The story of Aircel Limited’s financial collapse is not unusual in the Indian telecom sector, which has been battered by price wars, mounting debt, and unpaid regulatory dues. What made the Aircel insolvency legally extraordinary was not the default itself, but what the company’s lenders attempted to do in the aftermath. When Aircel Limited, Aircel Cellular Limited, and Dishnet Wireless Limited filed for voluntary Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) in March 2018, lenders led by State Bank of India had extended aggregate credit facilities of approximately ₹13,729 crore. The Department of Telecommunications (DoT) lodged claims of ₹9,894.13 crore in unpaid licence fees, spectrum usage charges, and Adjusted Gross Revenue (AGR) dues. As the insolvency machinery cranked into motion, a deceptively simple question was placed before the adjudicating authorities: could the spectrum — the very radio waves Aircel had licensed and used to run its network — be treated as an asset belonging to the corporate debtor, capable of being restructured, transferred, or monetised to repay creditors? [1]

On 13 February 2026, the Supreme Court of India answered that question emphatically in the negative. In State Bank of India v. Union of India & Ors. (Civil Appeal No. 1810 of 2021 and connected appeals), a bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar held that spectrum allocated to telecom service providers cannot be subjected to proceedings under the Insolvency and Bankruptcy Code, 2016. The court declared: “We hold that Spectrum allocated to TSPs and shown in their books of account as an ‘asset’ cannot be subjected to proceedings under Insolvency and Bankruptcy Code, 2016.” [2] The ruling fundamentally redraws the boundaries between the law of insolvency and the law governing natural resources, and its implications extend well beyond the fate of Aircel.

The Regulatory Architecture: How Spectrum Is Licensed in India

To understand why the Supreme Court reached the conclusion it did, one must first understand how spectrum is governed in India. The Indian Telegraph Act, 1885 — the colonial-era legislation that served as the foundational law for all forms of telecommunication in the country — vests the exclusive privilege of establishing, maintaining, and working telegraphs in the Central Government. Section 4(1) of the Act reads: “Within India, the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs: Provided that the Central Government may grant a license, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of India.” [3] The expression “exclusive privilege” is not merely rhetorical — it is constitutive of the entire licensing regime. The government does not sell spectrum. It does not transfer ownership. It grants a revocable permission to use a finite, scarce public resource under conditions it prescribes.

When the Aircel group entities were granted Unified Access Service Licences (UASL) in December 2006 for a twenty-year term, and when they subsequently acquired spectrum usage rights in multiple frequency bands through auctions held between 2010 and 2016, what they received was a conditional, revocable right to use spectrum — not proprietary title to it. Spectrum usage charges (SUC) and licence fees remained payable to the DoT as ongoing obligations. The Telecom Regulatory Authority of India (TRAI), established under the Telecom Regulatory Authority of India Act, 1997, regulates tariffs, quality of service standards, and advises the government on the terms under which licences are issued and renewed. The DoT, functioning under the Ministry of Communications, administers the licensing process and enforces payment of dues. Crucially, the Telegraph Act also empowers the Central Government to revoke any licence granted under Section 4 “on the breach of any of the conditions therein contained, or in default of payment of any consideration payable thereunder” — a revocation power that the court would later rely upon in reinforcing the conditional character of spectrum rights. [3]

This entire regulatory framework is grounded in a deeper constitutional principle. Article 39(b) of the Constitution of India, which forms part of the Directive Principles of State Policy, mandates that the State shall direct its policy towards ensuring that “the ownership and control of the material resources of the community are so distributed as best to subserve the common good.” Spectrum, being finite and exhaustible, has been consistently recognised by Indian courts as a material resource of the community within the meaning of this provision. [4]

The 2G Precedent: Spectrum as Public Trust

The constitutional characterisation of spectrum as a public resource was not a discovery made in the Aircel spectrum case. It was cemented in the landmark 2012 ruling of the Supreme Court in Centre for Public Interest Litigation v. Union of India, (2012) 3 SCC 1 — popularly known as the 2G Spectrum Case. [4] In that case, a bench of Justice G.S. Singhvi and Justice Asok Kumar Ganguly quashed 122 telecom licences that had been granted by the DoT in 2008 using a first-come, first-served policy, finding the process arbitrary and violative of Article 14 of the Constitution. More significantly for our purposes, the court articulated that the State, when dealing with natural resources like spectrum, acts as a trustee for the public. Natural resources cannot be disposed of or alienated at the discretion of the government without adherence to constitutional principles of fairness, transparency, and public interest.

The public trust doctrine embedded in the 2G ruling means that spectrum is not the government’s to sell as it pleases, nor is it a private asset that a licensee can deal with as its own. The licensee is a conditional occupant — permitted to use the resource so long as it complies with licence conditions and pays its dues. The 2026 Aircel judgment drew directly upon this precedent, observing that spectrum is “a material resource of the community” and that the State holds it as a cestui que trust — a beneficiary-trustee — for the people of India. “Natural resources belong to the people but the State legally owns them on behalf of its people and from that point of view natural resources are considered as national assets… The State is bound to act in consonance with the principles of equality and public trust,” the court noted, echoing the 2G ruling. [1]

The IBC Framework and the Asset Pool Problem

The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate and amend laws relating to reorganisation and insolvency resolution of companies, partnership firms, and individuals. When a company enters the CIRP — as Aircel did under Section 10 (which allows voluntary filing by the corporate debtor itself) — the National Company Law Tribunal (NCLT) passes a moratorium order under Section 14. This moratorium prohibits, among other things, the institution or continuation of suits against the corporate debtor, transfer or disposal of its assets, and enforcement of security interests. The moratorium is intended to create a “calm period” — a breathing space during which the business can continue as a going concern while a resolution plan is formulated. [5]

The resolution professional, appointed upon admission of the CIRP application, is responsible under Section 18 of the IBC for taking custody and control of all assets of the corporate debtor, including business records, intellectual property rights, financial assets, and tangible and intangible assets. It was under this provision that the SBI-led lenders argued that spectrum usage rights — reflected as intangible assets in Aircel’s balance sheets — must form part of the insolvency estate and be made available for distribution among creditors or transferred to a resolution applicant.

The NCLT, Mumbai admitted the insolvency applications in March 2018. A resolution plan submitted by UV Asset Reconstruction Company was approved by the Committee of Creditors (CoC) and sanctioned by the NCLT in June 2020. The DoT challenged this before the National Company Law Appellate Tribunal (NCLAT). The NCLAT, in its impugned order, took a nuanced but internally inconsistent position: it held that spectrum is indeed a natural resource owned by the nation, and that the right to use spectrum is an intangible asset of the licensee capable of being subjected to insolvency proceedings — yet it simultaneously ruled that spectrum could not be used without clearance of government dues. This created a logical tension: how can an asset be dealt with in insolvency if it cannot be transferred or utilised without satisfying obligations that insolvency is supposed to temporarily relieve? [2]

It was against this backdrop that cross-appeals were filed before the Supreme Court — by the financial creditors and resolution professionals seeking to preserve the NCLAT’s treatment of spectrum as an insolvency asset, and by the DoT seeking to remove spectrum from the insolvency estate entirely.

The Supreme Court’s Analysis: Conditional Licensing Cannot Yield Proprietary Rights

The court’s reasoning in the Aircel judgment is structured around three interlocking arguments, each reinforcing the others.

The first and most foundational argument concerns the legal character of a telecom licence. The court examined Section 4 of the Indian Telegraph Act, 1885 — now the Telecommunications Act, 2023 has replaced it, though the proceedings in question were governed by the 1885 Act — and held that what the government confers on a licensee is “a limited, conditional and revocable privilege” to use spectrum. [2] This language deliberately echoes the vocabulary of administrative law, not property law. A privilege is not a proprietary right. A licence is not a conveyance. The court was emphatic: “Recognition of spectrum licensing rights as an intangible asset in the balance sheet is not determinative of recognition or transfer of ownership of the spectrum to TSPs.” Accounting treatment does not change legal character. A telecom company may record spectrum usage rights as an intangible asset in its financial statements for purposes of amortisation and depreciation, but that accountancy practice cannot transform a conditional government licence into private property. [1]

The second argument concerns the specific exclusions built into the IBC itself. Section 36(4) of the Code expressly excludes from the liquidation estate assets owned by a third party in possession of the corporate debtor, as well as contractual arrangements that confer only a right of use rather than transfer of title. The court read the explanation to Section 18 and Section 36(4)(a)(iv) together, concluding that since the TSPs do not have ownership title over spectrum, it cannot form part of the asset pool in either the CIRP or liquidation. As the court observed: “Under the IBC framework, spectrum licensing rights is not a part of the pool of assets for insolvency or liquidation.” [2] The insolvency estate, in other words, is bounded by ownership — and Aircel simply did not own the spectrum.

The third argument is structural: IBC cannot be used to override the specific statutory regime that governs telecommunications. The court held that insolvency law must be reconciled with, not permitted to override, sector-specific statutes governing natural resources. “IBC cannot be the guiding principle for restructuring the ownership and control of spectrum,” the court declared. [1] To allow otherwise would be to permit a private insolvency process to rewrite sovereign obligations, extinguish public dues, and transfer a national resource to private creditors without government approval — outcomes that are directly contrary to the public trust doctrine and the constitutional mandate under Article 39(b).

The Moratorium Question and Government Dues

One of the most practically significant aspects of the ruling is its treatment of the Section 14 moratorium. Under the IBC, once a moratorium is declared, no suits can be instituted against the corporate debtor and no recovery proceedings can be initiated. The telecom companies and their lenders had argued that the moratorium should protect against DoT’s recovery of licence fees, spectrum usage charges, and AGR dues during the CIRP period. The Supreme Court categorically rejected this position. Telecom companies in insolvency cannot invoke the Section 14 moratorium to stall payment of licence fees, spectrum usage charges, or AGR dues. Resolution plans must comply with the applicable telecom statutes and obtain government approval before any transfer of spectrum usage rights can be contemplated. [1]

This is a significant clarification because it places government dues in a privileged position that the moratorium cannot touch — at least insofar as they relate to the use of a sovereign resource. The DoT is not merely an operational creditor in the ordinary commercial sense; it is the licensor of a public resource, and its dues arise from the terms on which the State permitted a private party to exploit a community asset. Allowing the moratorium to freeze those dues would, in the court’s view, amount to allowing the IBC to recast the entire architecture of sovereign resource governance.

Implications: Credit Assessment, Recovery, and the Sector’s Future

The practical consequences of the judgment are already visible. The ruling clears the path for DoT to initiate licence cancellation and spectrum recovery proceedings against Aircel, Reliance Communications, and Videocon — all of which are currently in or approaching insolvency. As sources close to the DoT indicated in the days following the judgment, the department would examine the order, take legal advice, and begin proceedings to take back the spectrum once grounds for termination are determined. [1]

For financial creditors — banks and other lenders who had extended large credit facilities to telecom companies on the assumption that spectrum usage rights would function as quasi-security — the judgment is a sharp setback. Spectrum cannot be pledged, transferred, or monetised through insolvency to repay private debts if licence conditions and government dues are not met. The senior banker quoted anonymously in the aftermath of the ruling put it bluntly: “Whatever the prospect of recovering something was there, that is gone now.” [1] Going forward, credit assessment frameworks for telecom lending will need fundamental revision. Lenders will need to recalibrate the value of spectrum-backed security and account for the elevated priority of government dues in any distress scenario.

For the broader jurisprudence of insolvency law, the judgment represents an important step in defining the limits of the IBC. Insolvency proceedings are designed to resolve private commercial distress — they are not instruments for reorganising the ownership and control of natural resources held in public trust. The court’s reliance on the principles articulated in Embassy Property Developments Pvt. Ltd. v. State of Karnataka — which established that NCLT, as a creature of statute, cannot exercise jurisdiction over matters governed by public law — reinforces this boundary between the domain of insolvency and the domain of sovereign resource management. [2]

Conclusion

The Aircel spectrum case is, at its core, a case about the limits of contract and the persistence of sovereignty. When Aircel received its Unified Access Service Licences in 2006 and acquired spectrum through auctions over the following decade, it entered a relationship with the State that was contractual in form but sovereign in substance. The government never intended to, and legally could not, divest itself of ownership over the airwaves. What it granted was access — conditional, temporary, and revocable. When Aircel’s financial position collapsed, its lenders discovered that the most valuable resource on the company’s balance sheet — its spectrum rights — belonged to someone else all along. The Supreme Court, in drawing this line with clarity, has done more than settle a dispute between SBI and the DoT. It has re-established the principle that some resources are held in trust for the public, that IBC is not a tool to privatise sovereign assets through the back door of insolvency, and that the accounting treatment of a right tells us nothing about its true legal character. [1][2][3][4]

References

[1] Business Standard, “Spectrum a public resource, not IBC asset, says Supreme Court”, 13 February 2026 — https://www.business-standard.com/industry/news/spectrum-public-resource-not-ibc-asset-supreme-court-126021301828_1.html

[2] Law Trend, “Spectrum Allocation Cannot Be Subjected to Insolvency Proceedings Under IBC: Supreme Court”, 13 February 2026 — https://lawtrend.in/spectrum-allocation-cannot-be-subjected-to-insolvency-proceedings-under-ibc-supreme-court/

[3] Indian Kanoon, Indian Telegraph Act, 1885, Section 4 — https://indiankanoon.org/doc/1927191/

[4] Law Article, “Case Analysis: 2G Spectrum Scam – Centre for Public Interest Litigation & Ors. v. Union of India & Ors., (2012) 3 SCC 1” — https://lawarticle.in/case-analysis-2g-spectrum-scam-centre-for-public-interest-litigation-ors-v-union-of-india-ors/

[5] Bar and Bench, “Scope of Moratorium under Section 14 and 33(5) of the Insolvency and Bankruptcy Code, 2016” — https://www.barandbench.com/view-point/scope-of-moratorium-under-section-14-and-33-5-of-the-insolvency-and-bankruptcy-code-2016

[6] IBC Laws, Section 14 – Moratorium, Insolvency and Bankruptcy Code, 2016 — https://ibclaw.in/section-14-moratorium-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sec/

[7] IBC Laws, Section 36 – Liquidation Estate, Insolvency and Bankruptcy Code, 2016 — https://ibclaw.in/section-36-liquidation-estate/

[8] Bar and Bench, “Telecom spectrum not restructurable asset under IBC: Supreme Court in Aircel AGR insolvency dispute”, 13 February 2026 — https://www.barandbench.com/amp/story/news/litigation/telecom-spectrum-not-restructurable-asset-under-ibc-supreme-court-in-aircel-agr-insolvency-dispute

[9] The Indian Lawyer, “Supreme Court Holds Insolvency and Bankruptcy Code Cannot Be Guiding Principle for Restructuring Ownership and Control of Telecom Spectrum”, February 2026 — https://theindianlawyer.in/supreme-court-holds-insolvency-and-bankruptcy-code-cannot-be-guiding-principle-for-restructuring-ownership-and-control-of-telecom-spectrum/

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On February 3, 2026, the Supreme Court of India delivered a landmark judgment in Satinder Singh Bhasin v. Col. Gautam Mullick & Ors. [1], which affirmed that a single insolvency petition under the Insolvency and Bankruptcy Code, 2016 can be maintained against multiple corporate entities when they are intrinsically linked in project execution and marketing. By expressly recognizing the permissibility of joint insolvency proceedings under the IBC, the Court provided crucial clarity on proceedings against separate corporate debtors whose operations and obligations to creditors are deeply intertwined, particularly in real estate developments where multiple entities often collaborate. The ruling underscores that corporate structures cannot be used to fragment unified business operations and thereby defeat the core objectives of insolvency resolution.

The Supreme Court Judgment

The case involved 141 allottees of the Grand Venezia Commercial Tower project in Greater Noida who filed a petition against M/s. Grand Venezia Commercial Towers Private Limited and M/s. Bhasin Infotech and Infrastructure Private Limited [1]. The allottees sought initiation of Corporate Insolvency Resolution Process against both companies jointly, claiming they had not received possession despite making substantial payments. The appellants challenged admissibility of a single petition against two distinct entities, arguing that segregating allottees by company would reduce numbers below the statutory threshold of 100 allottees required under Section 7(1) of the Insolvency and Bankruptcy Code.

The Supreme Court bench of Justice Sanjay Kumar and Justice K. Vinod Chandran rejected these arguments, upholding the National Company Law Tribunal and National Company Law Appellate Tribunal orders [1]. The Court observed that Bhasin Infotech originally undertook the project and later granted marketing rights to Grand Venezia. Both entities functioned as a unified commercial operation, being jointly answerable to allottees. The Supreme Court concluded that the corporate debtors were intrinsically linked and a joint insolvency process would maximize asset realization [1].

Legislative Framework Under IBC

The Insolvency and Bankruptcy Code, 2016 was enacted to consolidate laws relating to reorganization and insolvency resolution of corporate persons in a time-bound manner for maximization of value of assets [2]. Section 7 provides that a financial creditor may file an application for initiating corporate insolvency resolution process against a corporate debtor when default has occurred [2]. This provision forms the foundation for creditor-initiated proceedings and has been extensively invoked by financial creditors, including homebuyers recognized as financial creditors following amendments.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 introduced specific thresholds for real estate allottees through the second proviso to Section 7(1), mandating that allottees file applications jointly with not less than one hundred creditors or not less than ten percent of total creditors, whichever is less [3]. This threshold was upheld in Manish Kumar v. Union of India [3], where the Supreme Court held that the amendment prevented frivolous petitions and protected interests of other allottees who might have different views on insolvency proceedings.

Threshold Requirements and Their Application

In Manish Kumar v. Union of India (2021), the Supreme Court examined constitutional validity of threshold requirements for real estate allottees [3]. The Court held that classification was based on intelligible differentia, including numerosity, heterogeneity, and individuality in decision-making among allottees in large real estate projects. The Court reasoned that allowing a single allottee to initiate proceedings could jeopardize interests of hundreds or thousands of other allottees who might prefer different remedies or have faith in the developer.

The Supreme Court clarified that required numbers must be reckoned at the time of filing the application, not at admission stage [3]. This principle was directly applied in the Satinder Singh Bhasin case, where 103 allottees filed the petition, satisfying the threshold. The Court rejected contentions that thresholds should be calculated separately for each corporate entity, holding that where entities are intrinsically linked to the same project, allottees should be counted collectively.

Group Insolvency Principle: The Edelweiss Precedent

The Supreme Court’s decision drew heavily from the National Company Law Appellate Tribunal’s ruling in Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Private Limited [4], which established that group insolvency proceedings can be initiated when multiple corporate entities are jointly involved in collaborative development projects. The case involved five corporate guarantors who were co-borrowers in a township development project in Palwal, Haryana.

The National Company Law Appellate Tribunal held that these corporate debtors were co-borrowers and corporate guarantors, and resolution would not succeed if the entire township was not developed comprehensively [4]. The Tribunal found it was a joint consortium requiring group insolvency to develop the township on corporate debtors’ land along with Corporate Insolvency Resolution Process against Adel Landmarks Limited, the principal borrower. The Tribunal directed group Corporate Insolvency Resolution Process against five corporate debtors apart from ongoing proceedings against the principal borrower [4].

