The IBC Explained for Creditors and Companies

Vikrant D. Shetty

4 days ago

10 min read

The IBC Explained for Creditors and Companies

The Insolvency and Bankruptcy Code, 2016 is India's consolidated, time-bound framework for resolving corporate and personal insolvency, replacing the earlier winding-up provisions of the Companies Act. Enacted on 28 May 2016 on the recommendations of the Bankruptcy Law Reforms Committee, the Code shifted control of the process from the debtor to its creditors, who decide through the committee of creditors whether the company is rescued or liquidated. A financial creditor, an operational creditor, or the corporate debtor itself can trigger the process before the National Company Law Tribunal on a default of one crore rupees or more. This article explains initiation, key participants, and the resolution plan.

Background and Objectives

The IBC was enacted on 28 May 2016 on the recommendations of the Bankruptcy Law Reforms Committee. Its stated objectives were to consolidate the country's fragmented insolvency laws into a single code; to provide a time-bound resolution, originally set at one hundred and eighty days and now capped at three hundred and thirty days including litigation; to maximise the value of the corporate debtor's assets; to promote entrepreneurship and the availability of credit; and to balance the interests of all stakeholders. The Code is administered through an institutional architecture that includes the Insolvency and Bankruptcy Board of India as the regulator, the insolvency professionals who run the process, the information utilities that record defaults, and the National Company Law Tribunal as the adjudicating authority for corporate debtors.

Initiating Insolvency: Sections 7, 9, and 10

A corporate insolvency resolution process may be initiated in three ways. A financial creditor, such as a bank, a non-banking finance company, or a bondholder, may apply under Section 7 on a financial-debt default of one crore rupees or more. An operational creditor, such as a supplier, an employee, or a utility, may apply under Section 9 after serving a demand notice under Section 8 and the corporate debtor failing either to pay or to point to a pre-existing dispute within ten days. The corporate debtor itself may apply under Section 10. The Tribunal is expected to admit or reject the application within fourteen days, although in practice this timeline is often exceeded.

Landmark Judgments Shaping the IBC

Three decisions of the Supreme Court have done more than any others to settle how the Code operates. In Innoventive Industries Ltd. v. ICICI Bank [(2018) 1 SCC 407], the first case decided under the Code, the Court held that once a financial creditor establishes a default and files a complete application under Section 7, the Tribunal must admit it, and that an inconsistent State law must yield to the Code. In Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. [(2018) 1 SCC 353], the Court laid down the test for an operational creditor's petition under Section 9, holding that the existence of a genuine pre-existing dispute, one that is not spurious or illusory, requires the Tribunal to reject the application. In Swiss Ribbons Pvt. Ltd. v. Union of India [(2019) 4 SCC 17], the Court upheld the constitutional validity of the Code, including the classification between financial and operational creditors, the bar in Section 29A, and the high threshold for withdrawal under Section 12A. Together these decisions confirmed that the Code is a complete code with a firm, creditor-driven design.

What Does the Moratorium Under Section 14 of the IBC Prevent?

A defining feature of the process is the moratorium imposed under Section 14 the moment an application is admitted. During the moratorium, the institution or continuation of suits against the corporate debtor is barred, the transfer or disposal of its assets is prohibited, the enforcement of security interests is stayed, and the recovery of property by an owner or lessor is suspended. The purpose is to preserve the corporate debtor as a going concern and to give the resolution professional a calm period in which to run the process, free from a race between creditors to seize assets. The moratorium does not, however, extend to a personal guarantor of the corporate debtor, and certain contracts and licences essential to keeping the business running are protected from termination merely on the ground of insolvency.

Key Stakeholders: the CoC, IRP, and Resolution Applicant

On admission of an application, the Tribunal declares a moratorium and appoints an interim resolution professional. The professional makes a public announcement, invites and verifies claims from creditors, and constitutes the committee of creditors, which is composed of the financial creditors of the corporate debtor. Acting by the majority voting share prescribed by the Code, the committee may confirm or replace the interim professional with a resolution professional to conduct the process, and it takes the central commercial decisions, including whether to approve a resolution plan. Section 29A prohibits promoters, related parties, and wilful defaulters from submitting a resolution plan, which prevents the very management that ran the company into default from buying it back at a discount.

