IBC & Insolvency

India's insolvency framework changed fundamentally when the Insolvency and Bankruptcy Code came into force in 2016. For the first time, a debtor's creditors had a time-bound, structured process to resolve stress — not years of winding-up petitions gathering dust in High Courts, but a 180-day process with a real chance of a going-concern outcome. A decade in, the Code has its share of rough edges, but it remains the most consequential reform to India's corporate law landscape in a generation.

What the Code Actually Does

The IBC consolidates the law on insolvency for individuals, partnerships, and companies under one roof, replacing a patchwork of legislation — the Companies Act winding-up provisions, SICA, the Presidency Towns Insolvency Act — that had made genuine debt resolution nearly impossible. For corporate debtors, the Code creates two distinct tracks: the Corporate Insolvency Resolution Process (CIRP), aimed at keeping the business alive under new ownership or management, and Liquidation, which kicks in when resolution fails.

The institutional backbone is the National Company Law Tribunal (NCLT), which adjudicates insolvency applications, approves resolution plans, and supervises liquidations. Appeals go to the National Company Law Appellate Tribunal (NCLAT) and then to the Supreme Court. The Insolvency and Bankruptcy Board of India (IBBI) sets the regulatory framework, licenses Insolvency Professionals, and registers Information Utilities.

Initiating the CIRP: Section 7 vs Section 9

An insolvency application can be filed by a financial creditor (Section 7), an operational creditor (Section 9), or the corporate debtor itself (Section 10). In practice, Section 7 and Section 9 applications are the vast majority of cases.

Section 7 — Financial Creditors

A financial creditor — a bank, NBFC, debenture holder, or any party to whom money is owed on account of a financial transaction — can file under Section 7 when a corporate debtor commits a default. Default means non-payment on the due date. The threshold is ₹1 crore (raised from the original ₹1 lakh by the 2020 amendment — a response to the pandemic that made the mechanism less accessible to smaller creditors).

The Section 7 application is filed before the NCLT bench with territorial jurisdiction over the corporate debtor's registered office. The Tribunal has 14 days to either admit the application or reject it. If the debt and default are established, the NCLT admits the application and appoints an Interim Resolution Professional (IRP). There is very little room for the debtor to contest admission — the Supreme Court in Innoventive Industries settled that early.

Section 9 — Operational Creditors

Operational creditors — suppliers, employees, service providers, government authorities owed statutory dues — must first issue a demand notice (or a copy of an invoice) to the corporate debtor. The debtor then has 10 days to either pay the debt or raise a notice of dispute. If neither happens, the operational creditor can file before the NCLT.

The existence of a dispute is the most-contested ground in Section 9 applications. The Supreme Court in Mobilox Innovations clarified that a pre-existing dispute — not a manufactured one — is a valid ground to reject an application. Tribunals routinely examine the correspondence trail to assess whether a dispute is genuine or a defence constructed post-default.

Inside the CIRP: How It Unfolds

On admission of the application, a moratorium takes effect immediately under Section 14. This is one of the Code's most powerful provisions: all suits, executions, and enforcement actions against the corporate debtor are suspended. Secured creditors cannot enforce their security. Pending arbitration proceedings are stayed. The objective is to create a clean space for the resolution process to work.

Simultaneously, the NCLT appoints an IRP who takes charge of the debtor company. The IRP's primary task in the first 30 days is to constitute the Committee of Creditors (CoC) — the body of financial creditors that will drive the resolution process. The CoC meets to appoint a Resolution Professional (RP), who may be the same person as the IRP or someone new, and the RP takes over the management and operations of the corporate debtor.

The Committee of Creditors

The CoC is a creditor-controlled body with significant authority. It can approve or reject resolution plans, decide whether to liquidate, and extend or conclude the CIRP within the outer timeline. Voting thresholds matter: most decisions require 66% by value of admitted claims; liquidation requires 66%; and certain significant decisions require 75%. A dissenting creditor — even one with 34% — can be overruled, which makes CoC strategy a high-stakes exercise.

Financial creditors with related-party exposure to the debtor are excluded from CoC membership and voting. This was a deliberate design choice to prevent promoters or connected parties from gaming the process through friendly creditors.

Resolution Plans

Any person — a prospective acquirer, a restructuring fund, even a creditor — can submit a resolution plan if they qualify as a Resolution Applicant under the eligibility criteria in Section 29A. Section 29A is a long and somewhat sprawling provision: it bars promoters with NPAs, wilful defaulters, guarantors of the corporate debtor, and persons convicted of certain offences from submitting plans. The intent is to prevent the same parties who caused the stress from buying back assets at a discount — what the courts have called "back-door entry."