The Edelweiss judgment recognized that when multiple corporate entities jointly participate in a project with inseparable business operations, conducting fragmented insolvency proceedings would jeopardize project completion and adversely affect allottees [4]. The Tribunal emphasized recognizing interconnected roles of corporate guarantors in land development projects, reasoning that their insolvency could not be addressed in isolation without impacting overall project viability. Group insolvency resolution was therefore warranted to create a cohesive plan for project completion.

Determining When Entities Are Intrinsically Linked

The Supreme Court in Satinder Singh Bhasin provided guidance on determining when corporate entities should be considered intrinsically linked for joint insolvency proceedings under the IBC [1]. The test is not merely existence of separate legal personalities, but practical reality of how entities function in relation to the project and their obligations to creditors. Several factors are relevant in this determination.

First, the nature of collaboration in project development and marketing is examined. Where one entity undertakes development while another handles marketing, but both are jointly answerable to allottees, this demonstrates functional integration. Second, operational intertwining is assessed. When business operations cannot be segregated and entities function as a unified commercial operation, this indicates intrinsic linkage. Third, the Court considers whether keeping entities as going concerns requires a consolidated approach. Where separate proceedings would diminish resolution prospects and reduce asset realization, joint proceedings become appropriate [1].

Protection of Homebuyers’ Rights

Recognition of homebuyers and real estate allottees as financial creditors under the Insolvency and Bankruptcy Code represents a significant shift in Indian insolvency law. Prior to 2018 amendments, homebuyers were classified as operational creditors, placing them in a subordinate position. Amendment to Section 5(8) to include amounts raised from allottees under real estate projects as financial debt fundamentally altered real estate insolvency dynamics.

This reclassification empowers homebuyers by giving them rights to initiate Corporate Insolvency Resolution Process proceedings against defaulting developers and provides representation in the Committee of Creditors, where they participate in critical decisions regarding resolution plans. While 2020 amendment threshold requirements impose limitations on individual action, they actually strengthen collective bargaining positions by requiring coordinated action.

The Satinder Singh Bhasin decision further enhances homebuyer protection by ensuring developers cannot escape liability by fragmenting operations across multiple corporate entities [1]. The judgment recognizes that in many real estate projects, developers use multiple special purpose vehicles for different project aspects, and allowing them to avoid joint insolvency would prejudice allottees who dealt with the project as a unified whole.

Maximization of Asset Value through Joint Insolvency Proceedings under IBC

A fundamental objective of the Insolvency and Bankruptcy Code is maximizing value of corporate debtor assets. Section 1(1) explicitly states it is enacted for reorganization and insolvency resolution in a time-bound manner for maximization of value of assets [2]. The Supreme Court’s endorsement of joint insolvency proceedings for intrinsically linked entities directly serves this objective by addressing inefficiencies that arise when functionally integrated entities are subjected to separate insolvency proceedings under the IBC.

When corporate entities are functionally integrated but subjected to separate insolvency proceedings, several inefficiencies arise. There may be duplication of costs with separate resolution professionals and administrative expenses for each entity. Resolution applicants face difficulties formulating viable plans when they cannot acquire the integrated business as a whole. Potential exists for conflicting decisions by different Committees of Creditors, leading to suboptimal outcomes.

Joint insolvency proceedings address these concerns by enabling consolidated approaches to resolution. A single resolution professional can be appointed for related entities, reducing costs and ensuring coordinated decision-making. Resolution applicants can submit plans treating the integrated business as a whole, increasing likelihood of successful resolution. The Committee of Creditors can make informed decisions considering the complete picture of assets and liabilities across related entities. These efficiencies ultimately benefit all stakeholders, including creditors, employees, and corporate debtors [1].

Implications for the Real Estate Sector

The real estate sector in India has been characterized by use of multiple corporate entities for different phases or components of integrated projects. Developers commonly establish separate special purpose vehicles for land holding, development, marketing, and facilities management. While these structures serve legitimate business purposes, they can also fragment liabilities and complicate creditor recovery.

The Supreme Court’s judgment sends a clear message to the real estate industry that corporate structures cannot be used to defeat legitimate creditor claims. Where entities are intrinsically linked in project execution and marketing, they will be treated as jointly liable for insolvency purposes [1]. This has several important implications for how real estate projects are structured and managed.

Developers will need to carefully consider insolvency implications when establishing corporate structures for projects. If entities within a group are functionally integrated and jointly answerable to creditors, they should anticipate possibility of joint insolvency proceedings. This may influence decisions about corporate governance, financial management, and risk allocation within project structures. Additionally, the judgment provides greater certainty to homebuyers and financial creditors, who can pursue joint proceedings against related entities without fear that technical arguments about separate legal personality will defeat their claims.

Conclusion

The Supreme Court’s judgment in Satinder Singh Bhasin v. Col. Gautam Mullick & Ors. represents a significant development in Indian insolvency jurisprudence by affirming that single insolvency petitions can be maintained against multiple corporate entities when they are intrinsically linked in their operations and obligations [1]. This principle ensures that objectives of the Insolvency and Bankruptcy Code, particularly maximization of asset value and efficient resolution, are not frustrated by corporate structures that fragment integrated business operations.

The judgment provides crucial protection to homebuyers and financial creditors in real estate projects by recognizing that developers cannot escape liability through use of multiple corporate entities for different aspects of unified projects. It builds on the National Company Law Appellate Tribunal’s precedent in the Edelweiss case [4] and applies principles consistent with the Supreme Court’s earlier ruling in Manish Kumar v. Union of India [3] regarding threshold requirements for real estate allottees.

The decision strengthens India’s insolvency framework by prioritizing substance over form and ensuring that the Code serves its fundamental purpose of facilitating effective resolution while protecting the interests of all stakeholders. As insolvency law continues to evolve in India, allowing joint insolvency proceedings under the IBC for intrinsically linked entities will remain an important tool for achieving efficient and equitable outcomes in complex corporate insolvency cases.

References

[1] Satinder Singh Bhasin v. Col. Gautam Mullick & Ors., 2026 INSC 104 (Supreme Court of India, February 3, 2026)

[2] Insolvency and Bankruptcy Code, 2016, Preamble and Section 7

[3] Manish Kumar v. Union of India, (2021) 5 SCC 1 (Supreme Court of India)

[4] Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Private Limited, Company Appeal (AT) (Insolvency) No. 377 of 2019 (National Company Law Appellate Tribunal, September 20, 2019)

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The Indian real estate sector has witnessed unprecedented turmoil over the past decade, with thousands of homebuyers trapped in incomplete projects and their life savings hanging in balance. The Supreme Court of India recently delivered a landmark judgment in Elegna Co-Op. Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Limited [1], addressing the critical intersection between creditor rights and homebuyer protection in insolvency proceedings. This decision establishes crucial safeguards for homebuyers while reaffirming the mandatory nature of admitting insolvency petitions upon default. The Supreme Court judgment clarifies the position of housing societies in insolvency proceedings and issues prospective directions to the Committee of Creditors to ensure transparency and protect homebuyers’ interests during the Corporate Insolvency Resolution Process.

The Elegna Case: Factual Background

The dispute centered around Takshashila Heights India Private Ltd., a real estate developer that had undertaken a residential-cum-commercial project titled “Takshashila Elegna” in Ahmedabad. The developer had availed financial assistance amounting to Rs. 70 crores from ECL Finance Ltd. in 2018. Following defaults in repayment, the loan accounts were classified as Non-Performing Assets on December 30, 2021. Subsequently, the debt was assigned to Edelweiss Asset Reconstruction Company Ltd. Despite entering into a Restructuring cum One Time Settlement agreement in May 2023, the corporate debtor failed to adhere to the repayment schedule, leading to the revocation of the settlement. Edelweiss ARC then filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Ahmedabad Bench. The NCLT initially dismissed the petition on November 6, 2024, holding that the project was viable and substantially complete, and that insolvency proceedings were being invoked merely as a recovery mechanism. However, the National Company Law Appellate Tribunal reversed this order on July 1, 2025, directing admission of the Corporate Insolvency Resolution Process and rejecting an intervention application filed by Elegna Co-operative Housing and Commercial Society Ltd. on grounds of lack of locus standi.

Mandatory Admission under Section 7 of the Insolvency and Bankruptcy Code

The Supreme Court emphatically reaffirmed that admission of a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 is mandatory once the existence of financial debt and default is established. Section 7 provides that a financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. The provision states that where the Adjudicating Authority is satisfied that a default has occurred and the application under sub-section 2 is complete, and there is no disciplinary proceeding pending against the proposed resolution professional, it shall admit the application.

The Division Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan rejected the corporate debtor’s reliance on Vidarbha Industries Power Ltd. v. Axis Bank Ltd. [2], clarifying that this judgment operates as a narrow exception applicable only where there is an adjudicated claim in favor of the corporate debtor exceeding the debt owed. The Court observed that the inquiry under Section 7(5)(a) is confined strictly to the determination of debt and default, leaving no scope for equitable or discretionary considerations. Once the ingredients of Section 7, most importantly default, are satisfied, admission must follow. This position aligns with the earlier pronouncements in Innoventive Industries Ltd. v. ICICI Bank [3] and E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd., which established that the Adjudicating Authority has limited discretion in admitting Section 7 applications.

The Court noted that the corporate debtor possessed no adjudicated claim exceeding the default amount, and arguments regarding business viability or project status did not constitute good reasons to deny admission. The legislative intent behind the Code is to provide a time-bound resolution mechanism for insolvency, and introducing subjective considerations regarding viability would defeat this purpose. The mandatory admission framework ensures that creditors can initiate the resolution process without facing prolonged litigation over the admission itself, thereby preserving the value of the corporate debtor’s assets during the insolvency resolution process.

Locus Standi of Housing Societies in Insolvency Proceedings

A significant aspect of the supreme court judgment concerned whether a cooperative housing society formed by homebuyers can intervene in insolvency proceedings against the developer. The Supreme Court held that while individual homebuyers qualify as financial creditors, a society or association does not automatically acquire such status unless it is a creditor in its own right. The Court observed that a society is a distinct juristic entity separate from its members. Unless it has itself advanced funds, executed allotment agreements, or received allotments, it cannot claim financial creditor status. The Insolvency and Bankruptcy Code does not contemplate ad hoc or self-appointed representation at the pre-admission or appellate stage.

The Court clarified that the right to participate in Corporate Insolvency Resolution Process flows from the statute, and under Section 21(6A) of the Code, collective representation of allottees is strictly regulated through an Authorized Representative after the admission of insolvency proceedings. The provisions mandate that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees, whichever is less. This threshold requirement ensures that frivolous petitions are not filed by individual homebuyers acting alone.

The Court emphasized that homebuyers’ societies or welfare associations are ordinarily constituted for maintenance and management of common facilities. Their office-bearers cannot litigate on behalf of allottees or claim representative status before adjudicatory fora absent explicit statutory recognition or legally valid authorization. Any contrary interpretation would impermissibly enlarge the statutory definition of financial creditor, encroach upon individual rights of allottees, and create an extra-statutory layer of representation. It would also enable errant corporate debtors to obstruct and delay insolvency proceedings under the guise of purported collective interests, an abuse expressly cautioned against in Pioneer Urban Land and Infrastructure Ltd. v. Union of India [4].

Evolution of Homebuyers as Financial Creditors

The recognition of homebuyers as financial creditors represents a significant evolution in insolvency jurisprudence. Originally, the Insolvency and Bankruptcy Code, 2016 did not explicitly include homebuyers within the definition of financial creditor or operational creditor. This lacuna created enormous hardship for homebuyers who had invested their life savings in real estate projects that subsequently went into insolvency. The landmark case of Chitra Sharma v. Union of India arose from the insolvency proceedings against Jaypee Infratech Limited, where over twenty thousand homebuyers faced the prospect of losing both their money and their homes. The Supreme Court intervened to protect their interests and directed the appointment of authorized representatives to represent homebuyers in the Committee of Creditors.

Subsequently, the legislature enacted the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, which inserted an explanation to Section 5(8)(f) of the Code. This explanation specifically included any amount raised from an allottee under a real estate project within the definition of financial debt. The constitutional validity of this amendment was challenged in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, where real estate developers argued that homebuyers should be classified as operational creditors rather than financial creditors. The Supreme Court upheld the constitutional validity of the amendment, observing that the sale agreement between developer and homebuyer has the commercial effect of a borrowing. Money is paid in advance for temporary use so that a flat or apartment is given back to the homebuyer. The Court noted several distinctions between homebuyers and operational creditors, including the fact that homebuyers are vitally concerned with the financial health of the corporate debtor, consideration for the time value of money exists in real estate transactions, and documentary evidence for amounts due is available through information registered with Real Estate Regulatory Authorities.

The Pioneer judgment established that homebuyers being financial creditors are entitled to be represented in the Committee of Creditors through their authorized representative. This participation gives homebuyers a voice in deciding the outcome of the corporate debtor undergoing insolvency proceedings, including decisions regarding resolution plans and liquidation. However, the representation through authorized representatives rather than individual participation ensures that the Committee of Creditors functions efficiently without being overwhelmed by thousands of individual homebuyers.

Committee of Creditors: Powers and Responsibilities

The Committee of Creditors plays a central role in the Corporate Insolvency Resolution Process. Under Section 21 of the Insolvency and Bankruptcy Code, 2016, the Committee of Creditors comprises all financial creditors of the corporate debtor. Section 21(6A) provides that where the financial debt owed to a class of creditors exceeds one hundred, the interim resolution professional shall make an application to the Adjudicating Authority for the appointment of an authorized representative to represent such class of creditors in meetings of the Committee of Creditors. For homebuyers in real estate projects, the authorized representative mechanism ensures collective representation while maintaining the efficiency of the insolvency process.

The Committee of Creditors exercises significant powers during the insolvency resolution process. It approves the appointment of the resolution professional, approves any interim finance to be raised by the resolution professional, constitutes a committee to assist the resolution professional, and most importantly, approves the resolution plan by a vote of not less than sixty-six percent of voting share. These decisions have far-reaching consequences for all stakeholders, including homebuyers who are waiting for possession of their units. The Committee’s commercial wisdom is generally respected by tribunals and courts, and individual dissenting creditors cannot override the collective decision of the majority.

However, this concentration of power in the Committee of Creditors, which is often dominated by institutional financial creditors such as banks and financial institutions, has raised concerns about adequate protection of homebuyer interests. Institutional creditors are primarily interested in recovering their dues and may not prioritize project completion or delivery of possession to homebuyers. Resolution plans that maximize recovery for financial creditors may involve liquidation or transfer to third parties, which could delay or defeat homebuyers’ expectations of receiving possession of their units. Recognizing these concerns, the Supreme Court in the Elegna judgment issued specific directions to the Committee of Creditors to ensure transparency and protect homebuyer interests.

Supreme Court Directions to Committee of Creditors in Insolvency Proceedings to Protect Homebuyers

Recognizing the need to protect homebuyers interests during insolvency proceedings, the Supreme Court issued three crucial prospectively operating directions to the Committee of Creditors in all future cases involving real estate developers. The first direction mandates transparency regarding allottee information. The Information Memorandum prepared by the resolution professional must mandatorily disclose comprehensive details of all allottees under the real estate project. This ensures that the Committee of Creditors and potential resolution applicants have complete information about the number of homebuyers, amounts paid by them, units allotted, and possession status. Such transparency is essential for formulating resolution plans that adequately address homebuyer claims and expectations.

The second direction concerns decisions regarding possession of completed or substantially completed units. If the Committee of Creditors decides not to approve the handover of possession under Regulation 4E of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, it must mandatorily record cogent and specific reasons in writing. Regulation 4E provides that where the corporate debtor has completed construction of a real estate project and holds a completion certificate, the resolution professional may hand over physical possession to allottees who have paid the full consideration. However, the Committee of Creditors may decide not to approve such handover if it believes that possession would adversely affect the resolution process. The Supreme Court’s direction ensures that such decisions are not arbitrary and are supported by specific reasoning that can be examined by stakeholders and courts if necessary.

The third direction addresses the extreme measure of liquidation. Any recommendation for liquidation must be accompanied by a reasoned justification recorded in writing, evidencing proper application of mind and due consideration of all viable alternatives. Under Section 33 of the Code, if the Committee of Creditors decides to liquidate the corporate debtor, the resolution professional shall file an application before the Adjudicating Authority for liquidation. However, liquidation should be the last resort, particularly in real estate cases where completed or substantially completed projects exist. The requirement of recorded reasoning ensures that the Committee of Creditors genuinely explores all resolution possibilities, including project completion, partial sale, or Reverse CIRP mechanisms, before recommending liquidation.

These directions represent a significant judicial intervention to balance creditor rights with homebuyer protection. While the Code vests substantial decision-making power in the Committee of Creditors, the Supreme Court has imposed procedural safeguards to ensure that these powers are exercised transparently and with due consideration of homebuyer interests. The supreme court directions apply prospectively to all future insolvency proceedings, thereby creating a framework for more balanced decision-making that protects both creditor rights and homebuyers’ interest in real estate insolvency cases.

Real Estate Regulation and Development Act: Harmonization with IBC

The Real Estate (Regulation and Development) Act, 2016 was enacted to establish Real Estate Regulatory Authorities in each state for regulation of the real estate sector and to protect the interest of consumers in the real estate sector. Section 3 of the Act requires every promoter to register real estate projects with the Authority before advertising or selling. Section 4 mandates disclosure of comprehensive project details, approvals, timelines, and payment schedules. Section 11 obligates promoters to maintain separate accounts for each project and deposit seventy percent of amounts collected from allottees in a separate account to be used only for construction and land costs of that project.

Homebuyers have remedies under the Act for various grievances. Section 18 provides that if the promoter fails to complete or is unable to give possession of an apartment in accordance with the agreement for sale, the allottee is entitled to claim refund of the amount paid along with interest, or claim possession with compensation for delay. Section 31 empowers the Real Estate Regulatory Authority to impose penalties on promoters for violations, and Section 71 makes certain violations punishable with imprisonment and fine. These provisions create a robust regulatory framework specifically designed to protect homebuyer interests and ensure timely project delivery.

However, the relationship between the Act and the Insolvency and Bankruptcy Code has been subject to judicial examination. Section 88 of the Real Estate Act provides that its provisions are in addition to and not in derogation of the provisions of any other law for the time being in force. This suggests that remedies under the Act can coexist with other legal remedies. In contrast, Section 238 of the Insolvency and Bankruptcy Code states that its provisions shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. This creates an apparent conflict regarding which law prevails.

