IBC promise of a ‘clean slate’: A legal amendment can clarify the concept but the message must reach everyone

Subscribe to enjoy similar stories. India’s finance minister has stated in interviews that the Budget Session of Parliament is slated to amend the Insolvency and Bankruptcy Code (IBC) to clearly grant insolvent companies a “clean slate," with their civil and criminal liabilities wiped out, once a new management takes over. However, the key question is whether legislative reform is sufficient, given the tenacity of tax authorities and investigative agencies.

Insolvency law has different policy priorities from tax and criminal law. On one hand, the goal is to resolve insolvent companies and maximize value for creditors (a significant part of which are public sector banks or PSBs), repurpose productive assets and free up bank capital. On the other, the state has a duty to investigate economic crimes and recover tax revenue for public spending.

While insolvency, tax and criminal law are often viewed as hermetically sealed silos, they are intricately connected. When investors lack confidence that the assets they purchase will be insulated from old claims, they discount valuations. This limits recoveries for lenders, traps bank capital and prevents credit outflow for productive uses.

This in turn has fiscal consequences (including the need to recapitalize PSBs) and therefore requires policy trade-offs at the time of framing insolvency and tax laws. Courts and legislators may treat insolvency, tax and criminal laws as silos, but reform requires a cohesive, whole-of-government approach. The proposed amendments prioritize insolvency claims over the government’s tax dues and criminal attachments.