Corporate Insolvency Resolution Process Under IBC, 2016

Introduction

The enactment of the Insolvency and Bankruptcy Code in 2016 marked a transformative moment in India’s financial and corporate legal landscape. Before this legislation came into force, the country’s insolvency framework was fragmented across multiple statutes, creating a maze of procedural complexities that often left creditors waiting for years to recover their dues. The Code consolidated these disparate laws into a single, unified framework designed to address corporate insolvency in a time-bound manner while balancing the interests of all stakeholders involved. The legislative intent behind the Insolvency and Bankruptcy Code was clear: to shift the paradigm from a debtor-friendly regime to one where creditors exercise meaningful control over the corporate insolvency resolution process. This fundamental change recognized that India’s earlier approach, which provided extensive protection to defaulting entities, had contributed to mounting non-performing assets in the banking sector and hindered credit availability in the economy. The Code sought to remedy these issues by introducing strict timelines, professional oversight, and a clear hierarchy for the distribution of assets.

The Legislative Framework and Its Evolution

The Insolvency and Bankruptcy Code received Presidential assent on May 28, 2016, and was notified in the official gazette the same day.[1] This legislation represented a deliberate effort to overhaul and replace a complex web of existing laws that had governed insolvency matters. Prior to the Code’s introduction, corporate insolvency and debt recovery were scattered across provisions in the Companies Act of 1956 and 2013, the Recovery of Debts Due to Banks and Financial Institutions Act of 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002, and the Sick Industrial Companies Act of 1985.[2]

The fragmented nature of these laws created significant inefficiencies. Different forums had jurisdiction over various aspects of debt recovery and insolvency, leading to conflicting decisions and prolonged litigation. Creditors often found themselves navigating multiple legal avenues simultaneously, with no guarantee of timely resolution. The Code addressed these concerns by establishing the National Company Law Tribunal as the primary adjudicating authority for corporate insolvency matters and by creating an ecosystem of supporting institutions.

The Code’s objective, as articulated in its preamble, extends beyond mere debt recovery. It aims to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons in a time-bound manner for maximization of asset value, while promoting entrepreneurship, credit availability, and balancing stakeholder interests. Notably, the Code altered the traditional priority order for payment of government dues, recognizing that secured creditors and workmen should receive preference in the distribution waterfall.

Understanding the Triggering Mechanism

The initiation of corporate insolvency proceedings under the Code can be triggered by three categories of applicants: financial creditors, operational creditors, and the corporate debtor itself. Each category follows a distinct procedural pathway, though all applications ultimately reach the National Company Law Tribunal for adjudication.

Financial creditors, as defined under the Code, are entities to whom a financial debt is owed. This includes banks, financial institutions, debenture holders, and any person to whom a debt is owed in respect of the financial assistance provided. A financial creditor may file an application under Section 7 of the Code when a default in repayment occurs. The threshold for initiating proceedings is currently set at one hundred thousand rupees, though this amount may be revised through notification.[3]

Operational creditors represent a different category of stakeholders. These are entities to whom operational debt is owed, typically suppliers of goods or services. Before an operational creditor can approach the Tribunal under Section 9, they must first serve a demand notice upon the corporate debtor. This notice must clearly state the amount due and demand payment within ten days of receipt. If the corporate debtor fails to make payment or disputes the debt by demonstrating the existence of a genuine dispute, the operational creditor may then proceed to file an insolvency application.

The corporate debtor itself, acting through its board of directors or partners, may also initiate insolvency proceedings under Section 10 of the Code. This provision allows companies facing financial distress to voluntarily seek resolution before creditors force the process. Such voluntary initiation demonstrates a recognition by the company’s management that continuing operations without restructuring would be detrimental to all stakeholders.

The Role of Dispute in Operational Debt Cases

The question of what constitutes a valid dispute capable of preventing the initiation of insolvency proceedings has been the subject of judicial interpretation. The Supreme Court’s decision in Mobilox Innovations Private Limited versus Kirusa Software Private Limited provided important clarity on this issue.[4] The case arose when Kirusa, claiming to be an operational creditor, issued a demand notice to Mobilox seeking payment of certain dues. Mobilox responded by asserting the existence of serious disputes and alleging breach of a non-disclosure agreement by Kirusa.