The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India held that it is difficult to accede to arguments that the Real Estate Act is a special enactment which, in case of conflict, would override the Code. The Court noted that under Section 88, the provisions of the Real Estate Act are in addition to and not in derogation of provisions of any other law, whereas no similar provision exists in the Code. The Court further observed that the legislative judgment was that the Code would prevail notwithstanding any other law for the time being in force. Therefore, homebuyers can pursue remedies under both statutes, and insolvency proceedings under the Code do not automatically bar proceedings under the Real Estate Act, except to the extent the moratorium under Section 14 of the Code prohibits institution of suits or proceedings against the corporate debtor.

Challenges and Recent Regulatory Reforms

Despite legislative and judicial interventions, homebuyers in real estate insolvency cases continue to face significant challenges. The representation of homebuyers through authorized representatives in the Committee of Creditors often results in dilution of their collective voting power. Institutional financial creditors like banks and asset reconstruction companies hold substantial voting shares based on the quantum of debt owed to them, whereas homebuyer representatives may have limited voting power even though they represent thousands of individual allottees. This power imbalance means that decisions of the Committee often favor recovery for institutional creditors over project completion and possession for homebuyers.

The recent amendments to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2025 have sought to address some of these concerns. The amendments mandate that the resolution professional prepare and submit a detailed report on the status of development rights and permissions required for project development within sixty days of appointment. This ensures that resolution applicants have accurate information about regulatory approvals and pending clearances, which is crucial for formulating viable resolution plans for real estate projects.

The amendments also allow relaxed eligibility criteria for homebuyer associations submitting resolution plans. Recognizing that homebuyer associations may not have the same financial and technical capacity as large corporate applicants, the Committee of Creditors can waive requirements for performance security and earnest money deposit for homebuyer-led resolution plans. This encourages homebuyer participation in the resolution process and prevents liquidation due to lack of resolution applicants. Additionally, the amendments require resolution professionals to invite the competent authority under the Real Estate Act to Committee of Creditors meetings, allowing regulatory authorities to provide inputs on project completion and approvals. This integration of Real Estate Regulatory Authority perspectives into insolvency proceedings represents an important step toward harmonizing the two regulatory frameworks.

Conclusion

The Supreme Court’s judgment in Elegna Co-Op. Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Limited represents a significant milestone in the evolution of homebuyer protection within the insolvency framework. By reaffirming the mandatory nature of admission upon default while simultaneously imposing transparency and accountability requirements on the Committee of Creditors, the Court has attempted to balance creditor rights with homebuyer interests. The directions regarding disclosure of allottee information, reasoned decisions on possession, and justification for liquidation create procedural safeguards that will apply to all future real estate insolvency cases.

The supreme court judgment must be viewed within the broader context of legislative and regulatory reforms aimed at protecting homebuyers in insolvency proceedings. The recognition of homebuyers as financial creditors through the 2018 Amendment to the Code, upheld in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, gave homebuyers standing to initiate insolvency proceedings and participate in the Committee of Creditors. The recent regulatory amendments further strengthen homebuyer position by facilitating their participation as resolution applicants and integrating Real Estate Regulatory Authority inputs into the insolvency process. These reforms collectively reflect a policy shift toward recognizing that homebuyers are not merely unsecured creditors seeking monetary recovery but stakeholders with a unique interest in project completion and possession of their units.

However, challenges remain. The dominance of institutional creditors in the Committee of Creditors, the complexity of coordinating among thousands of dispersed homebuyers, and the tension between maximizing creditor recovery and ensuring project completion continue to pose difficulties. Future reforms should focus on enhancing homebuyer representation in the Committee of Creditors, establishing dedicated resolution mechanisms for real estate projects that prioritize completion over liquidation, and creating government-backed relief funds to support project completion when resolution plans are not forthcoming. The Supreme Court on homebuyers in cases like Elegna provides a foundation for more balanced and transparent decision-making in insolvency proceedings, but sustained legislative and regulatory attention will be necessary to fully realize the objective of protecting homebuyer interests while maintaining the efficacy of the insolvency resolution process.

References

[1] Elegna Co-Op. Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Limited & Anr., Civil Appeal No. 10261 of 2025, Supreme Court of India (2025). Available at: https://lawtrend.in/cirp-admission-mandatory-on-default-housing-societies-lack-locus-to-intervene-in-section-7-proceedings-supreme-court/ 

[2] Vidarbha Industries Power Ltd. v. Axis Bank Ltd., (2022) 8 SCC 32, Supreme Court of India.

[3] Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, Supreme Court of India.

[4] Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, Supreme Court of India. Available at: https://indiankanoon.org/doc/118478827/ 

[5] Insolvency and Bankruptcy Code, 2016, No. 31 of 2016. Available at: https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/ 

[6] Real Estate (Regulation and Development) Act, 2016, No. 16 of 2016.

[7] Chitra Sharma & Ors. v. Union of India & Ors., (2018) 18 SCC 575, Supreme Court of India.

[8] E.S. Krishnamurthy v. Bharath Hi-Tech Builders Pvt. Ltd., (2022) 2 SCC 367, Supreme Court of India.

[9] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Available at: https://corporate.cyrilamarchandblogs.com/2025/03/latest-reforms-in-real-estate-cirp-strengthening-the-position-of-homebuyers/ 

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Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a watershed moment in India’s insolvency regime, fundamentally transforming how corporate distress is managed. At the heart of this transformative legislation lies a critical principle that distinguishes it from previous debt recovery mechanisms: the Interim Resolution Professional (IRP) must take actual, physical control of the corporate debtor’s assets, not merely symbolic possession. This principle was recently reinforced by the National Company Law Appellate Tribunal (NCLAT), which categorically stated that the IBC does not recognize the concept of symbolic possession during the Corporate Insolvency Resolution Process (CIRP).

The distinction between symbolic and actual possession carries profound implications for the success of insolvency resolution. Unlike the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which permits secured creditors to take symbolic possession of assets, the IBC mandates that the IRP must assume complete operational control over all assets of the corporate debtor. This requirement stems from the fundamental objective of the Code: to preserve the corporate debtor as a going concern and maximize the value of its assets for the benefit of all stakeholders. The NCLAT’s recent pronouncement serves as a powerful reminder that half-measures and token gestures have no place in the insolvency resolution framework established under the IBC.

The Legislative Framework Governing Asset Control Under IBC

The Insolvency and Bankruptcy Code, 2016, establishes a comprehensive framework for managing corporate insolvency in India. The Code came into force on December 1, 2016, and introduced a paradigm shift from the debtor-in-possession model to a creditor-in-control regime. Section 18 of the IBC forms the cornerstone of the IRP’s authority and delineates the duties that the professional must discharge during the CIRP.

Section 18(1)(f) of the IBC explicitly mandates that the IRP shall “take control and custody of any asset over which the corporate debtor has ownership rights, including but not limited to: (a) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (b) assets of any Indian or foreign subsidiary of the corporate debtor; and (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.”[1] This provision is unambiguous in its requirement that the IRP must assume actual custody and control, not merely nominal or symbolic possession.

The legislative intent behind this provision becomes clear when examined in the context of the IBC’s objectives. The Code was designed to consolidate and amend laws relating to insolvency resolution of corporate persons in a time-bound manner for maximization of value of assets of such persons. The moratorium under Section 14 of the IBC prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. This moratorium creates a protective umbrella under which the IRP can effectively manage the corporate debtor’s assets without external interference.

Section 17 of the IBC further strengthens the IRP’s position by vesting the management of the corporate debtor in the IRP. From the date of appointment, the powers of the board of directors or the partners of the corporate debtor, as the case may be, stand suspended and are exercised by the IRP. This complete displacement of existing management is essential to ensure that the IRP can take unfettered control of all assets and operations. The corporate debtor’s personnel, officers, managers and other employees are required to report to the IRP and provide access to all documents and records of the corporate debtor.[2]

Distinguishing IBC from SARFAESI: The Symbolic Possession Debate

The concept of symbolic possession finds its genesis in the SARFAESI Act, 2002, which was enacted to enable banks and financial institutions to realize long-term assets, manage problem loans, and sustain credit delivery in the economy. Under Section 13(4) of the SARFAESI Act, secured creditors are empowered to take possession of secured assets, including the right to transfer by way of lease, assignment or sale. The courts have interpreted this provision to permit symbolic possession in certain circumstances, particularly where physical possession is impractical or where the borrower does not resist the creditor’s assertion of ownership.

However, the IBC operates on an entirely different premise. The NCLAT has repeatedly emphasized that the IBC is a complete code in itself, designed to achieve specific objectives that differ fundamentally from those of the SARFAESI Act. Where the SARFAESI Act focuses on enabling individual secured creditors to enforce their security interests, the IBC aims to resolve insolvency in a collective manner that balances the interests of all stakeholders while preserving the corporate debtor as a viable economic entity.

The distinction between symbolic and actual possession becomes particularly relevant when examining the interface between these two legislative frameworks. When CIRP is initiated against a corporate debtor, the moratorium under Section 14 comes into effect automatically. Section 14(1)(c) specifically prohibits any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property. This means that even if a secured creditor had taken symbolic possession under the SARFAESI Act before the commencement of CIRP, such possession must yield to the IRP’s right to take actual control under Section 18 of the IBC.

The rationale for this distinction lies in the different stages of debt recovery at which these legislations operate. The SARFAESI Act is an early-stage intervention mechanism that allows secured creditors to bypass lengthy judicial processes. Symbolic possession may suffice at this stage because the creditor’s primary objective is to assert its right over the secured asset and prevent the borrower from alienating or encumbering it. In contrast, the IBC comes into play when the corporate debtor is in severe financial distress, and piecemeal enforcement of individual securities would undermine the collective resolution process. At this stage, actual possession is non-negotiable because the IRP must actively manage the corporate debtor’s operations, preserve asset value, and explore resolution possibilities.[3]

Judicial Interpretation: Key Case Laws on IRP’s Right to Actual Possession

The Indian judiciary has developed a robust jurisprudence on the IRP’s right to take actual control of the corporate debtor’s assets. These decisions have consistently upheld the primacy of Section 18 of the IBC and rejected attempts to limit the IRP’s authority through concepts borrowed from other legislations.

One of the landmark judgments in this area is the NCLAT’s decision in Dena Bank v. C. Shivakumar Reddy. In this case, the bank had taken possession of the corporate debtor’s property under the SARFAESI Act before the initiation of CIRP. When the IRP sought to take control of the property, the bank resisted, arguing that it had already taken possession under the SARFAESI Act and that this possession should be respected. The NCLAT categorically rejected this argument and held that upon the commencement of CIRP, the IRP is entitled to take custody and control of all assets of the corporate debtor, regardless of whether any secured creditor had earlier taken possession under the SARFAESI Act. The tribunal observed that the property continued to reflect as an asset in the balance sheet of the corporate debtor, and therefore, the IRP was bound under Section 18 of the IBC to take control and custody of such property. The NCLAT further held that any action by the bank to enforce its security interest after the commencement of CIRP would be in violation of the moratorium under Section 14.[4]

The Supreme Court of India has also addressed the scope of the IRP’s authority over assets. In Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel, the Supreme Court examined whether the exclusion of assets owned by third parties but in possession of the corporate debtor applies across all provisions of the IBC. The Court held that the exclusion of assets owned by a third party but in the possession of the corporate debtor under contractual arrangements is limited to Section 18 of the IBC. This means that while the IRP cannot take control of assets that belong to third parties, the IRP has comprehensive authority over all assets that the corporate debtor owns, regardless of who may be in possession of those assets.[5]

These judicial pronouncements establish several important principles. First, the IRP’s right to take actual control of assets is not contingent upon the absence of competing claims by secured creditors. Second, the moratorium under Section 14 operates as a statutory shield that protects the IRP’s authority to assume custody and control of assets. Third, the concept of symbolic possession, which may be relevant under the SARFAESI Act, has no application in the IBC framework. Fourth, the IRP’s duty to take control of assets is mandatory, not discretionary, and flows directly from the language of Section 18.

Regulatory Framework and Practical Implementation

The Insolvency and Bankruptcy Board of India (IBBI), established under Section 188 of the IBC, serves as the principal regulator for insolvency professionals and insolvency professional agencies. The IBBI has issued detailed regulations that operationalize the provisions of the IBC and provide guidance to IRPs on the discharge of their duties. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, prescribe the manner in which the CIRP shall be conducted and specify the timelines within which various steps must be completed.

Regulation 7 of the IBBI Regulations requires the IRP to make a public announcement within three days of his appointment. This announcement must include details of the corporate debtor, the last date for submission of claims, and other relevant information. Following this announcement, the IRP must begin the process of taking control of the corporate debtor’s assets. This involves identifying all assets, verifying ownership rights, assessing the physical condition and location of assets, and implementing measures to secure and preserve asset value.

The practical challenges in taking actual control of assets are significant. In many cases, assets may be scattered across multiple locations, including foreign jurisdictions. Section 18(1)(f)(a) specifically contemplates this scenario by empowering the IRP to take control of assets located in foreign countries. However, enforcing this authority in foreign jurisdictions requires navigating complex issues of private international law and may necessitate cooperation from foreign courts or authorities. The IRP must also deal with situations where third parties may be using the corporate debtor’s assets under various contractual arrangements, such as leases, licenses, or bailments.

The IBBI has issued guidance notes and circulars to assist IRPs in addressing these practical challenges. For instance, the IBBI has clarified that the IRP should take physical custody of tangible assets, change passwords and access credentials for digital assets, assume control over bank accounts, and implement appropriate security measures to prevent theft, damage, or unauthorized removal of assets. The IRP must also prepare a detailed inventory of all assets, including their description, location, condition, and estimated value.[6]

Asset Identification and Valuation During CIRP

Once the IRP assumes control of the corporate debtor’s assets, one of the most critical tasks is to identify and value these assets accurately. This process forms the foundation for the preparation of the information memorandum, which is a key document that potential resolution applicants use to formulate their resolution plans. Section 29 of the IBC requires the resolution professional (who replaces the IRP after the first meeting of the committee of creditors) to prepare an information memorandum containing all relevant information about the corporate debtor.

The definition of “assets” under Section 18 is deliberately broad and includes not only tangible property like land, buildings, plant and machinery, but also intangible assets such as intellectual property rights, goodwill, contractual rights, and development rights. The NCLAT has held that development rights constitute property within the meaning of Section 3(27) of the IBC and can be included in the information memorandum by the resolution professional. This expansive interpretation ensures that all value-bearing assets are brought within the ambit of the CIRP and made available for the benefit of stakeholders.

The valuation of assets must be conducted by registered valuers in accordance with the provisions of the Companies Act, 2013, and the rules made thereunder. Regulation 27 of the IBBI Regulations mandates that the resolution professional shall appoint two registered valuers to determine the fair value and liquidation value of the corporate debtor. One valuer must estimate the fair value and liquidation value of the assets of the corporate debtor, while the other must estimate the fair value and liquidation value of the business of the corporate debtor as a going concern.

The distinction between fair value and liquidation value is crucial. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Liquidation value, on the other hand, represents the estimated amount that would be realized if the assets were sold piecemeal under distress conditions. The IBC requires both valuations to establish a floor price for resolution plans, ensuring that stakeholders receive at least as much under a resolution plan as they would receive in liquidation.

Rights and Obligations of Secured Creditors During CIRP

The commencement of CIRP has profound implications for secured creditors who may have enforcement proceedings pending under the SARFAESI Act or other mechanisms. Section 14 of the IBC imposes a comprehensive moratorium that prohibits various actions against the corporate debtor, including the enforcement of security interests. This moratorium is automatic and takes effect immediately upon the admission of the insolvency application by the National Company Law Tribunal (NCLT).

The moratorium serves multiple purposes in the IBC framework. First, it provides breathing space to the corporate debtor and prevents a race among creditors to enforce their claims. Second, it preserves the corporate debtor’s assets and prevents their dissipation during the CIRP. Third, it creates a level playing field among creditors by ensuring that individual enforcement actions do not prejudice the collective resolution process. Fourth, it enables the IRP to take stock of the corporate debtor’s financial position and explore resolution possibilities without external pressures.

However, the moratorium is not absolute. Section 14(3) lists certain actions that are permitted notwithstanding the moratorium. These include proceedings under the Prevention of Money Laundering Act, 2002, or the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976. Additionally, the moratorium does not affect the right of a secured creditor to realize the value of its security interest after the liquidation order is passed.

Secured creditors play a crucial role in the CIRP through their participation in the committee of creditors (CoC). Section 21 of the IBC provides for the constitution of a CoC, which comprises all financial creditors of the corporate debtor. The CoC is the primary decision-making body during the CIRP and has the authority to approve or reject resolution plans, decide on the extension of the CIRP period, and take various other decisions relating to the conduct of the CIRP. Each financial creditor’s voting share in the CoC is proportionate to the financial debt owed to it.[7]

The Supreme Court has emphasized that the CoC must exercise its commercial wisdom in evaluating resolution plans. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court held that the CoC is the ultimate authority to approve a resolution plan and that the adjudicating authority’s role is limited to checking whether the resolution plan complies with the requirements specified in Section 30(2) of the IBC. This decision recognizes the business judgment of financial creditors and minimizes judicial interference in commercial decisions.[8]

Enforcement Mechanisms and Penalties

The IBC contains robust enforcement mechanisms to ensure compliance with its provisions and to penalize violations. Section 69 of the IBC empowers the adjudicating authority to punish any person who makes a statement that is false in material particulars or intentionally omits any material fact knowing it to be material with imprisonment for a term which may extend to two years or with fine which may extend to one crore rupees, or with both. This provision applies to all stakeholders, including the corporate debtor, its officers, creditors, and insolvency professionals.

The IBBI also has disciplinary powers over insolvency professionals. Section 220 of the IBC empowers the IBBI to impose penalties on insolvency professionals for professional misconduct, negligence, or contravention of the Code or the regulations. The penalties may include warnings, reprimands, monetary penalties, or even cancellation of registration as an insolvency professional. The IBBI has established a Disciplinary Committee to inquire into allegations of professional misconduct and recommend appropriate action.

In cases where the IRP encounters resistance in taking control of assets, the NCLT has the power to pass appropriate orders to facilitate compliance with Section 18. The NCLT may direct the corporate debtor’s officers and employees to cooperate with the IRP, order the police to assist the IRP in taking physical possession of assets, and even initiate contempt proceedings against persons who obstruct the IRP in the discharge of his duties. These coercive powers ensure that the IRP’s authority is not merely theoretical but can be enforced effectively on the ground.

Section 235 of the IBC provides for the punishment of contravention of orders of the adjudicating authority. Any person who contravenes any order of the NCLT or the NCLAT shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to one crore rupees, or with both. This provision serves as a powerful deterrent against non-compliance and reinforces the authority of the adjudicating bodies.

Challenges in Implementation and Emerging Issues

Despite the clear legislative mandate and supportive judicial precedents, IRPs continue to face practical challenges in taking actual control of corporate debtors’ assets. One recurring challenge is the lack of cooperation from the corporate debtor’s management and employees. Although Section 17 suspends the powers of the board of directors and Section 19 requires personnel to cooperate with the IRP, in practice, many corporate debtors attempt to obstruct or delay the transfer of control. This may involve withholding information, concealing assets, transferring assets to related parties, or creating artificial obstacles to the IRP’s access to premises and records.

