Understanding Corporate Insolvency in India
The Insolvency and Bankruptcy Code (IBC) 2016 revolutionized the corporate insolvency landscape in India by providing a time-bound, creditor-driven framework for resolving insolvency. Before IBC, India had fragmented laws governing insolvency, leading to delays of years or even decades in resolving distressed assets. The IBC consolidated these laws and established the National Company Law Tribunal (NCLT) as the adjudicating authority.
This comprehensive guide covers the Corporate Insolvency Resolution Process (CIRP), liquidation proceedings, voluntary liquidation, roles of various stakeholders, and strategies for navigating insolvency. Whether you're a creditor seeking recovery, a director of a distressed company, or an investor looking at distressed assets, understanding the IBC framework is essential.
Overview of IBC 2016
Time-Bound Process
CIRP must conclude within 330 days including litigation time. This includes the 180-day resolution period plus extensions.
Creditor-in-Control
The Committee of Creditors (CoC) makes key decisions including appointment of Resolution Professional and approval of resolution plans.
Moratorium Protection
Automatic stay on all legal proceedings against the corporate debtor from the date of admission.
Key Objectives of IBC
- • Early detection and resolution of financial distress
- • Maximization of value of corporate debtor's assets
- • Promotion of entrepreneurship and credit availability
- • Balancing interests of all stakeholders
- • Orderly and timely resolution or liquidation
- • Rehabilitation and revival of corporate debtors where possible
When Does Insolvency Apply?
Insolvency proceedings under IBC are triggered by a "default" - the failure to pay a debt when due and payable. Key thresholds and triggers:
Default Threshold
The minimum default amount is ₹1 crore (as per notification effective from March 2020). This threshold applies to:
- • Combined defaults to single or multiple creditors
- • Financial debts (loans, debentures)
- • Operational debts (goods, services, employment)
- • Both secured and unsecured debts
Who Can Trigger CIRP?
- Financial Creditors: Banks, financial institutions, bondholders
- Operational Creditors: Suppliers, vendors, employees
- Corporate Debtor: Company itself can file (voluntary)
- Corporate Applicant: Authorized person/entity
Corporate Insolvency Resolution Process (CIRP) - Step by Step
Default Occurs
Company fails to pay debt exceeding ₹1 crore. Creditor issues demand notice or corporate debtor decides to file.
Application Filing
Application filed with NCLT (Forms 1-6 depending on applicant type). Application fee: ₹25,000. Must demonstrate default with evidence.
Admission/Rejection
NCLT decides within 14 days. If admitted, moratorium declared immediately. If rejected, applicant can appeal to NCLAT.
Moratorium and Public Announcement
Moratorium prohibits legal proceedings, asset transfers, and recovery actions. Public announcement invites claims from creditors.
Interim Resolution Professional (IRP) Appointment
IRP appointed by NCLT. Takes over management of corporate debtor. Powers of board suspended. IRP collects claims and verifies.
Committee of Creditors (CoC) Formation
CoC constituted within 7 days of claim verification. Financial creditors have voting rights (operational creditors above threshold may attend). First CoC meeting appoints RP.
Resolution Professional Takes Over
RP manages operations, prepares Information Memorandum, invites resolution plans. Due diligence facilitated for potential applicants.
Resolution Plan Submission
Resolution applicants submit plans by 330th day deadline. Plans must meet mandatory requirements including 30-day implementation period.
CoC Evaluation and Voting
CoC evaluates plans. Plan approved with 66% voting share. Resolution applicant cannot vote on their own plan.
NCLT Approval
Approved plan submitted to NCLT. NCLT approves within 30 days if plan compliant. Once approved, binding on all stakeholders.
Plan Implementation
Successful resolution applicant implements plan. Management transferred to successful applicant. CIRP concludes.
Understanding Moratorium Under IBC
What Moratorium Prohibits (Section 14)
- • Institution or continuation of suits/legal proceedings against corporate debtor
- • Transferring, encumbering, or disposing of assets by corporate debtor
- • Recovery actions by creditors including enforcement of security interest
- • Termination of essential contracts (electricity, water, telecom, IT)
What Moratorium Does NOT Prohibit
- • Criminal proceedings against corporate debtor or officers
- • Tax assessment and demand (though recovery stayed)
- • IBC proceedings against guarantors
- • Proceedings for personal guarantees
Duration: Moratorium begins on CIRP admission and continues until conclusion of CIRP (max 330 days) or until liquidation order.
Committee of Creditors (CoC) and Decision Making
| Matter | Voting Threshold |
|---|---|
| Appointment/Replacement of RP | 66% of voting share |
| Approval of Resolution Plan | 66% of voting share |
| Extension of CIRP Timeline | 66% of voting share |
| Raise Interim Finance | 51% of voting share |
| Change in Management | 51% of voting share |
| Appointment of Professionals | 51% of voting share |
Liquidation: When Resolution Fails
If no resolution plan is approved by the 330th day (or extended period), NCLT orders liquidation. The distribution waterfall under Section 53:
Voluntary Liquidation
Voluntary liquidation is for solvent companies that want to wind up their affairs in an orderly manner. Key differences from CIRP:
Voluntary Liquidation
- ✓ For solvent companies
- ✓ Can pay all debts in full
- ✓ Initiated by shareholders
- ✓ Declaration of solvency required
- ✓ No moratorium
- ✓ No CoC involved
- ✓ Timeline: 6-12 months
- ✓ Less costly
CIRP/Liquidation
- ✗ For insolvent companies
- ✗ Cannot pay debts as they fall due
- ✗ Triggered by creditors
- ✗ No solvency declaration
- ✗ Moratorium applies
- ✗ CoC controls process
- ✗ Timeline: 330 days+
- ✗ More expensive
Section 29A: Who Can Bid?
Section 29A disqualifies certain persons from submitting resolution plans. Disqualified persons include:
- • Wilful defaulters: Persons classified as wilful defaulters by banks
- • NPA accounts: Promoters/directors of companies with NPA for over 1 year
- • Undischarged insolvents: Persons undergoing insolvency
- • Convicted fraudsters: Persons convicted of offense punishable with imprisonment >2 years
- • Disqualified directors: Persons disqualified under Companies Act
- • Non-compliant persons: Those prohibited by SEBI, RBI, or other regulators
Note: Recent amendments allow MSME promoters to bid under certain conditions. For other companies, promoters can bid only if their account was standard and they are not wilful defaulters.
IBC Success Metrics (Since 2016)
Data as of 2024. Resolution has improved creditor recoveries compared to previous regime (average ~25%).