When Kirusa filed an application under Section 9 before the National Company Law Tribunal in Mumbai, the Tribunal dismissed it, accepting Mobilox’s contention that a valid dispute existed. However, the National Company Law Appellate Tribunal reversed this decision, holding that the notice of dispute did not reveal a genuine disagreement between the parties. The matter eventually reached the Supreme Court, which had to determine the threshold for establishing a dispute that would preclude insolvency proceedings.

The Supreme Court’s judgment emphasized that the existence of a dispute must be assessed based on the materials available at the time the demand notice was issued. If the corporate debtor can demonstrate that a dispute existed before the receipt of the demand notice, or if the dispute is raised in response to the notice and is supported by credible evidence, the Tribunal should reject the insolvency application. This interpretation prevents the Code from being misused as a debt collection mechanism in cases where genuine commercial disagreements exist.

The Initial Phase: Admission and Moratorium

When the National Company Law Tribunal admits an insolvency application under Section 7, 9, or 10, it triggers a series of immediate consequences. The Tribunal must appoint an Interim Resolution Professional within fourteen days of admission, subject to confirmation from the Insolvency and Bankruptcy Board of India that the proposed professional is eligible and willing to act. This appointment marks the beginning of a critical transition in the management and control of the corporate debtor.

Upon the appointment of the Interim Resolution Professional, the powers of the board of directors or partners of the corporate debtor are suspended and vested in the professional. This transfer of control represents one of the Code’s most significant departures from previous insolvency regimes. The directors no longer have authority to make decisions regarding the company’s operations or assets. Instead, the Interim Resolution Professional assumes responsibility for managing the debtor as a going concern, preserving asset value, and facilitating the corporate insolvency resolution process.

Simultaneously with the appointment, the Tribunal declares a moratorium under Section 14 of the Code. This moratorium prohibits the institution or continuation of suits or proceedings against the corporate debtor, the enforcement of security interests, the recovery of property by owners or lessors, and any action to foreclose or enforce contracts. The moratorium serves a crucial function by providing breathing space during which a resolution plan can be formulated without the distraction and value destruction that multiple recovery proceedings would cause.

The moratorium does not, however, provide blanket protection to the corporate debtor. Certain proceedings, such as those necessary to preserve the debtor’s assets or those initiated by government authorities for statutory obligations, may continue despite the moratorium. The Supreme Court has also clarified that the moratorium applies only to recovery actions against the corporate debtor and does not extend to personal guarantors of the corporate debtor’s obligations.

Constitution and Functioning of the Committee of Creditors

One of the Code’s most significant innovations is the Committee of Creditors, which exercises ultimate decision-making authority regarding the corporate insolvency resolution process. Within seven days of his appointment, the Interim Resolution Professional must constitute this committee, comprising all financial creditors of the corporate debtor or their authorized representatives. The committee does not include operational creditors as voting members, though they may attend meetings and make representations.[5]

The exclusion of operational creditors from voting rights reflects the Code’s underlying philosophy that financial creditors, having provided capital based on assessed commercial risk, should have primary control over resolution decisions. Operational creditors are owed money for goods or services supplied in the ordinary course of business and are considered less equipped to make complex restructuring decisions. However, if the total dues owed to operational creditors represent at least ten percent of the debt, they may be represented on the committee, though without voting rights.

Related parties of the corporate debtor are explicitly prohibited from participating in the Committee of Creditors. This exclusion prevents conflicts of interest and ensures that resolution decisions are made by independent creditors with genuine economic interests at stake. The determination of whether an entity qualifies as a related party follows the definitions provided in relevant regulations and accounting standards.

