[Naman Aggarwal is a 5th year B.A. LL.B. (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow]
The Insolvency and Bankruptcy Code, 2016 (IBC) has transformed India’s legal regime on addressing corporate distress by prioritising timely revival, value maximisation and fairness to creditors. Since its introduction, the IBC has effected the resolution of stressed assets valued at over ₹26 lakh crore directly and indirectly and served as a credible threat to wilful defaulters and encouraged pre-insolvency transactions. As of Q4 FY25, the overall recovery rate registered under the IBC was 32.76%, an increase from the 31.39% recorded in the previous quarter. However, it still reflects a continuing challenge of bridging the gap between claims admitted and claims realised, implying a haircut of 67% on admitted claims. Although a recovery rate of 32.76% under the IBC is stronger than pre-IBC processes, it is still below the global standards in successful insolvency jurisdictions, such as recoveries exceeding 80% in Singapore, the United States, and the United Kingdom.
A key obstacle in achieving high rate of recoveries is the lack of use of avoidance proceedings under section 43 (preferential transactions), section 45 (undervalued transactions), section 66 (fraudulent trading), and section 50 (extortionate transactions) of the IBC which largely relate to the recovery of assets that are removed from a company prior to insolvency. These claims are often ignored since there are prohibitive litigation costs and risk, especially in the case of resolution professionals (RPs) and liquidators who are already dealing with resource constrained estates. This is where third-party litigation funding (TPF) can be helpful, where a third-party funder agrees to pay for litigation costs and the funder recoups its investment from the recovery of the litigation if the case is successful. The TPF model provides the estate the benefit of reduced, if not zero, cost of litigation and increased price discovery.
Globally, TPF will mature into a $25.1 billion industry by the end of 2025 and is projected to be worth $56.2 billion by 2034. While TPF is still in its infancy in India, it is becoming increasingly acceptable due to positive judicial feedback and the special need to deal with litigation backlogs. This post analyses the characteristics of TPF in India, its intersection with IBC, and policy recommendations for using TPF on behalf of creditors and improving creditor outcomes.
Evolving Dynamics of Third-Party Funding in India
TPF, whose validity was met with scepticism because of colonial era doctrine of maintenance and champerty, has acquired legitimacy through progressive jurisprudence. In Bar Council of India v. A.K. Balaji, the Supreme Court held that non-lawyers could indeed fund litigation so long as it does not implicate the issue of contingency fee under rule 20 of the Bar Council of India Rules and does not contravene professional ethics rules. The ruling removed the barriers to access to justice and casts TPF in a compelling light within the fight to ensure parity of arms for the lesser resourced claimant in a commercial dispute.
The Indian TPF market is still emerging but is ready for growth based on the growing awareness and institutional participation in TPF. Recently, it has received a noteworthy boost from Yashomati Hospitals Pvt. Ltd. (2025) in insolvency, in which the RP secured the funding through TPF channel, and within nine months the funder exited the investment with a return of over 26%, marking it as the first successful TPF exit under the Indian IBC regime. TPF’s role can be even more critical as, in Tomorrow Sales Agency v. SBS Holdings, the Delhi High Court acknowledged the relevance of TPF and held that funders cannot automatically be liable for adverse costs, thus reducing the entry barriers.
Furthermore, states such as Uttar Pradesh, Andhra Pradesh, Madhya Pradesh, Tamil Nadu and Odisha have expressly recognised the concept of TPF through amendments to Order XXV Rule 1 of the Code of Civil Procedure. Also, the Insolvency Law Committee Report has acknowledged TPF and noted that it is a commercial decision and can be best left to the market forces. Thus, there is adequate jurisprudence to legitimize TPF in India, particularly in insolvency matters.
Synergy between TPF and the IBC
TPF’s integration with the IBC provides strategic synergies, particularly in terms of improving price discovery and creditor recoveries. Under the IBC, RPs and liquidators are usually resource-constrained in pursuing avoidance claims that are a small fraction of total recoveries but can potentially recover billions. TPF provides non-recourse funding, takes on all of the downside risk, and has a success based return from the proceeds for its investment.
This process builds a deeper secondary market for distressed assets that leads to more competitive resolution plans. For example, Hindustan Construction Company Ltd. received litigation funding where TPF funded the arbitration claims during the CIRP process, which helped improve valuations and recovery values for the assets. Similarly, in the Patel Engineering insolvency, TPF provided funding to resolve disputes, which was part of TPF’s function of creating or preserving a going concern. This was helpful because it allowed for litigation funding without using the estate’s funds but still helped ensure the estate complied with IBC imperatives of maximisation of value.