The Resolution Plan and the Liquidation Waterfall

Prospective resolution applicants submit plans to the resolution professional, who places them before the committee of creditors. The committee evaluates and approves a plan by a sixty-six per cent voting share, after which the plan goes to the Tribunal. Once the Tribunal approves it, the plan becomes binding on all stakeholders, including dissenting creditors and equity shareholders, and it extinguishes the prior claims against the corporate debtor so that the successful applicant takes the company on a clean slate. If no viable plan is approved within the resolution period, the Tribunal orders liquidation. The waterfall in Section 53 then fixes the order of distribution: first the costs of the insolvency and liquidation process; then, ranking equally, the workmen's dues for the twenty-four months preceding liquidation and the debts of secured creditors who relinquish their security; then other employees' dues for twelve months; then the dues of unsecured financial creditors; then, ranking equally, government dues and the amounts left unpaid to secured creditors who enforced their security; and finally any remaining debts, preference shareholders, and the equity shareholders.

How Does the IBC Treat Personal Insolvency Differently from Corporate Insolvency?

Although the corporate process attracts the most attention, the Code also governs the insolvency of individuals and partnership firms, including the personal guarantors who so often stand behind corporate borrowing. For these persons the adjudicating authority differs, and the process contemplates an interim moratorium, the appointment of a resolution professional, and a repayment plan put to the creditors. The extension of the Code to personal guarantors has proved significant in practice, because a lender can now pursue both the corporate debtor and the individuals who guaranteed its debts within a single statutory framework, rather than through separate and slower proceedings.

Key Amendments and Developments

The Code has been amended repeatedly. The amendment of 2020 raised the minimum default for initiating a corporate process from one lakh to one crore rupees. The amendment of 2021 introduced the pre-packaged insolvency resolution process for micro, small, and medium enterprises, allowing a debtor and its creditors to negotiate a base resolution plan before the formal process begins. The provisions on the insolvency of individuals and partnership firms, in Sections 94 to 187, have been brought into force in stages, and Section 96 gives an interim moratorium to a personal guarantor of a corporate debtor. The framework for cross-border insolvency, drawn from the UNCITRAL Model Law, has been drafted but is yet to be notified.

What Are Avoidance Transactions Under the IBC?

A resolution professional is not confined to running the process going forward; the Code also allows the recovery of value that left the company before insolvency began. Sections 43 to 51 empower the professional, with the Tribunal's approval, to reverse preferential transactions that favoured one creditor over others, undervalued transactions that transferred assets for less than they were worth, and extortionate credit transactions, while Section 66 addresses transactions amounting to fraudulent or wrongful trading. Each category has its own look-back period and its own test, and a successful application can bring assets back into the pool available to creditors. For a director or a counterparty, the possibility of a later avoidance application is a reason to keep contemporaneous records showing that a transaction was made in the ordinary course of business and for fair value, since those records are often decisive when the professional reviews the company's dealings in the run-up to insolvency.

Frequently Asked Questions

Who can initiate a corporate insolvency and what is the default threshold?

A corporate insolvency resolution process can be initiated by a financial creditor under Section 7, by an operational creditor under Section 9, or by the corporate debtor itself under Section 10. Since 2020, the minimum default that will support an application is one crore rupees.

Who can be prohibited from submitting a resolution plan under Section 29A?

Section 29A of the IBC prohibits promoters, related parties, and wilful defaulters of the corporate debtor from submitting a resolution plan. The provision was introduced to prevent defaulting management from regaining control of a distressed company at a discount through the resolution process.

What voting threshold must the Committee of Creditors reach to approve a resolution plan?

The committee of creditors must approve a resolution plan by a sixty-six per cent voting share. Once approved by the committee, the plan is submitted to the NCLT, whose approval makes it binding on all stakeholders, including dissenting creditors and equity shareholders.

What is the order of priority in the IBC’s liquidation waterfall?

Section 53 prioritises, in order, the costs of the insolvency and liquidation process; then, ranking equally, workmen's dues for twenty-four months and secured creditors who relinquish their security; then other employees' dues for twelve months; then unsecured financial creditors; then, ranking equally, government dues and secured creditors' unpaid amounts; and finally remaining debts, preference shareholders, and equity shareholders.