The Committee of Creditors operates on the principle of collective decision-making, with most significant decisions requiring approval by not less than seventy-five percent of voting share. This supermajority requirement ensures that resolution decisions reflect broad creditor consensus rather than the wishes of a narrow majority. The voting share of each financial creditor is determined based on the proportion of financial debt owed to that creditor relative to the total financial debt.

The Resolution Professional and Management of the Process

At the first meeting of the Committee of Creditors, members must decide whether to confirm the Interim Resolution Professional as the Resolution Professional or to appoint a different insolvency professional. This decision requires approval by at least seventy-five percent of the voting share. Once appointed, the Resolution Professional may be replaced at any time by a similar supermajority vote of the committee.

The Resolution Professional’s responsibilities extend far beyond mere administration. Under Section 18 of the Code, the professional must manage the operations of the corporate debtor as a going concern, preserving asset value during the resolution period. This includes continuing essential business operations, maintaining relationships with suppliers and customers, and preventing asset dissipation. The Resolution Professional must also prepare an information memorandum containing relevant details about the corporate debtor’s assets, liabilities, operations, and financial condition.

The professional is empowered to call for information from any person associated with the corporate debtor and may apply to the Tribunal for directions when necessary. Directors, partners, and officers of the corporate debtor are obligated to cooperate with the Resolution Professional and provide all requested information. Failure to cooperate can result in penalties and, in severe cases, may constitute grounds for treating the conduct as fraudulent or wrongful trading.

The Code provides the Resolution Professional with immunity from liability for actions taken in good faith during the course of performing duties. This protection is essential to enable professionals to make difficult decisions without fear of personal consequences, provided they act within the bounds of their authority and without malicious intent. However, this immunity does not extend to actions involving gross negligence, willful misconduct, or fraud.

Formulation and Approval of Resolution Plans

The central objective of the corporate insolvency resolution process is to arrive at a viable resolution plan that addresses the corporate debtor’s financial distress while maximizing the value available to all stakeholders. Resolution applicants, who may be existing promoters, competitors, financial investors, or any other interested parties, submit proposed plans to the Resolution Professional. These plans typically involve some combination of financial restructuring, operational improvements, asset sales, and changes to management or ownership structure.

The Resolution Professional is responsible for evaluating submitted plans against the criteria established by the Code and regulations. A resolution plan must provide for the payment of corporate insolvency resolution process costs in priority to all other debts. It must also specify the manner of distributing amounts to creditors, taking into account the order of priority established under the Code. Plans must be feasible and provide for the implementation of the proposed actions within specified timeframes.

Before a plan is presented to the Committee of Creditors, the Resolution Professional must ensure that it conforms to the requirements of the Code. The plan must not contravene any law and must not affect the rights of workers beyond what is specifically provided. Once satisfied that a plan meets these basic requirements, the Resolution Professional presents it to the committee for approval.

The Committee of Creditors evaluates submitted plans based on their commercial wisdom, considering factors such as the amount being offered to creditors, the viability of the proposed business model, the credibility of the resolution applicant, and the likelihood of successful implementation. The committee may request modifications to plans or may negotiate with resolution applicants to improve terms. Approval of a resolution plan requires an affirmative vote of at least sixty-six percent of the voting share of the committee.

Timeline and Extension Provisions

The Code imposes strict timelines on the corporate insolvency resolution process, reflecting its time-bound philosophy. From the date of admission of an application by the Tribunal, the entire corporate insolvency resolution process must be completed within one hundred eighty days. This period encompasses the appointment of the Resolution Professional, constitution of the Committee of Creditors, invitation and evaluation of resolution plans, and approval of a final plan.

Recognizing that complex cases may require additional time, the Code permits a one-time extension of the resolution period by up to ninety days. This extension may be granted by the Tribunal on application by the Resolution Professional, provided the Committee of Creditors approves the request by a seventy-five percent vote. The extension provision acknowledges that rigid adherence to the initial timeline might, in certain circumstances, prevent the formulation of optimal resolution outcomes.[6]

The time limits imposed by the Code are mandatory rather than directory. Courts have consistently held that these timelines reflect Parliamentary intent to prevent indefinite delays that characterized previous insolvency regimes. However, the computation of the timeline excludes certain periods, such as time taken in legal proceedings where the operation of the resolution process is stayed by judicial order.