A compliant resolution plan, once approved by the CoC with 66% votes, goes to the NCLT for judicial approval. Once the NCLT approves the plan, it binds everyone — the corporate debtor, all creditors (whether or not they were part of the CoC), employees, guarantors, and statutory authorities. The Supreme Court in Committee of Creditors of Essar Steel reinforced that approved resolution plans have overriding effect on competing claims and statutory dues.

When Resolution Fails: Liquidation

If no viable resolution plan emerges within the CIRP timeline, or the CoC votes to liquidate, the NCLT passes a liquidation order under Section 33. A Liquidator is appointed — typically the RP who handled the CIRP — and takes over the assets of the corporate debtor for realisation and distribution.

The distribution waterfall under Section 53 is fixed by statute. CIRP costs rank first (including the IRP/RP's fees and operational expenses during the process). Secured creditors rank next, followed by workmen's dues for 24 months, then employee wages, then unsecured financial creditors, then government dues, and finally equity shareholders. In practice, by the time secured creditors are partially paid, there is often nothing left for unsecured creditors or equity holders.

A secured creditor has the option to "relinquish" their security to the liquidation estate and participate in the waterfall, or to "realise" their security outside the process and contribute any surplus. The choice has significant implications depending on the asset quality and the estimated liquidation value.

Avoidance Transactions

The Code gives the RP tools to unwind transactions that weakened the corporate debtor before insolvency: preferential transactions (payments to related parties within two years, or third parties within one year, before the insolvency commencement date that preferred them over other creditors), undervalued transactions, and fraudulent trading. These provisions mirror similar concepts in UK insolvency law and give RPs a meaningful ability to recover value for the estate.

Appeals: The NCLAT and Beyond

Appeals from NCLT orders lie before the NCLAT under Section 61, but the grounds are narrow. An aggrieved creditor, resolution applicant, or any person affected by an NCLT order can appeal within 30 days of the order. Appeals cannot be made on questions of fact — only on questions of law or mixed fact and law. Given the Code's emphasis on speed, courts have been strict about entertaining appeals that seem designed to delay a running CIRP.

From the NCLAT, a further appeal lies to the Supreme Court under Section 62, again within 45 days. The Supreme Court has been both the Code's most important interpreter and, periodically, a source of complexity — its judgments on Section 29A eligibility, the nature of the moratorium, and the treatment of personal guarantors have each required significant course corrections by practitioners.

Personal Guarantors and Pre-Packaged Insolvency

Personal Guarantors to Corporate Debtors

One of the most significant extensions of the Code's reach has been its application to personal guarantors of corporate debtors. Under Part III of the Code (notified in November 2019), a creditor can simultaneously initiate insolvency proceedings against a personal guarantor — often a promoter — alongside or after a CIRP against the corporate debtor. The Supreme Court in Lalit Kumar Jain upheld this framework, confirming that a personal guarantor's liability does not discharge even if a resolution plan is approved for the corporate debtor.

This has materially changed the risk calculus for promoters who have extended personal guarantees to lenders. The Code is no longer a purely corporate mechanism.

Pre-Packaged Insolvency (PPIRP)

Introduced in 2021 primarily for MSMEs, the pre-packaged insolvency framework allows a corporate debtor and its creditors to agree on a base resolution plan before approaching the NCLT, reducing the cost and disruption of a full-blown CIRP. The process is faster and less public than a conventional CIRP. Uptake has been modest so far, partly because of procedural complexity and partly because the existing CIRP framework has become more familiar to market participants.

How We Work on IBC Matters

Our IBC practice covers the full spectrum of insolvency proceedings — from the first strategic assessment of whether to file under Section 7 or Section 9, through NCLT hearings, CoC participation, and resolution plan structuring, to NCLAT appeals when outcomes need to be challenged.

• Advising financial and operational creditors on admission strategy, claim filing, and CoC representation
• Drafting and reviewing resolution plans for prospective resolution applicants, including Section 29A eligibility analysis
• Acting as legal advisors to Insolvency Professionals and Resolution Professionals on complex matters
• Representing parties in contested NCLT hearings across all benches in India
• Arguing appeals before the NCLAT on questions of law arising from CIRP orders
• Advising on the insolvency implications of personal guarantees and cross-default clauses in financing documents
• Avoidance transaction analysis and recovery proceedings during liquidation

Every IBC engagement at Tejas Advisors is led personally by the founder. There is no hand-off to junior counsel on hearing days or at critical junctures in the process. The Code is complex, timelines are short, and the cost of a missed deadline or a poorly worded application is high. We take that seriously.