Another challenge arises in cases involving complex corporate structures with multiple subsidiaries and holding companies. Section 18(1)(f)(b) empowers the IRP to take control of assets of Indian or foreign subsidiaries of the corporate debtor. However, determining what constitutes effective control over a subsidiary and implementing that control across different legal entities can be complex. Subsidiaries may have their own boards of directors, management teams, and operational autonomy. The IRP must navigate these organizational structures carefully to ensure that control is established without disrupting the subsidiary’s operations or violating the corporate law of the jurisdiction in which the subsidiary is incorporated.

The treatment of third-party assets in the possession of the corporate debtor presents another area of difficulty. Many corporate debtors operate using assets that they do not own, such as leased properties, licensed intellectual property, or goods held on consignment. The Supreme Court’s decision in Phoenix ARC clarified that the exclusion of third-party assets from the IRP’s control is limited to Section 18, meaning that these assets are not under the IRP’s custody and control. However, the IRP must still manage the corporate debtor’s contractual rights and obligations relating to these assets, which requires careful analysis of the underlying agreements and coordination with the asset owners.

The interface between the IBC and other regulatory regimes also creates challenges. For instance, certain industries are subject to sector-specific regulations that impose conditions on the transfer of control or ownership. The IRP must ensure compliance with these regulations while exercising authority under the IBC. Similarly, labor laws continue to apply during the CIRP, and the IRP must manage workforce issues, including payment of wages, compliance with minimum wage laws, and handling of labor disputes.[9]

Conclusion

The principle that the IRP must take actual, not symbolic, possession of the corporate debtor’s assets is fundamental to the operation of the Insolvency and Bankruptcy Code, 2016. This requirement flows directly from Section 18 of the IBC and has been consistently upheld by Indian courts and tribunals. The distinction between the IBC and the SARFAESI Act in this regard reflects the different objectives and mechanisms of these two legislative frameworks. While symbolic possession may suffice for individual enforcement actions under the SARFAESI Act, the collective and rehabilitative nature of the IBC demands that the IRP exercise actual control over all assets to preserve their value and facilitate meaningful resolution.

The judicial pronouncements discussed in this article establish that the IRP’s right to take control of assets is paramount and cannot be defeated by prior actions of secured creditors under other laws. The moratorium under Section 14 creates a statutory shield that protects this right, and the adjudicating authorities have the power to enforce compliance with Section 18. However, practical challenges remain in implementing this principle, particularly in cases involving complex corporate structures, third-party assets, and resistance from existing management.

Going forward, it will be important for stakeholders to recognize and respect the IRP’s authority from the outset of the CIRP. Secured creditors must understand that their enforcement rights under the SARFAESI Act are suspended during the CIRP and that cooperation with the IRP serves the broader goal of maximizing asset value for all stakeholders. The corporate debtor’s management and employees must similarly recognize that obstruction of the IRP’s duties is not only counterproductive but also punishable under the IBC. With greater awareness, better coordination, and continued judicial support, the principle of actual control by the IRP can be implemented effectively to achieve the IBC’s objectives of timely resolution and value maximization.

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Introduction

The intersection of corporate insolvency proceedings and criminal prosecution has long presented complex jurisdictional questions in Indian jurisprudence. The recent judgment delivered by the Kerala High Court in the matter of M/s. Kalpetta Janakshema Maruthi Chits Private Limited (In Liquidation) [1] has provided crucial clarity on a significant procedural question that has implications for liquidation proceedings across India. Justice Viju Abraham, presiding over this matter, addressed a fundamental issue concerning the authority required for Official Liquidators to proceed with criminal complaints against companies that have been wound up under the jurisdiction of High Courts rather than the National Company Law Tribunal.

The judgment, delivered in Report No. 32/2025 in Company Petition No. 43/2016, arose from a report filed by the Official Liquidator seeking permission and clarity regarding the continuation of criminal complaints pending under the Negotiable Instruments Act, 1881. The core question before the Court was whether an Official Liquidator requires the leave of the National Company Law Tribunal to prosecute criminal complaints when the company in question was wound up by the High Court under the provisions of the Companies Act, 1956, which predates the establishment of the National Company Law Tribunal framework under the Companies Act, 2013. Notably, this judgment clarifies that NCLT approval is not required for criminal complaints in such circumstances.

This ruling assumes particular significance in the contemporary legal landscape where thousands of companies wound up under the erstwhile Companies Act, 1956 continue to have pending matters, including criminal proceedings. The judgment provides a definitive answer to the jurisdictional confusion that had arisen following the establishment of the National Company Law Tribunal and the transfer of certain powers from High Courts to this specialized tribunal, clarifying that NCLT approval is not required for criminal complaints in such cases. The decision reinforces the principle that jurisdictional continuity must be maintained and that High Courts retain supervisory authority over companies wound up under their jurisdiction, even after the advent of the new legislative framework.

Background and Factual Matrix of the Case

The case pertains to M/s. Kalpetta Janakshema Maruthi Chits Private Limited, a company that was ordered to be wound up by the Kerala High Court pursuant to its powers under the Companies Act, 1956. The winding-up order was passed before the establishment and operationalization of the National Company Law Tribunal, which came into effect on June 1, 2016, following the enactment of the Companies Act, 2013. An Official Liquidator was appointed to oversee the liquidation process, and this officer was tasked with realizing the assets of the company, settling claims of creditors, and conducting the affairs of the company in liquidation in accordance with the applicable legal provisions.

During the course of the liquidation proceedings, the Official Liquidator identified several criminal complaints that were pending before the Chief Judicial Magistrate Court under the provisions of the Negotiable Instruments Act, 1881. These complaints had been filed against the company for dishonor of cheques, an offense under Section 138 of the Negotiable Instruments Act. The complaints were initiated before the company was ordered to be wound up and remained pending at various stages of adjudication. The Official Liquidator, in the discharge of his statutory duties, sought to proceed with these criminal complaints as they could potentially result in recovery of amounts due to creditors and contribute to the overall realization of assets for distribution among stakeholders.

However, a procedural question arose regarding the necessity of obtaining leave from the National Company Law Tribunal before proceeding with these criminal complaints. This question stemmed from the provisions of the Companies Act, 2013, particularly the transitional provisions and the transfer of jurisdiction from High Courts to the National Company Law Tribunal for matters relating to companies. The Official Liquidator, exercising abundant caution and seeking to ensure procedural compliance, filed a report before the Kerala High Court seeking clarification on whether NCLT approval was required for criminal complaints to continue prosecution of these matters.

The report highlighted the ambiguity that existed in the legal framework regarding the appropriate forum for seeking leave to proceed with legal proceedings against companies in liquidation. While the Companies Act, 1956 vested High Courts with comprehensive jurisdiction over winding-up matters, the Companies Act, 2013 transferred many of these powers to the National Company Law Tribunal. The question was whether companies wound up under the old regime required the liquidator to approach the new tribunal for procedural permissions, or whether the High Court that ordered the winding-up retained continuing jurisdiction over such matters.

Legislative Framework and Statutory Provisions

The legal framework governing corporate liquidation in India has undergone substantial transformation over the past decade. Understanding the judgment of the Kerala High Court requires a comprehensive examination of the relevant statutory provisions that govern winding-up proceedings and the powers and duties of liquidators in prosecuting legal proceedings on behalf of companies in liquidation.

The Companies Act, 1956 was the primary legislation governing corporate affairs in India until it was substantially replaced by the Companies Act, 2013. Under the 1956 Act, High Courts exercised original jurisdiction over winding-up petitions and related matters. The Act contained detailed provisions regarding the procedure for winding up companies, the powers and duties of liquidators, and the restrictions on legal proceedings against companies in liquidation. One of the key provisions relevant to the present case was Section 446 of the Companies Act, 1956, which dealt with the stay of suits and legal proceedings upon the making of a winding-up order.

Section 446 of the Companies Act, 1956 provides that when a winding-up order has been made or when a provisional liquidator has been appointed, no suit or other legal proceeding shall be commenced or, if pending at the date of the winding-up order, shall be proceeded with against the company except by leave of the Court and subject to such terms as the Court may impose. The provision was designed to ensure that all claims against the company in liquidation are dealt with in an orderly manner under the supervision of the Court overseeing the winding-up, thereby preventing a race among creditors and ensuring equitable distribution of assets. The word “Court” in this provision referred to the High Court that ordered the winding-up.

The Companies Act, 2013 brought about a paradigm shift in the administration of corporate law in India. This legislation established the National Company Law Tribunal as a specialized forum to adjudicate matters relating to companies. The National Company Law Tribunal was constituted under Section 408 of the Companies Act, 2013 and was designed to be a quasi-judicial body with expertise in corporate and commercial matters. The establishment of this tribunal was based on recommendations made by various expert committees, including the Justice V. Balakrishna Eradi Committee, which had advocated for a specialized tribunal to handle corporate disputes expeditiously.

Under the Companies Act, 2013, jurisdiction over winding-up matters and other company law proceedings was transferred from High Courts to the National Company Law Tribunal. Section 434 of the Companies Act, 2013 contains provisions regarding the transfer of pending proceedings from High Courts to the National Company Law Tribunal. However, the transitional provisions and the question of which forum exercises jurisdiction over companies wound up under the old Act before the establishment of the tribunal have been subjects of interpretational challenges. The Kerala High Court judgment addresses precisely this gap in understanding.

Section 446 of the Companies Act, 1956 explicitly states that no suit or other legal proceeding shall be proceeded with against the company except by leave of the Court. The question that arose in the present case was whether “Court” in this context, for companies wound up under the 1956 Act, should be interpreted to mean the High Court that ordered the winding-up or the National Company Law Tribunal that now exercises jurisdiction over winding-up matters under the 2013 Act. The Official Liquidator’s report sought clarification on this precise question, particularly in the context of criminal complaints under the Negotiable Instruments Act.

The Negotiable Instruments Act, 1881 is a special legislation that governs negotiable instruments such as promissory notes, bills of exchange, and cheques. Section 138 of this Act creates an offense for dishonor of cheques due to insufficiency of funds or for reasons that indicate that the cheque would be dishonored on presentment. The offense under Section 138 is a criminal offense punishable with imprisonment or fine or both. The provision has been extensively used by creditors and suppliers to enforce payment obligations, and a significant volume of criminal litigation in India pertains to cases under this section.

The Court’s Reasoning and Legal Analysis

The Kerala High Court undertook a detailed examination of the legal principles governing the jurisdiction of High Courts and the National Company Law Tribunal in relation to companies wound up under the Companies Act, 1956. Justice Viju Abraham’s judgment reflects a careful analysis of statutory provisions, precedent, and the principles of jurisdictional continuity that are fundamental to the administration of justice.

The Court began its analysis by noting the fundamental principle that when a company is wound up by an order of the High Court under the Companies Act, 1956, the High Court exercises supervisory jurisdiction over all aspects of the winding-up process. This jurisdiction is comprehensive and extends to all matters arising in the course of liquidation, including questions relating to the realization of assets, settlement of claims, and prosecution of legal proceedings by or against the company. The Court observed that this supervisory jurisdiction does not automatically cease or transfer to another forum merely because a new legislative framework has been enacted and a new tribunal has been established for dealing with company law matters.

The Court then examined the scope and application of Section 446 of the Companies Act, 1956. This provision, as noted earlier, requires that any suit or legal proceeding against a company in liquidation can only be commenced or continued with the leave of the Court. The Court emphasized that the term “Court” in this provision refers to the Court that made the winding-up order. Since the company in the present case was wound up by the Kerala High Court under the provisions of the Companies Act, 1956, the High Court remained the appropriate forum for granting leave to proceed with any legal proceedings, including criminal complaints.

An important aspect of the Court’s reasoning pertained to the nature of criminal proceedings under the Negotiable Instruments Act and whether such proceedings require leave under Section 446 of the Companies Act, 1956. The Court referred to its earlier decision in Jose Antony v. Official Liquidator [2], where it had been held that only those criminal proceedings which relate to the assets of the company come within the ambit of legal proceedings contemplated under Section 446. Proceedings under Section 138 of the Negotiable Instruments Act, which concern dishonored cheques, are directly related to the realization of debts due to the company and consequently relate to the assets of the company. Therefore, such proceedings do fall within the scope of Section 446, and leave of the Court is required to continue them.

The Court then addressed the central question of whether the Official Liquidator needed to obtain leave from the National Company Law Tribunal or from the High Court itself. The Court held unequivocally that since the company was wound up by the High Court under the Companies Act, 1956, the jurisdiction to grant leave for continuing legal proceedings remained with the High Court. The establishment of the National Company Law Tribunal under the Companies Act, 2013 and the transfer of jurisdiction for new winding-up petitions to the tribunal did not affect the continuing jurisdiction of High Courts over companies already wound up under their supervision.

The Court’s reasoning was grounded in the principle of jurisdictional continuity, which holds that once a Court acquires jurisdiction over a matter, that jurisdiction continues until the matter is finally disposed of unless expressly divested by statute. In the present case, there was no provision in the Companies Act, 2013 that expressly transferred the supervisory jurisdiction over companies wound up under the 1956 Act from High Courts to the National Company Law Tribunal. The transitional provisions in the 2013 Act dealt primarily with the transfer of pending proceedings, but did not address the question of continuing supervisory jurisdiction over completed winding-up orders.

Furthermore, the Court noted that requiring the Official Liquidator to approach the National Company Law Tribunal for leave to continue criminal proceedings in a matter where the company was wound up by the High Court would create procedural complications and unnecessary multiplicity of proceedings. It would also be inconsistent with the principle of having a single supervising forum for all matters relating to a particular liquidation. The High Court, having appointed the Official Liquidator and having supervisory control over the liquidation process, was best positioned to consider applications for leave to proceed with legal proceedings and to ensure that such proceedings were in the interests of the company’s creditors and stakeholders.

The Court also considered the practical implications of its decision. Thousands of companies across India were wound up by High Courts under the Companies Act, 1956 and remain in liquidation with Official Liquidators continuing to realize assets and settle claims. Many of these liquidations involve pending legal proceedings, including criminal complaints under the Negotiable Instruments Act and other statutes. If all such matters required leave from the National Company Law Tribunal rather than the High Court that ordered the winding-up, it would create enormous procedural burden and jurisdictional confusion. The Court’s decision provides much-needed clarity and ensures that the liquidation process continues smoothly under the supervision of the forum that initiated and oversaw it.

Implications for Official Liquidators and Corporate Stakeholders

The judgment of the Kerala High Court has significant practical implications for Official Liquidators, creditors, and other stakeholders involved in the liquidation of companies wound up under the Companies Act, 1956. The decision provides procedural clarity and eliminates a potential source of delay and litigation that could have hampered the efficient realization of assets in liquidation proceedings.

For Official Liquidators, the judgment confirms that they can continue to approach the High Court that ordered the winding-up for all permissions and directions required in the course of liquidation. This includes applications for leave to proceed with or defend legal proceedings, applications for directions regarding the realization of assets, and applications for approval of settlements and distributions. The Official Liquidator need not navigate the complexity of approaching a different forum, the National Company Law Tribunal, for such matters. This procedural simplification is particularly important given that Official Liquidators handle multiple liquidations simultaneously and efficiency in procedure directly impacts the speed and effectiveness of asset realization.

For creditors and other stakeholders, the judgment provides assurance that their claims and rights will continue to be adjudicated under the supervision of the High Court that has been overseeing the liquidation from its inception. This continuity is important for maintaining confidence in the liquidation process and ensuring that stakeholders have clarity regarding the appropriate forum for raising grievances and pursuing their claims. The judgment also confirms that criminal proceedings under the Negotiable Instruments Act can be effectively pursued by Official Liquidators without the procedural hurdle of obtaining permission from a separate tribunal.

The decision also has implications for companies wound up under the Companies Act, 1956 where criminal proceedings are pending. In many cases, directors and officers of such companies face prosecution under various criminal statutes, including the Negotiable Instruments Act, the Indian Penal Code, and special economic offenses legislation. The judgment clarifies that while such criminal proceedings can continue, the prosecution must obtain leave from the High Court supervising the liquidation to the extent that the proceedings relate to the assets of the company. This ensures that criminal proceedings do not proceed in a manner that is detrimental to the orderly winding-up of the company or that prejudices the interests of creditors.

From a broader systemic perspective, the judgment reinforces the importance of jurisdictional clarity in corporate insolvency and liquidation law. The establishment of the National Company Law Tribunal represented a major reform in India’s corporate dispute resolution framework, bringing together jurisdiction over insolvency, company law matters, and related commercial disputes under one specialized forum. However, the transition from the old regime under the Companies Act, 1956 to the new regime under the Companies Act, 2013 has inevitably created certain transitional challenges. The Kerala High Court’s judgment addresses one such challenge and provides a precedent that can guide courts and tribunals in resolving similar jurisdictional questions.

Regulatory Framework and the Role of National Company Law Tribunal

The National Company Law Tribunal represents a significant institutional innovation in India’s corporate governance and insolvency framework. Established under the Companies Act, 2013, the tribunal was constituted to provide a specialized forum for adjudication of company law matters, insolvency and bankruptcy proceedings, and related commercial disputes. Understanding the role and jurisdiction of the National Company Law Tribunal is essential to appreciating the significance of the Kerala High Court’s judgment and the jurisdictional boundaries that the Court has delineated.

The National Company Law Tribunal is constituted under Section 408 of the Companies Act, 2013. The tribunal consists of judicial members and technical members with expertise in law, accountancy, company law, and related fields. Each bench of the tribunal is presided over by a judicial member, who must be a person qualified to be a judge of a High Court. The technical members bring domain expertise that enables the tribunal to deal effectively with complex commercial and corporate matters. This composition reflects the legislature’s intention to create a specialized adjudicatory body that combines legal expertise with commercial and technical understanding.

The jurisdiction of the National Company Law Tribunal is expansive and covers a wide range of matters under the Companies Act, 2013. The tribunal has jurisdiction to hear and dispose of petitions for winding up of companies, applications relating to corporate insolvency resolution processes under the Insolvency and Bankruptcy Code, 2016, matters relating to oppression and mismanagement, compromises and arrangements between companies and their creditors or members, and various other matters specified in the Companies Act. The tribunal also exercises powers that were previously vested in the Company Law Board, which was abolished following the enactment of the Companies Act, 2013.

One of the key objectives behind the establishment of the National Company Law Tribunal was to ensure speedy disposal of corporate disputes. The tribunal is required to dispose of applications within specified time limits and is empowered to take measures to expedite proceedings. The Insolvency and Bankruptcy Code, 2016 further strengthened the framework by providing strict timelines for resolution of insolvency proceedings and imposing disciplines on the conduct of proceedings before the tribunal. These reforms were aimed at addressing the chronic problem of delays in commercial dispute resolution in India and creating a more efficient framework for dealing with corporate distress.