When the resolution process exceeds the maximum permissible duration without approval of a resolution plan, the Code mandates that the corporate debtor must be liquidated. This consequence underscores the seriousness with which the Code treats timeline compliance and prevents the process from becoming a mechanism for indefinitely postponing creditor rights.

Liquidation as the Alternative

If the Committee of Creditors fails to approve a resolution plan within the prescribed timeline, or if the committee decides by a vote of sixty-six percent of voting share that the corporate debtor should be liquidated rather than resolved, the Tribunal orders liquidation. Liquidation represents the terminal phase of the insolvency process, where the corporate debtor’s assets are sold and the proceeds distributed among creditors according to the priority waterfall established in the Code.

Upon passing a liquidation order, the Tribunal appoints a liquidator, who may be the same insolvency professional who served as the Resolution Professional. The liquidator takes custody and control of all assets of the corporate debtor and forms an estate comprising those assets. The liquidator’s primary responsibilities include verifying and admitting creditor claims, determining the liquidation value of assets, conducting the sale of assets, and distributing the proceeds to claimants.

The Code establishes a clear order of priority for distribution of liquidation proceeds. First in priority are the costs of the insolvency resolution process and liquidation process itself. Next are secured creditors, who may either relinquish their security interest to the liquidation estate and receive proceeds according to the priority order, or realize their security interest outside the liquidation process. Workmen’s dues for the twenty-four months preceding the liquidation commencement date rank equally with secured creditors who have relinquished their security.

Following secured creditors and workmen’s dues are wages and unpaid dues owed to employees other than workmen for twelve months preceding the liquidation. Unsecured financial creditors rank next, followed by government dues for a period not exceeding two years. This placement of government dues relatively low in the priority order represents a significant departure from previous law, where government claims often took precedence. The rationale is that prioritizing productive creditors over the government encourages lending and economic activity.

The Institutional Framework Supporting the Code

The effective operation of the Insolvency and Bankruptcy Code depends on a robust institutional framework. The Insolvency and Bankruptcy Board of India serves as the apex regulatory body, responsible for regulating insolvency professionals, insolvency professional agencies, and information utilities. The Board establishes standards, monitors compliance, and takes disciplinary action when necessary.

Insolvency professionals are individuals who have completed specified educational qualifications, passed examinations, and obtained membership with an insolvency professional agency recognized by the Board. These professionals serve as interim resolution professionals, resolution professionals, or liquidators in insolvency proceedings. Their role requires specialized knowledge of business, finance, law, and restructuring, combined with ethical standards that ensure impartial conduct.

Information utilities represent another crucial component of the ecosystem. These entities maintain electronic databases containing financial information about corporate debtors, including records of debt, defaults, and security interests. By providing authenticated information quickly, information utilities reduce the time and effort required to verify claims during insolvency proceedings. Creditors may submit evidence of debt and default from information utilities when filing insolvency applications.

The National Company Law Tribunal functions as the adjudicating authority for corporate insolvency matters under the Code. Tribunals are established at various locations across India, with each tribunal comprising judicial and technical members. The Tribunal has jurisdiction to entertain and dispose of insolvency applications, approve or reject resolution plans, pass liquidation orders, and adjudicate disputes arising during the resolution or liquidation process. Appeals from Tribunal orders lie to the National Company Law Appellate Tribunal, with further appeals to the Supreme Court.[7]

Critical Analysis and Practical Considerations

The Insolvency and Bankruptcy Code has fundamentally altered the balance of power between creditors and debtors in India. By placing creditors in control and imposing strict timelines, the Code has made insolvency proceedings more efficient and predictable. However, practical implementation has revealed certain challenges that merit consideration.