Empirical data demonstrates that avoidance recoveries under IBC are a limited pursuit, which provides an increasing gap between fair value assessments and actual realisations. TPF assists in closing this gap by funding prolonged proceedings. There are plenty of examples around the world, such as the UK Carillion insolvency process, where the TPF funded claims process shows a significant uplift in potential realisations for creditors. In India, the National Company Law Appellate Tribunal (NCLAT) in the Archernar Brand Technologies case allowed defensible petitioners and creditors to be included in the proceedings through the scheme and, in doing so, created a path indirectly for TPF by allowing a wider range of petitioners and creditors to compete.
TPF also supports portfolio diversity for funders as it diversifies the risk associated with types of claims and sectors. This creates a virtuous cycle; successfully funded claims drive an increase in demand, which creates more bidders, which in turn positively affect price discovery for the estate that aligns with the IBC framework timelines.
Recommendations
Notwithstanding its potential, the hurdles associated with TPF’s acceptance in IBC processes are complex and various. Therefore, targeted recommendations are needed to promote acceptance and mitigate the risks.
The first main hurdle is the lack of a dedicated regulatory framework, which creates ambiguity regarding required disclosures, funder control, and even ethical obligations, and provides opportunities for conflicts with committee of creditors’ (CoC) approvals under section 28 of the IBC. Judicial attitudes about TPF vary considerably, with some tribunals perceiving it as “litigation speculation” along with champerty despite the judicial endorsement, such as the National Company Law Tribunal (NCLT) did in the GoAir Insolvency (2025) case.
To address this issue, India should consider a hybrid regulatory framework, whereby the IBC is amended to expressly permit RPs and/or liquidators to obtain funding from a third-party funder, with the requirement that CoC approval and disclosures of the commercial terms of the funding facility be made. The Insolvency and Bankruptcy Board of India (IBBI) may consider registering third-party funders adopting the guidance of Hong Kong’s Code of Practice for Third Party Funding of Arbitration and Singapore’s model, with regulatory parameters that impose a cap on success fees of approximately 30%, and limit controls over proceedings to maintain RP’s independence.
Another obstacle is the high funding premiums and tax uncertainties on funder returns, which affect creditor recoveries and serve as disincentives for investors. Further, foreign exchange controls for non-residents under the Foreign Exchange Management Act (FEMA) complicate the position of international global funders and their path to repatriate proceeds. To address this, tax neutrality could be implemented to introduce ranked TPF recoveries, which can lower costs and give the funded claims priority in the waterfall mechanism under section 53, providing incentives to fund cases with merit. Also, analysing FEMA provisions and removing barriers on a TPF basis can yield significant global capital in required cases. It is also recommended that a standard template for TPF agreements may be adopted, with safeguards on funded premiums and obligations, which can help ensure consistent practice, build trust and mitigate concerns.
Another challenge is that the NCLT’s delays (resolution under IBC on average takes more than 600 days), and compounded risks have limited the TPF to select targeted claims. Cultural resistance and lack of awareness among insolvency practitioners exacerbate the situation, resulting in limited use by practitioners. It is recommended that initiating pilot programmes in the NCLT to embed TPF in high-value insolvencies to create jurisprudence can be helpful. At the same time, the IBBI should also consider capacity building workshops for RPs and liquidators regarding the TPF to help address knowledge gaps.
There are also systemic challenges, including capacity-constrained tribunals and fractured market ecosystems, which further contribute to TPF’s discouragement. The suggestions include that more systemic measures, such as enhancing the judicial infrastructure and promoting awareness through collaboration by the various stakeholders takes place ensuring that the TPF aligns with India’s economic goals. The measures, if implemented successfully, can transform TPF from a niche apparatus to a broader influencer of IBC efficiency.
Conclusion
As the Indian economy moves towards the Viksit Bharat 2047 vision, it is critical to recognise third-party litigation funding under the IBC statute as a potentially transformative intervention to increase creditor recovery in IBC actions and make recovery of distressed assets within stipulated timelines. However, the apprehension over regulatory uncertainty surrounding TPF and the expense of TPF funders’ allocation are legitimate. It is crucial to deal with these factors while employing TPF to uncover latent value, create synergy, and reduce the average resolution time of distressed debt, which is currently more than double the IBC statutory timeframe.
The future of insolvency can be capably advanced through responsible incorporation and proper management of the TPF to achieve an effective mechanism for resolution and getting value for a distressed asset whilst maximising stakeholder recoveries. If one were to look at existing efficient practices across the globe and implement these back into local practice, one can start to address current lacunae and encourage more participation from funders and professionals. Addressing challenges head-on can lead to a sustainable, fair and capable next generation of insolvency systems that are capable of addressing distressed assets.
– Naman Aggarwal