The National Company Law Tribunal exercises powers equivalent to those of a civil court under the Code of Civil Procedure, 1908 for purposes of taking evidence, enforcing attendance of witnesses, compelling discovery and production of documents, and other procedural matters. The tribunal also has the power to punish for contempt and to enforce its orders through appropriate coercive measures. These powers ensure that the tribunal can effectively adjudicate matters before it and enforce compliance with its directions.

Appeals from orders of the National Company Law Tribunal lie to the National Company Law Appellate Tribunal, which is constituted under Section 410 of the Companies Act, 2013 [3]. The appellate tribunal is headed by a chairperson who is or has been a judge of the Supreme Court or a Chief Justice of a High Court, and includes judicial and technical members. Further appeals from the National Company Law Appellate Tribunal lie to the Supreme Court of India on questions of law. This appellate hierarchy provides for judicial review of the tribunal’s decisions while maintaining the specialized nature of the adjudicatory framework.

Despite the comprehensive jurisdiction of the National Company Law Tribunal under the Companies Act, 2013, the Kerala High Court’s judgment makes it clear that the tribunal’s jurisdiction does not retrospectively extend to companies wound up by High Courts under the Companies Act, 1956. The Court clarified that criminal complaints can proceed without NCLT approval, and the supervisory jurisdiction of High Courts over such liquidations remains intact. The tribunal does not have authority to grant leave for proceedings against such companies or to exercise supervisory control over the conduct of such liquidations. This delineation of jurisdiction is important for maintaining systemic clarity and ensuring that the transition from the old legislative regime to the new one does not create procedural confusion or undermine ongoing liquidation proceedings.

Procedural Aspects of Criminal Complaints Under the Negotiable Instruments Act

The criminal proceedings that were the subject of the Kerala High Court’s judgment involved complaints under Section 138 of the Negotiable Instruments Act, 1881. Understanding the procedural framework for such complaints and their relationship with liquidation proceedings is crucial to appreciating the significance of the Court’s decision.

Section 138 of the Negotiable Instruments Act creates an offense when a cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account is returned by the bank unpaid due to insufficiency of funds or for the reason that it exceeds the arrangement made by the drawer with his banker. The provision prescribes specific procedures that must be followed before a criminal complaint can be filed. The payee or holder in due course of the cheque must make a demand for payment by giving a notice in writing to the drawer of the cheque within thirty days of the receipt of information from the bank regarding the dishonor. If the drawer fails to make payment within fifteen days of the receipt of this notice, the payee can file a criminal complaint within one month of the expiry of the fifteen-day period.

The offense under Section 138 is punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both. The provision also empowers courts to order payment of compensation to the complainant in addition to imposing punishment. This compensatory aspect makes Section 138 proceedings particularly relevant in the context of liquidation, as successful prosecution can result in recovery of amounts due to the company, which can then be distributed among creditors.

When a company is wound up and an Official Liquidator is appointed, the liquidator becomes responsible for realizing all assets of the company, including book debts and amounts due under dishonored cheques. If criminal complaints under Section 138 were pending at the time of the winding-up order, the Official Liquidator must continue prosecution. Importantly, the Kerala High Court confirmed that NCLT approval not required for criminal complaints, allowing liquidators to pursue such proceedings directly through the High Court. Amounts recovered through these proceedings form part of the company’s assets and must be distributed according to statutory priority among creditors.

The requirement of obtaining leave from the Court supervising the liquidation before proceeding with legal proceedings, including criminal complaints, serves several important purposes. It enables the Court to ensure that the proceedings are in the interests of creditors and stakeholders and that they are being pursued diligently and efficiently. It also prevents frivolous or vexatious proceedings that might impose costs on the liquidation estate without corresponding benefits. Furthermore, it ensures that all legal proceedings are coordinated under the supervision of a single forum, preventing conflicting directions and ensuring consistency in the approach to realization of assets.

The Kerala High Court’s judgment confirms that criminal complaints under Section 138 of the Negotiable Instruments Act fall within the scope of legal proceedings that require leave under Section 446 of the Companies Act, 1956. The Court clarified that this leave must be obtained from the High Court that ordered the winding-up and not from the National Company Law Tribunal, making it clear that approval from the NCLT is not required for pursuing criminal complaints. This ensures that Official Liquidators can continue such proceedings efficiently, without unnecessary procedural hurdles or jurisdictional confusion.

Comparative Analysis with Other Jurisdictions

The question of jurisdiction over companies in liquidation and the authority required for liquidators to pursue legal proceedings is not unique to India. Courts and tribunals in various jurisdictions have grappled with similar issues, particularly during periods of legislative transition or reform. Examining how other jurisdictions have addressed these questions provides useful context for understanding the Kerala High Court’s approach and the principles underlying its decision.

In the United Kingdom, which has a well-developed insolvency law framework, liquidators appointed by courts exercise wide powers to pursue legal proceedings on behalf of companies in liquidation. The Insolvency Act, 1986 provides that once a winding-up order is made, no action or proceeding can be proceeded with or commenced against the company except by leave of the court. The court in this context is the court that made the winding-up order. This principle is similar to that articulated by the Kerala High Court and reflects the importance of maintaining unified supervision over the liquidation process.

In Australia, corporate insolvency proceedings are governed by the Corporations Act, 2001, which establishes a comprehensive framework for winding up companies and conducting liquidations. Australian law requires that liquidators obtain approval from courts or creditors for certain actions, including pursuing legal proceedings above specified monetary thresholds. The courts have consistently held that the supervisory jurisdiction over a liquidation remains with the court that ordered the winding-up, unless jurisdiction is expressly transferred by statute or with the consent of parties. This approach aligns with the principle of jurisdictional continuity articulated by the Kerala High Court.

In Singapore, the Companies Act provides that when a winding-up order is made, no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the court. The courts in Singapore have held that this provision applies to all forms of legal proceedings, including criminal proceedings that have civil consequences for the company’s assets. The approach taken by Singaporean courts emphasizes the need for coordinated supervision of all proceedings that might affect the assets available for distribution to creditors.

In the United States, corporate bankruptcy proceedings are governed by the federal Bankruptcy Code, which establishes an automatic stay that prohibits creditors from pursuing claims against the debtor company without permission from the bankruptcy court. While the structure of US bankruptcy law differs significantly from Indian insolvency law, the underlying principle is similar, which is that once insolvency proceedings commence, all claims against the company must be dealt with in an orderly manner under the supervision of the insolvency court. This ensures equitable treatment of creditors and prevents a race to judgment that could undermine the collective insolvency process.

The comparative analysis reveals that the approach taken by the Kerala High Court is consistent with international best practices in insolvency law. The principle that the court or tribunal that orders the winding-up of a company retains supervisory jurisdiction over the liquidation process and must grant leave for legal proceedings against the company is widely recognized across jurisdictions. This principle promotes efficiency, consistency, and fairness in the administration of insolvency proceedings and ensures that the interests of all stakeholders are appropriately balanced under unified judicial supervision.

Conclusion

The judgment of the Kerala High Court in the matter of M/s. Kalpetta Janakshema Maruthi Chits Private Limited (In Liquidation) represents an important contribution to the jurisprudence on corporate insolvency and liquidation in India. By holding that Official Liquidators approval not required from the National Company Law Tribunal (NCLT) to proceed with criminal complaints in cases where companies were wound up by High Courts under the Companies Act, 1956, the Court has provided crucial procedural clarity and eliminated a potential source of confusion and delay in liquidation proceedings.

The judgment is grounded in sound legal principles, including the doctrine of jurisdictional continuity, the importance of unified supervision over liquidation proceedings, and the need to interpret transitional provisions in a manner that promotes efficiency and avoids multiplicity of proceedings. The Court’s analysis of Section 446 of the Companies Act, 1956 and its application to criminal proceedings under the Negotiable Instruments Act reflects a careful balancing of the interests of creditors, stakeholders, and the broader objectives of insolvency law.

For Official Liquidators, creditors, and other stakeholders involved in liquidations under the Companies Act, 1956, the judgment provides clear guidance on procedural matters and confirms that the High Court supervising the liquidation remains the appropriate forum for all applications and directions relating to the conduct of the liquidation. This clarity will facilitate the efficient realization of assets and distribution to creditors, which are the ultimate objectives of the liquidation process.

The decision also contributes to the broader development of India’s insolvency and bankruptcy framework. As the country continues to refine and strengthen its mechanisms for dealing with corporate distress, judicial decisions that provide clarity on jurisdictional questions and procedural matters play a vital role in building confidence in the system and ensuring that the framework operates effectively. The Kerala High Court’s judgment is an important step in this ongoing process of legal development and reform.

References

[1] LiveLaw. (2025). NCLT Approval Not Needed To Adjudicate Criminal Complaints In Cases Where Companies Were Wound Up By HC: Kerala High Court. Retrieved from https://www.livelaw.in/high-court/kerala-high-court/kerala-high-court-leave-nclt-official-liquidator-wound-up-company-1956-act-pending-305566 

[2] Jose Antony v. Official Liquidator, 1998 (2) KLT 176 (Kerala High Court)

[3] Ministry of Corporate Affairs, Government of India. National Company Law Appellate Tribunal. Retrieved from https://nclat.nic.in/ 

[4] The Legal Affair. (2025). Kerala High Court Clarifies That NCLT Leave Is Not Required for Criminal Complaints in Winding Up Cases Under the Companies Act, 1956. Retrieved from https://thelegalaffair.com/news/kerala-high-court-clarifies-that-nclt-leave-is-not-required-for-criminal-complaints-in-winding-up-cases-under-the-companies-act-1956/ 

[5] Verdictum. (2025). Kerala High Court: Leave Of NCLT Not Required For Proceeding With Criminal Complaint Under NI Act Against Company Wound Up Under High Court’s Jurisdiction. Retrieved from https://www.verdictum.in/court-updates/high-courts/kerala-high-court/shajukg-v-mskalpetta-janakshema-maruthi-chits-private-limited-2025ker66124-leave-nclt-criminal-complaint-company-wound-up-1593152 

[6] Ministry of Corporate Affairs, Government of India. National Company Law Tribunal Official Website. Retrieved from https://nclt.gov.in/ 

[7] Ministry of Law and Justice, Government of India. The Companies Act, 1956. Retrieved from https://www.indiacode.nic.in/ 

[8] Indian Kanoon. Section 446 in The Companies Act, 1956. Retrieved from https://indiankanoon.org/search/?formInput=section+446+companies+act 

[9] BW Legal World. (2025). NCLT Leave Not Required for Criminal Complaints Against Wound-Up Companies: Kerala High Court. Retrieved from https://www.bwlegalworld.com/article/nclt-leave-not-required-for-criminal-complaints-against-wound-up-companies-kerala-high-court-573926 

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Introduction

The Insolvency and Bankruptcy Board of India has recently invited public comments on significant amendments to the corporate insolvency resolution process (CIRP), marking another evolutionary step in India’s insolvency regime. These proposed changes, announced in August 2025, reflect the regulatory body’s commitment to refining the framework that has transformed India’s approach to corporate distress since the enactment of the Insolvency and Bankruptcy Code in 2016. The CIRP amendments 2025 focus on three critical areas: recording deliberations of the Committee of Creditors regarding resolution applicant eligibility, enhancing disclosure requirements for resolution plans, and mandating electronic platforms for invitation and submission of resolution plans. These changes emerge from a confluence of judicial pronouncements, stakeholder feedback, and practical experiences accumulated over years of implementation, and they represent a parliamentary committee recommendation following the success of similar requirements in the liquidation process.

The significance of these CIRP amendments extends beyond procedural modifications. They address fundamental concerns about transparency, accountability, and fairness that have emerged through the resolution of hundreds of corporate insolvencies since the Code’s implementation. By requiring formal documentation of Committee of Creditors’ deliberations and expanding disclosure obligations, the regulatory framework seeks to minimize litigation, prevent potential abuse, and ensure that the insolvency resolution process achieves its twin objectives of maximizing asset value while maintaining the integrity of the corporate resolution mechanism. The timing of these amendments is particularly relevant as India continues to refine its insolvency ecosystem, balancing the need for swift resolution with safeguards against misuse of the process.

Understanding the Corporate Insolvency Resolution Process Framework

The corporate insolvency resolution process operates as the cornerstone of India’s insolvency regime, established through the Insolvency and Bankruptcy Code, 2016. This time-bound process, typically limited to 330 days including judicial processes [1], provides a structured mechanism for resolving corporate distress while preserving the corporate debtor as a going concern. The process commences upon admission of an application filed by financial creditors, operational creditors, or the corporate debtor itself, triggering an automatic moratorium that protects the debtor from legal proceedings and enforcement actions during the resolution period.

Once the process begins, an interim resolution professional takes control of the corporate debtor’s management, replacing the existing board of directors. The resolution professional’s responsibilities encompass managing the debtor’s operations, preserving and protecting its assets, constituting the Committee of Creditors, and facilitating the submission and approval of resolution plans. The Committee of Creditors, comprising financial creditors with voting rights proportional to their debt, becomes the primary decision-making body during the resolution process. This committee evaluates resolution plans submitted by prospective applicants and approves a plan that offers the best prospects for maximizing asset value while satisfying creditors’ claims.

The legislative framework governing this process extends beyond the primary Code to encompass detailed regulations issued by the Insolvency and Bankruptcy Board of India. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, supplemented by multiple amendments in subsequent years, provide operational guidelines covering every aspect of the resolution process. These regulations specify procedures for conducting the process, requirements for resolution professionals, formats for various submissions, and standards for resolution plans. The regulatory framework has evolved continuously since 2016, with the Board issuing amendments in 2025 alone that address various aspects including part-wise resolution of corporate debtors, homebuyer participation as resolution applicants, and enhanced disclosure requirements for resolution plans.

The Committee of Creditors and Decision-Making Authority

The Committee of Creditors represents one of the most distinctive features of India’s insolvency regime, concentrating decision-making authority in the hands of financial creditors who hold the largest economic stake in the corporate debtor’s revival. The composition and functioning of this committee have been subjects of extensive judicial interpretation, particularly regarding the extent of its powers and the limits on judicial interference with its commercial decisions. The Supreme Court of India, in the landmark judgment of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [2], articulated the foundational principle that the Committee of Creditors possesses wide discretion in commercial matters related to the resolution process, including the evaluation and approval of resolution plans.

The Essar Steel judgment clarified that the Committee of Creditors operates with substantial autonomy in assessing resolution plans based on commercial considerations, and courts should exercise restraint in interfering with these decisions unless they violate statutory provisions or suffer from patent illegality. This judicial deference recognizes that financial creditors, having the maximum stake in the outcome, are best positioned to evaluate competing resolution proposals and determine which plan maximizes value for all stakeholders. The judgment emphasized that the Code’s architecture deliberately places commercial wisdom with financial creditors rather than operational creditors or the adjudicating authority, reflecting a policy choice to prioritize the interests of those who advanced credit to the corporate debtor.

However, the Committee’s authority, while extensive, operates within defined boundaries. The Committee cannot take decisions that violate mandatory provisions of the Code or regulations, discriminate among creditors within the same class, or approve plans that fail to meet statutory requirements. The resolution plan must satisfy multiple conditions specified in the Code, including payment of insolvency resolution process costs, provision for operational creditors, and compliance with other applicable laws. Furthermore, the Committee must ensure that resolution applicants satisfy eligibility criteria specified in the Code, particularly those outlined in Section 29A, which disqualifies certain categories of persons from submitting resolution plans.

The proposed amendments to CIRP 2025 seek to strengthen the Committee’s decision-making process by requiring formal documentation of deliberations regarding resolution applicant eligibility. This requirement addresses concerns that have emerged through practical experience, where disputes about applicant eligibility have led to protracted litigation and delayed resolution. By mandating that the Committee record its deliberations in meeting minutes, the CIRP amendments aim to create a transparent record demonstrating that the Committee properly considered each applicant’s eligibility before approving their resolution plan. This documentation requirement serves multiple purposes: it encourages thorough discussion of eligibility issues, provides a basis for reviewing the Committee’s decision if challenged, and demonstrates compliance with statutory requirements regarding applicant eligibility.

Section 29A: Eligibility Criteria for Resolution Applicants

Section 29A of the Insolvency and Bankruptcy Code establishes comprehensive disqualifications that prevent certain categories of persons from submitting resolution plans, representing one of the Code’s most critical safeguards against misuse of the insolvency process. Introduced through the Insolvency and Bankruptcy Code (Amendment) Act, 2018, this provision emerged in response to concerns that the original framework allowed promoters and related parties who contributed to the corporate debtor’s distress to regain control through the resolution process. The section’s disqualifications extend to various categories including undischarged insolvents, wilful defaulters, persons with non-performing accounts, persons convicted of specified offenses, persons prohibited from trading in securities, and persons disqualified from acting as directors.

The scope of Section 29A extends beyond the resolution applicant to encompass persons acting jointly or in concert with the applicant, preventing circumvention through related party structures. The provision disqualifies not only individuals falling within specified categories but also entities where such individuals hold significant ownership or control. For instance, if a person is a wilful defaulter, not only is that person disqualified, but any entity where that person holds beneficial interest exceeding specified thresholds also becomes ineligible to submit resolution plans. This comprehensive approach prevents sophisticated structures designed to bypass eligibility requirements while nominally complying with the provision’s letter.

The interpretation and application of Section 29A have generated substantial jurisprudence, with courts addressing questions about the provision’s scope, timing of eligibility determination, and relationship with other Code provisions. The provision’s language requires resolution applicants to submit affidavits confirming their eligibility under Section 29A along with their resolution plans, as specified in Section 30(2) of the Code. This requirement places an initial burden on resolution applicants to conduct due diligence regarding their eligibility and certify compliance with all disqualification criteria. However, the Committee of Creditors retains responsibility for independently verifying applicant eligibility before approving any resolution plan, as approval of a plan submitted by an ineligible person would violate mandatory statutory provisions and render the approval void.

The IBBI proposed CIRP amendments recognize that despite existing requirements for eligibility affidavits, disputes regarding applicant eligibility continue to arise, often leading to litigation that delays or derails resolution processes. The current framework lacks specific provisions requiring the Committee of Creditors to formally document its consideration of eligibility issues, creating situations where committees approve plans without thoroughly examining applicant eligibility or maintaining clear records of their deliberations on these matters. This gap has resulted in cases where approved resolution plans were subsequently challenged based on applicant ineligibility, leading courts to remit matters back to the Committee for reconsideration or, in some instances, to reject approved plans altogether.

To address these concerns, the proposed amendments to CIRP introduce requirements for enhanced disclosure by resolution applicants, specifically mandating submission of statements regarding beneficial ownership and affidavits confirming eligibility. The beneficial ownership statement must identify all natural persons who ultimately own or control the prospective resolution applicant, including details of the shareholding structure and jurisdiction of each entity in the ownership chain. This requirement aims to prevent situations where ineligible persons hide behind complex corporate structures to circumvent Section 29A disqualifications. By requiring full transparency regarding beneficial ownership, the amendments enable the Committee of Creditors to conduct thorough due diligence and identify potential eligibility issues before approving resolution plans.