One significant issue concerns the treatment of operational creditors. While the Code’s decision to exclude them from voting in the Committee of Creditors may be justified on the grounds that financial creditors are better positioned to make restructuring decisions, operational creditors often suffer substantial losses when resolution plans are approved. Plans frequently provide minimal payments to operational creditors while offering better terms to financial creditors. This disparity has prompted debates about whether operational creditors deserve greater protection.

The strict timelines imposed by the Code, while laudable in principle, have proven difficult to maintain in practice. Many resolution processes extend beyond the prescribed limits due to factors such as judicial interventions, complexity of cases, and delays in obtaining necessary approvals. The distinction between excluding and including time spent in legal proceedings has been the subject of considerable litigation, with different benches of the Tribunal and Appellate Tribunal occasionally reaching different conclusions.

The Code’s treatment of personal guarantors to corporate debtors has also generated controversy. While the moratorium protects the corporate debtor from recovery actions, creditors remain free to proceed against personal guarantors during the insolvency process. This has led to situations where promoters who provided personal guarantees face enforcement actions even while serving on the Committee of Creditors or participating in the submission of resolution plans. The interplay between corporate insolvency and personal insolvency (which remains only partially implemented) continues to evolve through judicial interpretation.[8]

Another area requiring attention concerns the availability of interim finance during the corporate insolvency resolution process. While the Code provides for such finance and grants it priority status, many resolution professionals struggle to obtain funding because lenders remain hesitant to provide credit to companies undergoing insolvency proceedings. Without adequate working capital, maintaining the corporate debtor as a going concern becomes difficult, potentially reducing the value available to all stakeholders.

Conclusion

The Insolvency and Bankruptcy Code represents a landmark reform in India’s commercial legal framework. By consolidating fragmented insolvency laws into a coherent, time-bound process that prioritizes creditor control and asset value maximization, the Code has addressed longstanding deficiencies in debt resolution mechanisms. The shift from a debtor-friendly regime to one emphasizing creditor rights reflects an understanding that efficient insolvency processes are essential for credit availability and economic growth.

Since its implementation, the Code has processed thousands of cases, resulting in both successful resolutions and liquidations. The recovery rates achieved under the Code, while still below international benchmarks, represent a significant improvement over previous mechanisms. Perhaps more importantly, the Code has changed corporate behavior, with companies taking debt obligations more seriously to avoid the prospect of losing management control through insolvency proceedings.

As the Code matures, continued refinement through legislative amendments, regulatory guidance, and judicial interpretation will be necessary. Issues such as the treatment of operational creditors, the balance between timelines and thorough resolution, the implementation of personal insolvency provisions, and the facilitation of interim finance require ongoing attention. Nevertheless, the Code’s foundational architecture provides India with a robust framework for addressing corporate insolvency, balancing stakeholder interests, and promoting economic efficiency in credit markets.

References

[1] Ministry of Law and Justice. (2016). The Insolvency and Bankruptcy Code, 2016. https://www.indiacode.nic.in/handle/123456789/2154 

[2] Insolvency and Bankruptcy Board of India. (n.d.). About the Code. https://www.ibbi.gov.in/about 

[3] Ministry of Corporate Affairs. (2020). Corporate Insolvency Resolution Process. https://www.mca.gov.in/content/mca/global/en/home.html 

[4] Supreme Court of India. (2018). Mobilox Innovations Private Limited v. Kirusa Software Private Limited. Civil Appeal No. 9405 of 2017. https://main.sci.gov.in/supremecourt/2017/20796/20796_2017_Judgement_13-Sep-2018.pdf 

[5] National Company Law Tribunal. (n.d.). Insolvency Proceedings. http://www.nclt.gov.in/ 

[6] Bar and Bench. (2019). Timeline under IBC: Supreme Court clarifies exclusions. https://www.barandbench.com/columns/timeline-ibc-supreme-court 

[7] National Company Law Appellate Tribunal. (n.d.). About NCLAT. https://nclat.nic.in/ 

[8] Live Law. (2020). Personal Guarantors and IBC Moratorium. https://www.livelaw.in/ 

[9] India Code. (n.d.). Insolvency and Bankruptcy Code Database. https://www.indiacode.nic.in/