IBC Reform Debate: Should Insider Loans Be Treated as Equity in Insolvency Cases?

The Insolvency and Bankruptcy Code (IBC) has significantly improved debt resolution in India, but concerns are emerging around the treatment of insider or related-party lending in insolvency cases. Under the current framework, promoters or group entities that lend to their own companies are treated on par with external financial creditors during liquidation, despite having informational advantages and often structuring what is effectively equity as debt. This creates a distortion where insiders—who bear risk similar to equity holders—can recover ahead of genuine arm’s-length creditors, including operational creditors. While the IBC already restricts related parties from participating in decision-making bodies like the Committee of Creditors and subjects their transactions to scrutiny, it does not differentiate them in the recovery waterfall. Global practices such as equitable subordination in the US or statutory subordination in countries like Germany recognize this imbalance and place insider claims lower in priority. Experts argue that India should adopt a similar approach to ensure fairness, prevent misuse of the system, and better align with the core objectives of the IBC—maximizing value and balancing stakeholder interests—while still allowing legitimate intra-group financing.