Judicial Pronouncements Shaping CIRP Practice

The evolution of India’s insolvency framework has been substantially influenced by judicial interpretations that have clarified ambiguities, resolved conflicts, and established principles governing various aspects of the resolution process. The Supreme Court’s role has been particularly significant, with landmark judgments addressing fundamental questions about the Code’s architecture, the Committee of Creditors’ powers, eligibility of resolution applicants, and the scope of judicial review over commercial decisions made during the resolution process.

Beyond the Essar Steel judgment, which established the Committee of Creditors’ primacy in commercial decision-making, courts have addressed numerous other critical issues. In Swiss Ribbons Pvt. Ltd. v. Union of India [3], the Supreme Court upheld the constitutional validity of various Code provisions, including Section 29A’s disqualifications, rejecting challenges that these provisions violated constitutional rights or operated retrospectively. The judgment emphasized that Section 29A serves a legitimate purpose of preventing persons responsible for or connected with corporate debtor’s default from regaining control through the resolution process, and that the provision’s disqualifications represent reasonable restrictions necessary to achieve the Code’s objectives.

Courts have also addressed procedural aspects of the resolution process, including timelines, withdrawal of applications, and the relationship between settlement negotiations and insolvency proceedings. Recent Supreme Court pronouncements have clarified that applications for withdrawal under Section 12A of the Code can be filed even before constitution of the Committee of Creditors, provided settlements satisfy statutory requirements and receive necessary approvals [4]. These judgments reflect judicial recognition that while the Code establishes a time-bound process, flexibility remains necessary to accommodate genuine settlements that serve creditors’ interests better than continued insolvency proceedings.

The jurisprudence surrounding Section 29A has been particularly rich, with courts examining various disqualification criteria and their application to different factual scenarios. Courts have held that Section 29A disqualifications must be determined as of the date of resolution plan submission, and that subsequent events removing disqualifications do not render previously ineligible persons eligible. Similarly, courts have addressed questions about whether guarantors of corporate debtors’ debts are disqualified under Section 29A(h), which bars persons whose account has been classified as non-performing asset, concluding that guarantors generally fall within this disqualification when their accounts are classified as non-performing.

Judicial pronouncements have also emphasized the importance of maintaining process integrity and preventing abuse of the insolvency framework. Courts have intervened to prevent fraudulent conduct, unauthorized asset disposals, and violations of moratorium provisions, demonstrating that while the Committee of Creditors enjoys wide discretion in commercial matters, this discretion does not extend to tolerating illegal conduct or approving plans that violate mandatory statutory provisions. These judgments have shaped the practical implementation of the resolution process, establishing guardrails that balance efficiency with procedural fairness and legal compliance.

The proposed CIRP amendments draw extensively from lessons learned through judicial proceedings, incorporating requirements designed to address issues that have generated litigation and created uncertainty. The requirement to record Committee deliberations on eligibility reflects judicial emphasis on transparent decision-making and proper consideration of statutory requirements. Similarly, enhanced disclosure requirements for resolution applicants respond to judicial observations about the need for complete information regarding applicant structures and beneficial ownership to enable proper evaluation of Section 29A compliance.

Recording Committee Deliberations: Transparency and Accountability

The requirement to record Committee of Creditors’ deliberations regarding resolution applicant eligibility represents perhaps the most significant procedural innovation in the proposed CIRP amendments. Currently, the IBBI regulations require the resolution professional to prepare minutes of Committee meetings, documenting decisions taken and voting patterns. However, these regulations do not specifically mandate detailed recording of discussions, arguments, evidence considered, or reasoning underlying decisions regarding resolution applicant eligibility. The proposed amendments to CIRP seek to address this gap by requiring that the Committee’s deliberations on eligibility be formally documented in meeting minutes, creating a comprehensive record of how the Committee assessed compliance with Section 29A disqualifications.

This documentation requirement serves multiple interrelated purposes that strengthen the resolution process’s integrity and efficiency. First, it encourages thorough and rigorous consideration of eligibility issues by making the Committee’s analysis transparent and subject to review. When Committee members know their deliberations will be recorded and potentially scrutinized, they are more likely to carefully examine eligibility questions, seek necessary clarifications from resolution applicants, and ensure that decisions rest on proper evaluation of all relevant factors. This discipline in deliberation reduces the risk of cursory or superficial examination of eligibility issues that might lead to approval of plans submitted by ineligible persons.

Second, formal recording of deliberations creates evidentiary basis for defending Committee decisions if subsequently challenged. When resolution plans are approved, dissatisfied stakeholders sometimes file appeals challenging the plan’s validity, often raising questions about resolution applicant eligibility. In such proceedings, having detailed minutes documenting the Committee’s consideration of eligibility issues provides crucial evidence demonstrating that the Committee properly discharged its statutory responsibilities. Courts reviewing challenged decisions can examine the recorded deliberations to determine whether the Committee reasonably concluded that the resolution applicant satisfied Section 29A requirements, or whether the decision suffered from non-application of mind or failure to consider relevant factors.

Third, documentation requirements promote consistency and procedural fairness by ensuring that all resolution applicants receive equal consideration regarding eligibility issues. When the Committee must record its deliberations for each applicant, it becomes more difficult to apply different standards to different applicants or to dismiss eligibility concerns for favored applicants while rigorously examining others. The requirement to document deliberations thus serves as a procedural safeguard ensuring that eligibility determinations rest on objective assessment of statutory criteria rather than subjective preferences or improper considerations.

The practical implementation of this requirement will necessitate changes in how Committees conduct meetings and resolution professionals prepare minutes. Rather than simply recording votes and decisions, meeting minutes must now capture substantive discussions about eligibility issues, including concerns raised by Committee members, information provided by resolution applicants, expert opinions or legal advice considered, and the reasoning underlying the Committee’s ultimate conclusion regarding each applicant’s eligibility. Resolution professionals will need to ensure that adequate time is allocated in Committee meetings for thorough discussion of eligibility issues, and that minutes accurately reflect these deliberations while maintaining appropriate confidentiality regarding sensitive commercial information.

The documentation requirement also has implications for resolution applicants, who must anticipate that eligibility issues will receive careful scrutiny and be prepared to provide comprehensive information supporting their compliance with Section 29A requirements. Applicants may need to provide detailed submissions addressing each disqualification criterion, demonstrating through documentary evidence that neither they nor persons acting jointly or in concert fall within any disqualified category. This increased emphasis on eligibility verification may lengthen the evaluation process but should ultimately reduce post-approval challenges and enhance confidence in the integrity of approved resolution plans.

Enhanced Disclosure Requirements and Beneficial Ownership

The proposed amendments to CIRP introduce requirements for resolution applicants to file statements of beneficial ownership along with their resolution plans, addressing concerns about transparency regarding applicant structures and ultimate ownership. The concept of beneficial ownership has gained increasing prominence in corporate governance and regulatory frameworks worldwide, recognizing that legal ownership structures often obscure the natural persons who ultimately control or benefit from corporate entities. In the insolvency context, understanding beneficial ownership becomes critical for assessing Section 29A eligibility, as disqualifications extend to persons acting jointly or in concert with resolution applicants and entities where disqualified persons hold significant beneficial interest.

The beneficial ownership disclosure requirement mandates that resolution applicants provide information identifying all natural persons who ultimately own or control the applicant entity. This includes details of the complete shareholding structure, identifying each layer of ownership from the applicant entity through intermediate holding companies to ultimate individual shareholders. For each entity in the ownership chain, applicants must disclose the jurisdiction of incorporation, shareholding percentages, and any special rights or control mechanisms that affect actual control despite nominal shareholding. This comprehensive disclosure enables the Committee of Creditors to trace ownership through multiple layers and identify whether any disqualified persons hold beneficial interest in the resolution applicant.

The requirement responds to practical challenges that have emerged where resolution applicants have been structured to conceal the involvement of persons potentially disqualified under Section 29A. Complex corporate structures involving multiple jurisdictions, nominee arrangements, trust structures, and special purpose vehicles can obscure beneficial ownership, making it difficult for Committees to verify eligibility based solely on information provided in standard resolution plan formats. By mandating explicit beneficial ownership disclosure, the amendments shift responsibility to resolution applicants to transparently reveal their ownership structures, facilitating proper due diligence by the Committee.

The beneficial ownership statement must identify specific natural persons who qualify as beneficial owners under applicable definitions, which typically include persons holding significant ownership interest or exercising significant control over the entity. Significant ownership interest is generally defined as holding specified percentages of shares or voting rights, while significant control encompasses ability to appoint majority of directors, control management decisions, or exercise influence through agreements or arrangements. Resolution applicants must identify all individuals meeting these criteria at each level of their corporate structure, ensuring that the Committee can assess whether any such individuals fall within Section 29A disqualifications.

In addition to beneficial ownership statements, the amendments require resolution applicants to file affidavits confirming their eligibility under Section 29A. While Section 30(2) of the Code already requires such affidavits, the proposed CIRP amendments appear to strengthen this requirement, possibly by mandating more detailed affidavits addressing each disqualification criterion specifically. The affidavit serves as a formal certification by the resolution applicant that neither the applicant nor any person acting jointly or in concert falls within any disqualified category, and that all information provided regarding ownership, control, and related party relationships is accurate and complete.

These disclosure requirements create legal consequences for resolution applicants who provide false or misleading information. Submission of false affidavits can expose applicants to criminal liability for perjury, while material misrepresentation regarding beneficial ownership or eligibility can form grounds for rejecting resolution plans or canceling approved plans. The enhanced disclosure framework thus creates strong incentives for resolution applicants to conduct thorough internal due diligence regarding their eligibility and to provide complete and accurate information to the Committee. This shift toward greater applicant responsibility for eligibility verification should reduce situations where ineligible persons submit plans based on incomplete or misleading disclosures.

Electronic Platforms and Process Digitization

The proposed CIRP amendments include provisions requiring invitation and submission of resolution plans through electronic platforms, representing a significant step toward digitization of the insolvency resolution process. This requirement follows successful implementation of similar systems in the liquidation process, where electronic platforms have improved transparency, reduced processing time, and created comprehensive digital records of proceedings. The extension of electronic platforms to the resolution plan submission stage reflects broader governmental initiatives toward digital governance and paperless processes across regulatory domains.

Electronic platforms for resolution plan submission offer multiple advantages over traditional paper-based processes. They enable standardized data collection, ensuring that all resolution applicants provide information in consistent formats that facilitate comparison and analysis. Digital submission eliminates logistical challenges associated with physical document handling, particularly when multiple applicants submit lengthy plans with numerous annexures and supporting documents. Electronic platforms also create audit trails documenting when plans were submitted, what modifications were made, and how different versions compare, enhancing transparency and accountability throughout the evaluation process.

The requirement for electronic submission through designated platforms will necessitate development of appropriate technological infrastructure by the Insolvency and Bankruptcy Board of India. The Board will need to establish secure platforms capable of handling large document volumes, maintaining confidentiality of sensitive commercial information, providing appropriate access controls for resolution professionals and Committee members, and generating reports and analytics to support decision-making. The platform should accommodate various document formats, allow for secure communication between resolution applicants and resolution professionals, and maintain comprehensive records meeting evidentiary standards for potential litigation.

For resolution professionals and Committees of Creditors, electronic platforms promise to streamline the plan evaluation process significantly. Rather than reviewing paper documents spread across multiple volumes, Committee members can access digital plans through user-friendly interfaces that allow searching, comparison across different plans, and tracking of revisions. Electronic platforms can incorporate analytical tools that automatically extract key financial parameters, compare payment terms, and flag potential issues requiring closer examination. These capabilities should enable more efficient and thorough evaluation of resolution plans, particularly in cases involving multiple competing proposals.

Resolution applicants will need to adapt their plan preparation processes to accommodate electronic submission requirements. This includes preparing documents in specified electronic formats, organizing information according to platform requirements, and potentially using digital signatures or other authentication mechanisms to verify submitted materials. While electronic submission may initially present learning curves for some applicants, the standardization and efficiency gains should ultimately simplify the submission process compared to preparing multiple physical copies of voluminous plan documents.

The electronic platform requirement also facilitates compliance monitoring and regulatory oversight by the Insolvency and Bankruptcy Board of India. The Board can access standardized data from all corporate insolvency resolution processes, enabling analysis of trends, identification of systemic issues, and evidence-based policymaking. Electronic records allow the Board to monitor compliance with timelines, track outcomes across different categories of corporate debtors, and evaluate the effectiveness of regulatory requirements. This data-driven approach to regulation should support continuous refinement of the insolvency framework based on empirical evidence rather than anecdotal observations.

Implications for Stakeholders and Future Outlook

The IBBI’s Proposed CIRP Amendments carry significant implications for all participants in the corporate insolvency resolution process (CIRP), requiring adjustments to established practices and creating new compliance obligations. For resolution professionals, the amendments expand responsibilities regarding documentation, verification, and platform management. Resolution professionals must ensure that Committee meetings allocate sufficient time for thorough discussion of eligibility issues and that minutes accurately capture these deliberations while maintaining appropriate confidentiality. They must also manage the electronic platform for plan submission, verify that applicants have provided required beneficial ownership statements and affidavits, and facilitate Committee access to all submitted materials.

Financial creditors serving on Committees of Creditors will face expectations for more active engagement with eligibility issues. Rather than deferring to resolution professional recommendations or accepting applicant representations at face value, Committee members should conduct their own due diligence regarding eligibility, raise questions about concerning aspects of applicant structures or histories, and ensure that deliberations adequately address all relevant factors. The requirement to record deliberations creates accountability for Committee members’ contributions to eligibility discussions, potentially increasing their diligence in reviewing applicant credentials.

Resolution applicants confront heightened disclosure obligations and increased scrutiny of their eligibility credentials. Preparing beneficial ownership statements and detailed eligibility affidavits will require substantial effort, particularly for applicants with complex corporate structures spanning multiple jurisdictions. Applicants must conduct thorough internal due diligence to identify all persons who might be considered to be acting jointly or in concert and to verify that none of these persons falls within Section 29A disqualifications. The enhanced transparency requirements may deter some potential applicants whose eligibility status is uncertain or whose ownership structures would raise concerns if fully disclosed.

For the broader insolvency ecosystem, these amendments signal continued evolution toward greater transparency, formalization, and digital integration. The amendments reflect lessons learned from several years of implementation experience, incorporating practical solutions to recurring problems. They demonstrate the Insolvency and Bankruptcy Board of India’s commitment to evidence-based regulation that responds to stakeholder feedback and judicial pronouncements while advancing the Code’s fundamental objectives of maximizing value and preserving viable businesses.

Looking forward, successful implementation of these amendments will depend on several factors. The Board must develop robust electronic platforms that function reliably under high transaction volumes while maintaining security and confidentiality. Resolution professionals require training on new documentation requirements and platform operation. Committee members need guidance on conducting and recording eligibility deliberations. Resolution applicants should receive clear instructions regarding beneficial ownership disclosure requirements and affidavit contents. Stakeholder education and capacity building will be essential to ensure smooth transition to the amended framework.

The CIRP amendments also open possibilities for further evolution of India’s insolvency regime. Experience with electronic platforms in plan submission may inform broader digitization of insolvency processes, including claims verification, asset valuation, and distribution calculations. Enhanced beneficial ownership disclosure requirements established in the insolvency context might influence beneficial ownership reporting in other regulatory domains. Documentation of Committee deliberations could extend to other aspects of decision-making beyond eligibility determination, creating comprehensive records supporting all key decisions during the resolution process.

Conclusion

The proposed amendments to the corporate insolvency resolution (CIRP) process regulations represent thoughtful refinements addressing practical challenges identified through implementation experience. By requiring documentation of Committee deliberations on resolution applicant eligibility, mandating enhanced disclosure of beneficial ownership, and establishing electronic platforms for plan submission, the CIRP amendments strengthen transparency, reduce litigation risk, and modernize process infrastructure. These changes align with broader global trends toward greater transparency in insolvency proceedings and beneficial ownership reporting while respecting the distinctive architecture of India’s insolvency framework.

The CIRP amendments reflect careful balancing of competing considerations. They impose additional procedural requirements that may extend resolution timelines and increase compliance burdens, but these costs appear justified by benefits of reduced litigation, enhanced confidence in approved plans, and improved decision-making quality. The amendments preserve the Committee of Creditors’ primacy in commercial decision-making while creating accountability mechanisms ensuring that this discretion is exercised responsibly and transparently. They leverage technology to improve process efficiency without sacrificing the flexibility necessary to accommodate diverse circumstances across different corporate insolvencies.

As these CIRP amendments move from proposal to implementation, their success will ultimately be measured by whether they achieve intended objectives without creating unintended obstacles. Stakeholder comments during the public consultation period will provide valuable input for refining proposed provisions before finalization. The insolvency ecosystem’s response—how effectively participants adapt practices to comply with new requirements—will determine whether the amendments deliver promised improvements. With appropriate implementation support and continued monitoring of outcomes, these amendments should advance India’s insolvency framework toward greater maturity, transparency, and effectiveness in achieving the twin goals of maximizing value and preserving viable businesses facing financial distress.

References

[1] Supreme Court of India. (2025). Committee of Creditors of Essar vs. Satish. 2025 INSC 124. 

[2] Supreme Court of India. (2019). Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors. Civil Appeal No. 8766-67 of 2018. Available at: https://ibclaw.in/summary-of-landmark-judgment-of-supreme-court-in-committee-of-creditors-of-essar-steel-india-limited-vs-satish-kumar-gupta-ors-under-ibc/ 

[3] Supreme Court of India. (2019). Swiss Ribbons Pvt. Ltd. v. Union of India. Civil Appeal No. 99 of 2018. 

[4] Supreme Court of India. (2023). Withdrawal applications under Section 12A IBC. Available at: https://www.livelaw.in/top-stories/ibc-application-under-section-12a-for-withdrawal-of-cirp-is-maintainable-prior-to-constitution-of-coc-supreme-court-225026 

[5] Insolvency and Bankruptcy Board of India. (2016). IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Available at: https://ibbi.gov.in 

[6] Government of India. (2016). The Insolvency and Bankruptcy Code, 2016 (Act No. 31 of 2016). Available at: https://www.indiacode.nic.in/bitstream/123456789/15479/1/the_insolvency_and_bankruptcy_code,_2016.pdf 

[7] Insolvency and Bankruptcy Board of India. (2025). IBBI (Insolvency Resolution Process for Corporate Persons) (Fifth Amendment) Regulations, 2025. Available at: https://indiacorplaw.in/2025/07/24/amendments-to-the-ibbi-regulations-on-corporate-insolvency-the-future-of-transparency/ 

[8] IBC Laws. (2024). Section 29A of IBC – Persons not eligible to be resolution applicant. Available at: https://ibclaw.in/section-29a-persons-not-eligible-to-be-resolution-applicant/ 

[9] ELP Law. (2024). Recent landmark judgments of the Supreme Court under IBC. Available at: https://elplaw.in/leadership/recent-landmark-judgments-of-the-supreme-court-under-ibc/ 

The post IBBI’s Proposed CIRP Amendments: Strengthening Transparency and Integrity in India’s Insolvency Resolution Framework appeared first on Bhatt & Joshi Associates.