What is the Pre-Packaged Insolvency Resolution Process?

The pre-packaged insolvency resolution process, introduced by the 2021 amendment, is an expedited route available to micro, small, and medium enterprises. It allows the corporate debtor and its creditors to negotiate a base resolution plan before formal proceedings begin, which is then placed before the NCLT for approval.

Does the moratorium under Section 14 protect a personal guarantor of the corporate debtor from creditor action?

No. The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 protects the corporate debtor itself from suits, asset transfers, and enforcement of security once an insolvency application is admitted, but it does not extend to a personal guarantor of the corporate debtor. A lender can therefore continue to pursue a personal guarantor for recovery, or initiate a separate insolvency process against the guarantor under the Code's provisions on individual insolvency, even while the corporate debtor's moratorium is in force.

What is the timeline within which a corporate insolvency resolution process must be completed?

The corporate insolvency resolution process was originally intended to be completed within one hundred and eighty days, extendable once, and the Code now caps the total period, including time spent in litigation, at three hundred and thirty days. Delays beyond this outer limit have occurred in a significant number of cases in practice, but the statutory design treats time-bound resolution as central to preserving the value of the corporate debtor's assets.

What happens to a company's contracts and licences essential to its business during the moratorium?

Certain contracts and licences that are essential to keeping the corporate debtor's business running as a going concern are protected from termination by a counterparty on the sole ground that the company has entered insolvency, so long as the corporate debtor continues to perform its ongoing obligations under them. This protection exists because terminating essential supplies or licences merely because insolvency proceedings have begun would defeat the object of the moratorium, which is to preserve the business while a resolution is worked out.

What is the difference between an interim resolution professional and a resolution professional?

An interim resolution professional is appointed by the National Company Law Tribunal immediately on admission of an insolvency application, to make the public announcement, verify claims, and constitute the committee of creditors. Once formed, the committee of creditors, acting by the prescribed majority voting share, may either confirm the interim resolution professional in the role or replace that person with a different resolution professional to conduct the remainder of the process, including inviting and evaluating resolution plans.

What is the interim moratorium available to a personal guarantor under Section 96?

Section 96 of the Insolvency and Bankruptcy Code, 2016 grants an interim moratorium to a personal guarantor of a corporate debtor from the date an application concerning that guarantor is filed, which bars the institution or continuation of legal proceedings against the guarantor in respect of the relevant debt during that interim period. This protection is distinct from, and narrower in scope than, the moratorium available to a corporate debtor under Section 14, and it is confined to proceedings relating to the specific debt under consideration.

What is a preferential transaction, and how far back can a resolution professional look to reverse one?

A preferential transaction under Sections 43 to 44 of the Insolvency and Bankruptcy Code, 2016 is a transfer that puts one creditor or surety in a beneficial position compared to others, made within a specified look-back period before the insolvency commencement date. On the resolution professional's application, the National Company Law Tribunal can order such a transaction reversed and the value restored to the estate available to creditors, provided the transaction falls within the look-back period and the other statutory conditions for a preference are satisfied.

What is the difference between an undervalued transaction and an extortionate credit transaction under the IBC?

An undervalued transaction under Sections 45 to 46 of the Insolvency and Bankruptcy Code, 2016 is one where the corporate debtor transferred an asset for significantly less than its worth, without receiving fair value in return, within the applicable look-back period. An extortionate credit transaction under Section 50 is a lending arrangement whose terms required grossly exorbitant payments or were otherwise unconscionable when compared with the risk taken by the lender. Both categories allow the resolution professional to apply to the National Company Law Tribunal to have the transaction set aside or its terms modified, though the tests for establishing each are distinct.

How does the pre-packaged insolvency resolution process differ from the ordinary process in timeline?

The pre-packaged insolvency resolution process, introduced by the 2021 amendment for micro, small, and medium enterprises, allows the debtor and its creditors to negotiate a base resolution plan informally before the formal process begins, which is intended to make the subsequent National Company Law Tribunal-supervised process faster than the ordinary corporate insolvency resolution process. Because a base plan is already in place when the formal process starts, a pre-packaged case is designed to reach approval more quickly than a standard case where resolution applicants are invited and plans evaluated only after the process has formally commenced.