now find them central to recovery strategy. The amendment has increased both the offensive and defensive importance of transaction review.

That means the advisory window opens much earlier. Once a company begins to show distress, pre-insolvency transactions, related-party structures, last-mile security creation, asset migration, settlement design, inter-company adjustments and board minutes will all matter far more than many clients presently assume.

The firms that will matter most in this new phase are not those that merely cite sections. They are those who can read a distressed history and tell the client, with precision, where future attacks will come from.

The new creditor-initiated insolvency process is innovative, but it also opens a new class of mistakes

The creditor-initiated insolvency resolution process introduced through Chapter IV-A is the boldest reform in the Act. It attempts to create a middle path between informal restructuring and full CIRP. Management may remain in place. Moratorium is not automatic. The process is creditor-triggered, supervised, shorter, and capable of conversion into CIRP if it fails or is improperly invoked.

This could become a very useful restructuring tool, particularly in the mid-market.

But that is only one side of the story.

The other side is that this new mechanism will be highly sensitive to procedural design. Who qualifies as a notified creditor? Which classes of debtors are covered? How the debtor’s representation is handled. When should a moratorium be sought? How management conduct is controlled. How quickly a defective commencement can be attacked. How is the transition into CIRP managed if the softer route fails? These are not marginal questions. They will decide whether the mechanism becomes credible or collapses under its own architecture.

From a client-development perspective, this is exactly the sort of reform that creates retainer work. Not because it is easy. But because it is new, commercially important, and impossible to navigate safely by instinct.

Section 59A is promising, but it is also an invitation to litigation

The provision on group insolvency is where the amendment should be read with more caution than celebration.

Yes, section 59A is an important legislative step. It empowers the Central Government to frame rules for insolvency proceedings involving two or more corporate debtors forming part of a group. It contemplates common benches, transfer of proceedings, coordinated professionals, coordination agreements, committee structures and costs. On paper, this is overdue and welcome.

But the definition architecture is where the future difficulty begins.

The section defines “group” through control or significant ownership, and “significant ownership” includes the right to exercise 26% or more voting rights.

That 26% threshold may look neat in legislation. In practice, it is broad enough to trigger serious contest. In complex shareholding structures, especially those involving financial investors, layered rights, cross-holdings, quasi-control arrangements, veto-based governance, shareholder agreements, negative covenants and economic control without formal majority ownership, the question of whether a set of entities truly belongs inside a coordinated insolvency framework will not always be straightforward.

A threshold like this may pull in relationships that are commercially connected but not operationally integrated. It may also produce the opposite problem: parties contesting coordination because inclusion would alter venue, creditor dynamics, group bargaining power, or asset realisation strategy.

So yes, section 59A opens a door. But it also opens a corridor full of arguments.

From an advisory standpoint, that is hugely significant. Enterprise groups will need their structures reviewed before distress hardens. Investors will need to understand whether minority positions may create future group-level insolvency consequences. Lenders will want to model whether group coordination helps or harms their recoveries. Boards will need advice not merely on whether they are in distress, but on whether their distress can be procedurally tied to someone else’s.

This is not abstract law-reform commentary. This is a future boardroom risk.

Cross-border and digital process architecture will also increase the premium on early counsel

The enabling provisions for cross-border insolvency and electronic process infrastructure may look secondary today, but serious clients should not treat them lightly. Once rules begin to emerge, foreign-linked debt structures, offshore holding arrangements, cross-border guarantees, recognition issues, jurisdictional strategy and process administration will become increasingly system-driven.

That is another reason why reactive insolvency practice will not be enough.

The next generation of insolvency work will be less about last-minute rescue drafting and more about continuous strategic advisory: monitoring structure risk, documenting governance carefully, preserving enforcement options, anticipating forum shifts, stress-testing transaction steps, and positioning clients before insolvency becomes unavoidable.

That is retainer work. And rightly so.

The penalty regime tells its own story

The expansion of penalties under the amended Code is not merely about enforcement. It is about a change in legislative attitude. Frivolous proceedings can now attract a penalty. Moratorium breaches can attract a penalty. Resolution plan contraventions can attract a penalty. Operational creditors who conceal a pre-existing dispute or payment can attract a penalty. General contraventions are now governed by a stronger adjudicatory penalty framework.

The State has not become softer. It has become more efficient.

For corporates, lenders, officers and insolvency professionals, this means the cost of getting the process conduct wrong is going up. That is another clear reason why insolvency cannot be treated as episodic litigation alone. It is increasingly a compliance and governance problem.

How does this change our own practice?

At our firm, this amendment would change how we advise clients from the first sign of stress.

We would no longer treat insolvency advice as beginning with the petition. It would begin earlier, with record discipline, security review, related-party transaction mapping, claim positioning, information utility readiness, board minutes, distressed negotiations, and realistic assessment of whether the client should fight, settle, restructure or prepare for controlled entry.

For lenders, the focus would become tighter on enforceability, admission readiness, group exposure, guarantor strategy, and post-admission leverage. For corporates and promoter groups, the advice would become more candid: sentimental resistance at the threshold stage will increasingly fail unless anchored in real legal weakness. For resolution applicants, our work would become even more implementation-heavy, because continuity of permissions, claim extinguishment, liability carve-outs and post-approval enforceability are now where value will be won or lost. For enterprise groups, section 59A alone would justify early structural review. And for ongoing insolvency matters, avoidance, wrongful trading and liquidation supervision would no longer be treated as secondary chapters.

That is how serious insolvency practice now evolves. From event-based reaction to ongoing strategic control.

Conclusion

The Insolvency and Bankruptcy Code (Amendment) Act, 2026, is not just a legislative update. It is a market signal.

It tells creditors that process discipline will matter more. It tells debtors that threshold resistance will need to become sharper and less theatrical. It tells professionals that passivity carries risk. It tells promoters and related parties that pre-insolvency conduct may now be pursued with greater seriousness. And it tells sophisticated businesses something even more important: the cost of waiting too long for good advice has just increased.

That is the real commercial meaning of this amendment.

The Code has become sharper. So have the risks.

And when the law becomes more structured, more supervisory and more unforgiving, clients do not merely need lawyers to appear. They need lawyers who can see trouble before the petition is filed.