Introduction

The insolvency regime for personal guarantors to corporate debtors represents one of the most contentious and rapidly evolving areas of India’s insolvency jurisprudence. With the notification of provisions relating to personal guarantors under the Insolvency and Bankruptcy Code, 2016 (IBC) on December 1, 2019, the legal landscape underwent a fundamental transformation, establishing a specialized insolvency resolution framework for this distinct category of individuals. This development was particularly significant given the widespread practice in Indian corporate finance of promoters and directors extending personal guarantees to secure corporate debt—a practice that had previously created significant enforcement challenges when corporate borrowers faced financial distress. The Supreme Court’s interventions in this domain over the past few years have resulted in a series of landmark judgments that have progressively expanded Personal Guarantor Liability Post-Insolvency while clarifying the intricate relationship between corporate insolvency proceedings and personal guarantor obligations. These judicial pronouncements have addressed fundamental questions regarding the concurrent proceedings against corporate debtors and their personal guarantors, the impact of corporate resolution on guarantor liability, the relationship between the IBC and contract law principles governing guarantees, and the constitutional validity of treating personal guarantors as a distinct class. This article examines the Supreme Court’s expansive interpretation of personal guarantor liability post-insolvency context, analyzing landmark judgments, identifying key jurisprudential principles, and evaluating the practical implications for stakeholders. Through this analysis, the article aims to provide clarity on the current legal position while highlighting areas where further judicial development may be anticipated as this dynamic area of law continues to evolve.

Statutory Framework & SC Validation of Personal Guarantor Insolvency

The Notification and Its Implications of Personal Guarantor Insolvency Framework

The Ministry of Corporate Affairs’ notification dated November 15, 2019, which came into effect on December 1, 2019, operationalized specific provisions of the IBC in relation to personal guarantors to corporate debtors. This notification created a specialized insolvency resolution framework distinct from the general personal insolvency provisions, acknowledging the unique position of personal guarantors within the corporate insolvency ecosystem.

The notification specifically brought into force Sections 2(e), 78, 79, 94-187 (with certain exceptions), 239(2)(g), (h) and (i), 239(2)(m) to (zc), 239(2)(zn) to (zs), and 249 of the IBC in relation to personal guarantors to corporate debtors. Additionally, the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019, were promulgated to establish detailed procedural frameworks.

This selective implementation created a significant distinction between personal guarantors to corporate debtors and other individual insolvents, reflecting the policy recognition of their distinct position in the corporate credit ecosystem. The framework established the NCLT as the Adjudicating Authority for personal guarantor insolvency matters, creating jurisdictional alignment with corporate insolvency proceedings.

The Constitutional Challenge: Lalit Kumar Jain Case

The selective notification immediately faced constitutional challenges, with personal guarantors arguing that it arbitrarily created a distinct class without legislative authorization and impermissibly bifurcated the IBC’s personal insolvency provisions. These challenges culminated in the landmark judgment of the Supreme Court in Lalit Kumar Jain v. Union of India & Ors. (2021) 9 SCC 321.

The Supreme Court comprehensively upheld the constitutional validity of the notification, delivering a judgment with far-reaching implications for personal guarantor liability post-insolvency. Justice Ramasubramanian, writing for the three-judge bench, observed:

“Personal guarantors are a separate species of individuals for whom the adjudicating authority has been specially designated as NCLT. The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums resulting in conflicting outcomes, led to carving out personal guarantors as a separate species of individuals… The parliamentary intention was to treat personal guarantors differently from other individuals.”

The Court rejected arguments that the government lacked authority to notify different provisions for different categories of persons, finding that Section 1(3) of the IBC explicitly conferred such power. Addressing the classification issue, the Court held:

“The neat division of the Code into three parts—the first dealing with corporate insolvency, the second with individual insolvency and bankruptcy (including personal guarantors), and the third containing common provisions—does not mean that the classification made in the impugned notification is impermissible. The intimate connection between personal guarantors and corporate debtors is mirrored in various provisions, including Sections 60, 128, 129, and 133 of the Indian Contract Act.”

This constitutional validation paved the way for the subsequent judicial expansion of personal guarantor liability post-insolvency principles.

Landmark Judicial Pronouncements on Substantive Liability

State Bank of India v. V. Ramakrishnan: Early Foundations

Even before the personal guarantor provisions were operationalized, the Supreme Court had begun addressing the relationship between corporate resolution and guarantor liability in State Bank of India v. V. Ramakrishnan (2018) 17 SCC 394. This case examined whether the moratorium under Section 14 of the IBC, applicable during corporate insolvency resolution process (CIRP), extended to personal guarantors of the corporate debtor.

The Supreme Court held that the moratorium under Section 14 applied only to the corporate debtor and not to the personal guarantors, allowing creditors to pursue enforcement actions against guarantors even while corporate proceedings were ongoing. Justice R.F. Nariman, delivering the judgment, emphasized:

“Section 14 refers only to the debtor mentioned in the application, making it clear that the moratorium is only in relation to the corporate debtor. The protection of the moratorium under Section 14 is for the corporate debtor alone, in line with the fundamental purpose of the Code—to ensure that the corporate debtor continues as a going concern while the creditors assess the options of resolution… Had the intention been to apply the moratorium to personal guarantors as well, the section would have explicitly stated so.”

This early decision laid important groundwork by recognizing the conceptual separation between corporate debtor and personal guarantor liability, despite their interconnected nature.

Committee of Creditors of Essar Steel v. Satish Kumar Gupta: Discharge Principles

The landmark judgment in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. (2020) 8 SCC 531 addressed the critical question of whether approval of a resolution plan for a corporate debtor resulted in automatic discharge of the personal guarantor’s liability.

Justice Nariman, delivering the Court’s judgment, articulated a principle with profound implications for personal guarantor liability post-insolvency:

“Section 31 makes it clear that the guarantor’s liability is not extinguished by the approval of the resolution plan. The language of Section 31 specifically states that the approved resolution plan shall be binding on the corporate debtor, its employees, members, creditors, guarantors, and other stakeholders involved in the resolution plan. The inclusion of ‘guarantors’ among those bound by the plan establishes that far from discharging them from liability, the Code ensures they remain bound by the resolution outcome.”

The Court elaborated on the relationship between the IBC and the Indian Contract Act’s guarantee provisions:

“The liability of the guarantor remains separate and independent of the corporate debtor’s liability, consistent with Sections 128 and 133 of the Contract Act. The approved resolution plan does not operate as a discharge under Section 133, as it represents a statutory mechanism rather than a contract variation. The guarantor’s right of subrogation against the corporate debtor, while affected in practical terms, does not alter the fundamental nature of the guarantee obligation toward the creditor.”

This judgment established the critical principle that corporate resolution does not ipso facto discharge guarantor liability, preserving an important recovery avenue for creditors and shaping the framework of personal guarantor liability post-insolvency.

Phoenix ARC v. Ketulbhai Ramubhai Patel: Co-Extensive Liability Affirmation

In Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel (2021) 10 SCC 455, the Supreme Court further clarified the nature of guarantor liability, particularly examining the co-extensive nature of liability under Section 128 of the Contract Act in the IBC context.

Justice Indira Banerjee, writing for the Court, emphasized:

“The liability of a guarantor is co-extensive with that of the principal debtor unless the contract provides otherwise. Once the liability of the principal borrower has been established and a decree passed against him, the guarantor’s liability becomes actionable. There is no requirement to exhaust remedies against the principal debtor before proceeding against the guarantor unless the contract of guarantee provides otherwise.”

The Court specifically addressed the impact of corporate insolvency on this co-extensive liability principle:

“The mere initiation of CIRP against the corporate debtor does not dilute or modify the guarantor’s liability. Sections 128 to 134 of the Contract Act continue to govern the fundamental nature of guarantee obligations, with the IBC creating procedural mechanisms for enforcement rather than altering substantive liability principles. Once the corporate debtor’s liability is established, whether through adjudication or admission in insolvency proceedings, the guarantor cannot escape co-extensive liability except on grounds specifically recognized under contract law.”

This judgment reinforced that the guarantor’s liability remains fundamentally governed by contractual principles despite the statutory overlay of insolvency processes.

State Bank of India v. Mahendra Kumar Jajodia: Simultaneous Proceedings

In State Bank of India v. Mahendra Kumar Jajodia (2021) SCC OnLine NCLAT 193, the National Company Law Appellate Tribunal (NCLAT) addressed the question of whether proceedings against personal guarantors could be initiated while corporate insolvency was ongoing, a position later affirmed by the Supreme Court in subsequent judgments.

The NCLAT, drawing on Supreme Court precedents, held:

“There is no legal impediment to simultaneous initiation or continuation of proceedings against the corporate debtor and its personal guarantors. Section 60(2) of the IBC specifically enables applications relating to insolvency resolution of personal guarantors to be filed before the same Adjudicating Authority dealing with the corporate insolvency. This jurisdictional alignment acknowledges the interconnected yet distinct nature of these liabilities.”

The Tribunal further noted:

“Simultaneous proceedings serve the Code’s objective of comprehensive resolution of insolvency. They allow creditors to pursue legitimate recovery claims against both primary and secondary obligors without unnecessary procedural sequencing. The filing of claims in corporate proceedings does not create a bar against initiating separate recovery proceedings against guarantors, as these represent distinct legal pathways pursuing fundamentally separate obligors.”

This decision established an important procedural principle facilitating creditor recovery, subsequently reinforced by the Supreme Court in later cases.

Prahlad Bhai Patel v. Bangiya Gramin Vikash Bank: No Corporate Bar

In Prahlad Bhai Patel v. Bangiya Gramin Vikash Bank (2022) SCC OnLine SC 1557, the Supreme Court explicitly approved simultaneous proceedings against corporate debtors and personal guarantors, regardless of the corporate insolvency stage.

Justice Ravindra Bhat, delivering the judgment, held:

“Nothing in the IBC prevents the institution or continuation of proceedings against the guarantor under the personal guarantor insolvency provisions. The provisions of Sections 60(2) and (3), read with Section 179, clearly indicate that proceedings against personal guarantors can be filed or continued regardless of whether the corporate debtor is undergoing resolution or liquidation.”

The Court further emphasized the distinct nature of guarantor obligations:

“The guarantor assumes a separate and independent obligation to ensure payment, which remains enforceable regardless of the corporate proceedings’ status. The right of a creditor to pursue simultaneous remedies against both principal debtor and guarantor is well-established under contract law and remains undisturbed by the IBC framework, which instead facilitates coordinated adjudication through jurisdictional alignment.”

This decision removed any remaining doubts about procedural sequencing, confirming creditors’ right to pursue guarantors regardless of corporate proceedings’ status or outcome.

The State Bank of India v. Jah Developers Case: A Watershed Moment

Factual Background and Key Issues

The landmark judgment in State Bank of India v. Jah Developers Private Limited (2023) SCC OnLine SC 1379, delivered on September 28, 2023, represents the most comprehensive and expansive articulation of personal guarantor liability principles by the Supreme Court to date. The case involved multiple appeals addressing common questions about guarantor liability in relation to corporate resolution outcomes.

The central issue concerned whether a guarantor’s liability could exceed the amount specified in an approved resolution plan for the corporate debtor—a question of profound importance for creditors’ recovery prospects. Additional issues included whether guarantor liability could continue after a corporate resolution plan’s approval and the impact of Section 31 of the IBC on guarantor obligations.

The Court’s Expansive Interpretation

A three-judge bench comprising Justices Surya Kant, Dipankar Datta, and Ujjal Bhuyan delivered a unanimous judgment that substantially expanded guarantor liability principles. Justice Dipankar Datta, writing for the bench, held:

“A personal guarantor’s liability is not extinguished merely because a resolution plan has been approved in respect of the corporate debtor. The guarantor’s obligation operates independently of the corporate debtor’s financial status post-resolution. Most critically, the quantum of the guarantor’s liability is determined by the original contractual terms, not by the reduced amount accepted by creditors in the corporate resolution plan.”

The Court specifically rejected the argument that guarantor liability becomes limited to the amount specified in an approved resolution plan:

“The very essence of a guarantee is the promisor’s undertaking to be answerable for the debt or default of another person. The guarantor effectively promises: ‘if the principal debtor does not do what he has promised to do, I will do it for him.’ This fundamental obligation is not automatically modified merely because creditors have pragmatically accepted a reduced recovery through the corporate resolution process. The guarantor’s liability remains co-extensive with the principal debtor’s original contractual obligations, as guaranteed.”

Legal Reasoning and Implications on Personal Guarantor Liability

The Court’s reasoning drew on multiple legal foundations:

1. Contract Act Principles: The Court emphasized that Sections 128, 133, and 135 of the Indian Contract Act remained fully applicable despite the corporate insolvency process. Justice Datta observed: “The statutory principles governing guarantees under the Contract Act continue to apply with full force unless explicitly modified by the IBC, which they have not been. Section 128 establishes co-extensive liability with the principal debtor’s original obligation, not with any subsequently reduced amount.” 
2. Section 31 Interpretation: The Court interpreted Section 31’s language making resolution plans binding on guarantors as preserving rather than reducing guarantor liability: “Section 31 ensures that guarantors remain bound despite the corporate resolution, preventing them from arguing that changes to the principal debtor’s obligations have automatically discharged their liability under general guarantee principles.” 
3. Section 133 Analysis: The Court specifically addressed Section 133 of the Contract Act, which provides for guarantor discharge when the creditor makes a contract with the principal debtor to give time or not to sue: “The approval of a resolution plan does not constitute a ‘contract’ between the creditor and principal debtor within the meaning of Section 133. It represents a statutory process with court approval rather than a voluntary contractual variation. Even if considered a contractual modification, the guarantor explicitly or implicitly consents to such variations when executing a comprehensive guarantee.” 
4. Subrogation Rights Consideration: The Court acknowledged that resolution plans might practically impact a guarantor’s subrogation rights but found this insufficient to modify liability: “While a guarantor’s practical ability to recover from the corporate debtor post-resolution may be affected, this commercial consequence does not alter the legal relationship between the guarantor and the creditor. The guarantor knowingly assumed this risk when providing the guarantee.” 

The judgment conclusively established that personal guarantor liability post-insolvency remain liable for the entire guaranteed debt regardless of haircuts accepted in corporate resolution plans—a position with profound implications for recovery dynamics, particularly in promoter-guaranteed corporate debt scenarios.

Recent Developments and Emerging Doctrines

Kotak Mahindra Bank v. A. Balakrishnan: Mortgage Security Impact

In Kotak Mahindra Bank v. A. Balakrishnan (2023) SCC OnLine SC 211, the Supreme Court addressed how mortgage security provided by guarantors interacts with personal guarantor insolvency proceedings.

Justice V. Ramasubramanian, delivering the judgment, clarified:

“The existence of mortgage security provided by the guarantor does not preclude the initiation of personal guarantor insolvency proceedings. While secured creditors generally have options to relinquish or realize security outside the insolvency process, the availability of mortgage security does not change the guarantor’s fundamental status or liability. The personal insolvency process and mortgage enforcement represent parallel rather than mutually exclusive remedies.”

The Court further observed:

“Creditors are not obligated to first exhaust mortgage remedies before proceeding with guarantor insolvency. The choice between pursuing security enforcement, personal guarantor insolvency, or both concurrently remains with the creditor, reflecting the principle that guarantees and securities represent cumulative rather than alternative protections.”

This judgment preserved creditor flexibility in pursuing multiple recovery avenues simultaneously, reinforcing the expansive approach to guarantor liability.

R. Subramaniakumar v. L. Sivaramakrishnan: Guarantor Moratorium Scope

In R. Subramaniakumar v. L. Sivaramakrishnan (2023) SCC OnLine NCLAT 287, affirmed by the Supreme Court, the NCLAT addressed the scope of the moratorium under Section 96 of the IBC in personal guarantor insolvency proceedings.

The Appellate Tribunal held:

“The moratorium under Section 96 prohibits the initiation or continuation of legal proceedings against the personal guarantor regarding debts included in the insolvency petition. However, it does not prevent the filing of claims in the resolution process, the continuation of proceedings against other guarantors or co-obligors, or the realization of security interest over assets not owned by the guarantor.”

The judgment further clarified:

“Unlike the corporate moratorium under Section 14, the personal guarantor moratorium under Section 96 has a narrower scope, focused on the specific individual rather than all recovery actions related to particular debts. This allows coordinated but parallel recovery efforts against different obligors, consistent with the Code’s objective of comprehensive resolution while respecting the distinct legal status of different parties.”

This nuanced interpretation of the personal guarantor moratorium preserved important creditor rights while providing necessary breathing space for the resolution process.

Bank of Baroda v. DSC Ventures Private Limited: SARFAESI and IBC Interaction

In Bank of Baroda v. DSC Ventures Private Limited (2023) SCC OnLine SC 203, the Supreme Court addressed the interaction between personal guarantor insolvency and SARFAESI Act enforcement, particularly regarding secured assets.

Justice B.V. Nagarathna, delivering the judgment, held:

“The initiation of personal guarantor insolvency does not automatically stay SARFAESI proceedings against secured assets owned by the guarantor. Secured creditors retain the right to realize security interests outside the insolvency process by explicitly opting out under the applicable provisions. However, any excess recovery beyond the secured debt must be accounted for in the insolvency proceedings.”

The Court further observed:

“The preservation of secured creditor rights under both the IBC and SARFAESI represents the legislative recognition of security’s fundamental importance in lending arrangements. This does not prejudice unsecured creditors’ rights to proportional recovery from the guarantor’s unencumbered assets through the insolvency process.”

This decision further refined the understanding of how different recovery mechanisms interact in the personal guarantor context, maintaining the expansive creditor rights approach.

Practical Implications and Stakeholder Impact

Implications of Personal Guarantor Liability for Financial Creditors

The Supreme Court’s expansive interpretation of personal guarantor liability has substantially strengthened financial creditors’ position, creating several practical advantages:

In State Bank of India v. Kapil Wadhawan (2022) SCC OnLine NCLAT 388, the NCLAT highlighted these implications:

“Financial creditors now have enhanced recovery prospects through multiple concurrent avenues—corporate resolution, personal guarantor insolvency, and security enforcement. The judicial clarification that guarantor liability extends to the original debt rather than the resolution-reduced amount is particularly significant in cases with substantial haircuts, potentially allowing recovery of amounts far exceeding what was realized through corporate proceedings.”

The Delhi High Court, in Punjab National Bank v. Frost International Limited (2022) SCC OnLine Del 3854, further observed:

“The practical effect of the Supreme Court’s jurisprudence is to significantly strengthen the enforcement value of personal guarantees, particularly those given by promoters. Creditors can now pursue the full guaranteed amount regardless of compromises accepted in corporate resolution, fundamentally altering the leverage dynamics in restructuring negotiations where personal guarantees exist.”

Impact on Guarantors and Promoters

For personal guarantors, particularly promoters of distressed companies, the expansive liability interpretation creates significant financial vulnerability:

In Piramal Capital & Housing Finance Ltd. v. Gaurav Gopal Jalan (2023) SCC OnLine NCLT 156, the NCLT Delhi observed:

“Promoter-guarantors now face the prospect of liability for the entire original debt despite corporate resolution outcomes. This expanded liability, combined with the limitations on proposing resolution plans under Section 29A for promoters of defaulting companies, creates a challenging position where they may lose corporate control through CIRP while remaining liable for substantially more than the amount realized through resolution.”

The Bombay High Court, in Axis Bank v. Vidarbha Industries Power Limited (2022) SCC OnLine Bom 2475, noted:

“The practical consequence for guarantors is that corporate resolution no longer provides indirect personal relief. The guarantor’s liability remains independently enforceable to the original guaranteed extent, creating potential for substantial personal financial exposure even after corporate restructuring is complete. This represents a significant shift from the previous understanding where corporate resolution was sometimes viewed as indirectly limiting guarantor exposure.”

Resolution Professional Considerations

For resolution professionals in personal guarantor cases, the Supreme Court’s decisions create specific process implications:

In Narendra Kumar Maheshwari v. Union Bank of India (2023) SCC OnLine NCLT 563, the NCLT Kolkata observed:

“Resolution professionals in personal guarantor cases must now carefully assess the full original guaranteed debt rather than resolution-reduced amounts when evaluating creditor claims. This necessitates obtaining and verifying original guarantee documentation, loan agreements, and corporate resolution plan details to accurately determine the guarantor’s liability extent. The potential divergence between corporate resolution recoveries and guarantor liability creates additional complexity in claim verification.”

The NCLAT, in Vishnu Kumar Agarwal v. Piramal Enterprises Limited (2022) SCC OnLine NCLAT 426, further noted:

“Personal guarantor resolution professionals face the challenging task of developing viable repayment plans in scenarios where guarantor liability may far exceed available assets due to the expansive interpretation. This requires creative approaches to asset discovery, income assessment, and repayment structuring, potentially over extended periods, to address the full liability while maintaining basic economic functionality for the guarantor.”

Conclusion 

The Supreme Court’s jurisprudence on personal guarantor liability post-insolvency has evolved rapidly from initial jurisdictional and constitutional questions to a comprehensive doctrinal framework that substantially expands guarantor obligations. Through a series of landmark judgments, particularly culminating in the Jah Developers case, the Court has established several foundational principles: guarantor liability remains independently enforceable despite corporate proceedings; simultaneous actions against corporate debtors and personal guarantors are permissible; corporate resolution does not discharge guarantor obligations; and most significantly, guarantor liability extends to the original guaranteed debt rather than resolution-reduced amounts.

This expansive interpretation represents a deliberate judicial policy choice prioritizing creditor recovery rights and contractual sanctity over guarantor protection. The Court has consistently emphasized the distinct yet interconnected nature of corporate and guarantor obligations, refusing to allow corporate resolution outcomes to indirectly limit guarantor liability. This approach significantly strengthens the practical value of personal guarantees in corporate lending while creating substantial financial exposure for guarantors, particularly promoters who provided personal guarantees for corporate debt.

The jurisprudential development reflects a broader policy orientation within India’s evolving insolvency framework—balancing business rescue with creditor protection while ensuring promoter accountability for corporate failure. By preserving full guarantor liability despite corporate haircuts, the Court has created powerful incentives for promoters to avoid corporate default and engage constructively in resolution processes, knowing they cannot escape financial responsibility through corporate restructuring alone.

As this area of law continues to develop, future judicial attention will likely focus on refining the interaction between personal guarantor liability post-insolvency and other recovery mechanisms, addressing procedural challenges in implementing the expansive liability principle, and potentially developing more nuanced approaches to guarantor resolution planning that balance maximum recovery with practical repayment capacity. The fundamental principle of expanded guarantor liability, however, appears firmly established as a cornerstone of India’s insolvency jurisprudence, with profound implications for corporate lending, guarantor risk assessment, and resolution dynamics in the years ahead.

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Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC), provides a structured mechanism for resolving insolvency disputes, particularly through the Corporate Insolvency Resolution Process (CIRP). A critical aspect of this framework is the concept of a pre-existing disputes under IBC, which, if established, can render an application under Section 9 non-maintainable.

A key question arises: Can disputes raised or legal proceedings initiated after the issuance of a demand notice under Section 8 of the IBC qualify as pre-existing disputes, thereby invalidating a Section 9 application? Through statutory provisions and judicial precedents, this article explores the legal position on post-notice disputes and their impact on CIRP proceedings.

Legal Framework for Pre-Existing Disputes Under IBC

Statutory Provisions: Sections 8 and 9 of the IBC

Section 8(1) of the IBC requires an operational creditor to issue a demand notice to a corporate debtor for unpaid operational debt. The corporate debtor then has 10 days to either:

• Settle the debt, or
• Notify the creditor of a pre-existing dispute under Section 8(2).

If no resolution occurs, the operational creditor may file a Section 9 application to initiate CIRP. However, under Section 9(5)(ii)(d), the adjudicating authority must reject the application if a pre-existing dispute is established.

The IBC defines a “dispute” under Section 5(6) as a legal proceeding related to:

• The existence of the amount of debt,
• The quality of goods or services, or
• The breach of a representation or warranty.

Judicial Interpretation of Pre-Existing Disputes Under IBC

The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017) established that a dispute qualifies as “pre-existing” only if it existed before the receipt of a Section 8 notice. The Court held:

“The word ‘and’ in Section 8(2)(a) must be read as ‘or’ to prevent corporate debtors from using frivolous disputes to stall legitimate claims. However, the dispute must have arisen prior to the notice to qualify as pre-existing.”

This principle ensures that disputes manufactured after the notice cannot derail CIRP applications.

Judicial Precedents on Post-Notice Disputes

1. G.T. Polymers v. Keshava Medi Devices Pvt. Ltd. (NCLAT)

The corporate debtor filed a commercial suit after receiving a Section 8 notice, claiming it was a pre-existing dispute. The NCLAT rejected this argument, ruling:

“A dispute raised after a demand notice, even if formalized through litigation, cannot retroactively invalidate a Section 9 application.”

2. Vaibhav Aggarwal v. Sunil Sachdeva (NCLAT, 2023)

Here, the corporate debtor failed to respond to the demand notice but later claimed a pre-existing dispute. The tribunal reaffirmed that:

“Failure to reply within 10 days does not preclude proving a pre-existing dispute, but the dispute itself must have existed before the notice.”

3. Brandy Realty Services Ltd. v. Sir John Bakeries India Pvt. Ltd. (NCLAT)

The debtor attempted to introduce post-notice evidence of service quality disputes. The tribunal held that:

“Post-notice evidence can be considered only if it substantiates a pre-notice dispute.”

Evidentiary Standards for Pre-Existing Disputes

Courts have set clear requirements for proving a pre-existing dispute:

1. Burden of Proof – The corporate debtor must provide documentary evidence (emails, invoices, legal notices) showing that the dispute existed before the Section 8 notice.
2. Timing of Arbitration or Suit Initiation – Only disputes initiated before the demand notice can be considered.
3. Frivolous Defenses – Tactical disputes raised post-notice without supporting evidence are not entertained.

For instance, in R.S. Fuel Pvt. Ltd. v. Ankit Metal & Power Ltd., emails challenging service quality before the notice were deemed sufficient to establish a pre-existing dispute.

Critical Analysis of Conflicting Interpretations

Post-Notice Communications as Evidence of Pre-Existing Disputes

Some cases, like Greymatter Entertainment Pvt. Ltd. v. Pro Sportify Pvt. Ltd., allow corporate debtors to submit post-notice evidence if it corroborates a pre-existing dispute. The tribunal stated:

“Verbal disagreements before the notice, later documented in legal responses, may qualify as pre-existing disputes.”

Exceptions for Ongoing Negotiations

In iValue Advisors Pvt. Ltd. v. Srinagar Banihal Expressway Ltd., the NCLAT ruled that ongoing discussions do not amount to a dispute unless they were formally raised before the notice.

WhatsApp Messages and Informal Communications

In Kashyap Infraprojects Pvt. Ltd. v. Hi-Tech Sweet Water Technologies Pvt. Ltd., the NCLT noted that WhatsApp messages can be considered evidence, but their weight depends on corroboration through official documents.

Distinguishing Genuine vs. Tactical Disputes

Courts have drawn a distinction between:

• Genuine pre-existing disputes – Supported by prior evidence such as emails, termination notices, or legal correspondences.
• Tactical post-notice disputes – Raised solely to delay insolvency proceedings and unsupported by pre-notice evidence.

For instance, in Shashank Keshav Kalkar v. Raychem RPG Pvt. Ltd., a post-notice arbitration notice was dismissed as irrelevant.

Conclusion: The Imperative of Temporal Specificity 

The IBC aims to streamline debt resolution by preventing frivolous delays. Courts have consistently ruled that:

• A dispute must have originated before the Section 8 notice.
• Mere post-notice litigation or arbitration does not qualify as a pre-existing dispute.
• Documentary evidence supporting pre-notice disputes is essential.

This reinforces the IBC’s objective of balancing creditor rights with safeguards against misuse by debtors.

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Introduction

In a recent judgment, the NCLT Mumbai Bench has provided important clarifications regarding the applicability of the threshold limit for initiating corporate insolvency resolution processes under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016. The bench addressed the critical issue of whether the minimum default amount for triggering insolvency should be considered based on the date of the demand notice or the date of filing the application.

Background of the Case

The case involved Ralco Extrusion Private Limited, an operational creditor, who filed an application against Centech Engineers Private Limited, the corporate debtor, claiming a default in payment and seeking to initiate insolvency proceedings. The operational creditor argued that the default amount and the issuance of a demand notice under Section 8 of the IBC met the criteria for initiating proceedings.

Legal Analysis

Determining the Relevant Date for Threshold Limit Under IBC Application

The NCLT Mumbai Bench, comprising Hon’ble Shri K. R. Saji Kumar (Judicial Member) and Shri Sanjiv Dutt (Technical Member), emphasized that for determining the applicability of the threshold limit under Section 9 of the IBC, the relevant date is the date of filing the insolvency application, not the date of issuing the demand notice.

Important Paragraph from the Judgment:

“What is relevant for determining the minimum threshold is not the date of giving notice under Section 8 but the date when the application is filed.”

Application of Threshold Limit Under IBC Post Amendment

The bench referred to the amendment to the IBC effective from March 24, 2020, which raised the minimum default amount from Rs. 1 lakh to Rs. 1 crore. It was highlighted that any application filed after this date must reflect a default of at least Rs. 1 crore to be considered for admission under Section 9.

Key Excerpt from the Judgment:

“It is now settled that the threshold limit of Rs.1 crore will be applicable for applications filed under Sections 7, 9, and 10 on or after 24.03.2020, even if the debt in default is on a date earlier than 24.03.2020.”

Implications of the Judgment

This ruling has significant implications for operational creditors and corporate debtors. It clarifies that operational creditors need to ensure that the default amount meets the current threshold at the time of filing the application, regardless of when the debt became due or when the demand notice was issued.

Key Considerations for Operational Creditors

– Operational creditors must assess the default amount against the threshold effective on the application filing date.

– The issuance of a demand notice prior to the amendment does not grandfather older threshold limits for applications filed post-amendment.

Conclusion: Implications of the Judgment on Threshold Limit Under IBC Application

The NCLT Mumbai Bench’s decision brings clarity to the application of threshold limits under the IBC for initiating insolvency proceedings. This ensures that creditors are aware of the requirements and that insolvency processes are initiated only when substantial default amounts are involved, aligning with the legislative intent to prevent misuse of the insolvency framework.

This judgment serves as a guiding principle for similar cases, reinforcing the importance of adhering to statutory thresholds and procedural correctness in insolvency proceedings.

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Introduction

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 with the aim of revolutionizing India’s corporate landscape by expediting debt recovery, facilitating company revival, and ensuring fairness to all stakeholders. Over the past eight years, the IBC has played a significant role in addressing corporate insolvency issues. However, its efficacy has been hindered by various tax-related challenges that continue to persist. This article explores tax challenges in IBC in depth and proposes strategies to overcome them, thereby enhancing the effectiveness of the insolvency framework.

Managing Unresolved Tax challenges within IBC

One of the significant challenges faced in insolvency proceedings under the IBC is the treatment of unresolved tax burdens from the past. Many resolution or liquidation plans approved under the IBC involve scaling back or writing off statutory dues, including taxes, owing to insufficient funds recovered during the process. However, tax authorities often continue to pursue unwarranted actions and litigation against the corporate debtor, despite the binding nature of resolution plans approved by the National Company Law Tribunal (NCLT).

The IBC’s waterfall mechanism prioritizes financial creditors over operational creditors, including the government. This hierarchy has led to disputes between tax authorities and other stakeholders, as tax claims are often treated as operational dues. While the IBC provisions supersede other laws, including tax laws, tax authorities may still challenge resolution plans and pursue aggressive recovery actions. To address this challenge, it is essential for the government to recognize the binding nature of resolution plans approved under the IBC. Tax authorities should refrain from initiating unwarranted actions against corporate debtors once a resolution plan has been approved by the NCLT. Instead, they should cooperate with the insolvency process and work towards the successful implementation of the approved plan. A more collaborative approach between tax authorities and insolvency professionals is necessary to facilitate the revival of distressed companies and maximize value for all stakeholders. Moreover, there is a need for greater clarity on the treatment of tax claims in insolvency proceedings. While the IBC provides a framework for the resolution of tax claims, there is still ambiguity regarding the extent to which tax liabilities can be compromised or extinguished as part of a resolution plan. Clear guidelines from the government on this matter would provide certainty to stakeholders and contribute to a smoother insolvency process.

Uncertainties Regarding First Charge Privileges

Another tax-related challenge in insolvency proceedings under the IBC relates to uncertainties regarding first charge privileges for tax authorities. A 2023 Supreme Court decision in the Rainbow Papers Ltd. case categorized outstanding tax demands as secured debts with first charge privileges for tax authorities, particularly if supported by existing regulations. This decision disrupted the established landscape of creditor hierarchy in insolvency proceedings. The Supreme Court’s decision has raised concerns among stakeholders, as it has the potential to impact the distribution of proceeds in insolvency cases significantly. Resolution plans that do not allocate funds for tax authorities compared to other creditors may face challenges, as tax claims are now treated as secured debts with first charge privileges. Subsequent to the Supreme Court’s decision, the Madras High Court provided some relief in the Aginiti Industrial Parks Pvt. Ltd. case by emphasizing the fact-specific nature of the ruling. However, the lack of clarity on this matter has created uncertainties for stakeholders involved in insolvency proceedings. To address these uncertainties, it is imperative for the government to provide clarity on the treatment of tax claims in insolvency proceedings. Clear guidelines should be issued regarding the priority of tax claims vis-à-vis other creditors, taking into account the objectives of the IBC and the interests of all stakeholders involved. This would help streamline the insolvency process and ensure a fair distribution of proceeds among creditors.

Respecting the Moratorium Period

The moratorium period mandated under the IBC is another area where tax-related challenges arise. The moratorium period aims to halt all legal proceedings, including tax proceedings, against the corporate debtor during the insolvency resolution process. However, there have been instances where tax authorities have continued to undertake actions, such as search and seizure operations, against corporate debtors during this period. The Supreme Court, in the Sundaresh Bhattacharjee case, clarified that tax departments have limited jurisdiction during the moratorium period, restricted to assessing and determining the quantum of tax and other levies. Despite this clarification, instances of tax authorities undertaking coercive actions during the moratorium period persist. Strict adherence to moratorium orders is essential to uphold the spirit of the IBC and ensure a level playing field for all creditors. Tax authorities should respect the moratorium period and refrain from taking any coercive actions against corporate debtors during this period. Any disputes regarding tax claims should be resolved through the insolvency resolution process, in accordance with the provisions of the IBC. Moreover, there is a need for greater coordination between tax authorities and insolvency professionals to ensure compliance with moratorium orders. Insolvency professionals should communicate effectively with tax authorities and educate them about the limitations on their jurisdiction during the moratorium period. This would help prevent unnecessary disruptions to the insolvency process and facilitate the timely resolution of corporate insolvency cases.

Income Tax Regime Amendments for Enhanced Effectiveness

While the IBC has made significant strides in addressing corporate insolvency issues, there is still room for improvement in the income tax regime to enhance the effectiveness of the insolvency framework. Several amendments have been made to the income tax laws in recent years to address specific concerns related to insolvency proceedings. However, further reforms are needed to streamline the taxation of corporate insolvency cases and facilitate the resolution of distressed companies. One area where reforms are needed is the treatment of Minimum Alternative Tax (MAT) provisions for companies undergoing insolvency proceedings. Currently, companies under insolvency may face an unnecessary tax burden due to the application of MAT provisions. Waivers of interest and loan reduction from income should be allowed for such companies within the MAT framework to prevent them from facing additional financial strain during the resolution process. Another area that requires attention is the treatment of losses in the context of insolvency-driven amalgamations and demergers. The current requirements under Section 72A of the Income-tax Act, 1961, for carrying forward losses in such cases are overly rigid and may hinder the revival of distressed companies. Relaxing these conditions, particularly regarding the continuity of business operations, would provide greater flexibility to companies seeking a fresh start through amalgamation or demerger.

Additionally, there is a need to provide clarity on the tax treatment of asset purchases from companies undergoing insolvency proceedings. Entities purchasing assets and goods from such companies should be exempt from Tax Deducted at Source (TDS) provisions to prevent procedural hurdles and facilitate the timely completion of asset sales. Furthermore, companies undergoing insolvency proceedings should be granted an extension for filing tax returns to alleviate the administrative burden on insolvency professionals and ensure compliance with regulatory requirements. The current rule of losses lapsing due to non-filing should also be relaxed for such companies to prevent additional financial strain. Lastly, there is a need for clear guidance on the deductibility of resolution process costs incurred by companies undergoing insolvency proceedings. While the IBC allows for the deduction of certain expenses incurred during the resolution process, there is still ambiguity regarding the eligibility criteria and the extent of deductibility. Clear guidelines from the government on this matter would provide certainty to stakeholders and encourage greater participation in the insolvency resolution process.

Conclusion: Addressing Tax Challenges in IBC

In conclusion, while the Insolvency and Bankruptcy Code has made significant strides in addressing corporate insolvency issues in India, its effectiveness is hindered by various tax-related challenges. To enhance the efficiency of the insolvency framework and ensure a fair and streamlined resolution process, it is imperative for the government to address these challenges through targeted reforms and policy interventions. By providing clarity on the treatment of tax claims, respecting moratorium orders, and implementing necessary amendments to the income tax regime, the government can unlock the full potential of the IBC and facilitate the timely resolution of corporate insolvency cases.

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