Insolvency and Bankruptcy in India: Legal Framework and Resolution Process

The Insolvency and Bankruptcy Code, 2016 (IBC), provides a unified and time-bound framework for resolving insolvency for companies, partnerships, and individuals. It plays a vital role in ensuring creditor protection, business continuity, and economic stability by offering structured mechanisms for resolution and liquidation.

Overview of the Insolvency and Bankruptcy Code, 2016

Consolidates insolvency laws into one framework
Maximizes asset value through resolution mechanisms
Applies to corporate persons, partnerships, individuals
Promotes credit access and entrepreneurial growth

Institutional Framework under the IBC

NCLT: Adjudicating authority for corporate insolvency
NCLAT: Appellate tribunal for NCLT decisions
DRT: Handles personal and partnership insolvency
IBBI: Regulates insolvency professionals and utilities
Insolvency Professionals: Manage CIRP and liquidation
Information Utilities: Maintain financial records for use in insolvency

Corporate Insolvency Resolution Process (CIRP)

Initiation: Filed by financial (Sec 7), operational (Sec 9) creditors, or the debtor (Sec 10).
Moratorium: On admission, legal proceedings are stayed (Sec 14).
IRP Appointment: Manages the company during resolution phase.
Committee of Creditors: Financial creditors decide on the resolution.
Resolution Plan Submission: Applicants propose plans for restructuring.
NCLT Approval: Plan approved by 66% CoC vote is submitted for NCLT confirmation.
Liquidation: Triggered if no plan is approved within 330 days.

Liquidation Process

If CIRP fails, liquidation is initiated. A liquidator is appointed to:

Realize and sell assets
Settle claims
Distribute proceeds under Section 53 (waterfall mechanism)

Insolvency of Individuals and Partnerships

Fresh Start Process: For low-income individuals
Resolution Process: For those with significant debt
Bankruptcy Proceedings: If resolution fails
DRT: Adjudicating authority for such cases

Cross-Border Insolvency

Sections 234 and 235 allow reciprocal arrangements for international cases. India is exploring adoption of the UNCITRAL Model Law to formalize cross-border insolvency procedures.

Key Legal Concepts Under IBC

Moratorium (Sec 14): Suspension of legal actions against debtor
Resolution Plan: Proposal for restructuring
Preferential/Undervalued/Fraudulent Transactions: Subject to avoidance applications
Waterfall Mechanism (Sec 53): Order of claim settlement during liquidation
Pre-packaged Insolvency: For MSMEs as a faster alternative

Frequently Asked Questions (FAQs)

1. What triggers insolvency under IBC?: A default of ₹1 crore or more can initiate CIRP by creditors or the debtor.
2. What is the timeline for completing CIRP?: 180 days, extendable by 90 days. Max duration: 330 days (including litigation).
3. Can operational creditors initiate insolvency?: Yes, under Section 9 after issuing a demand notice and receiving no response in 10 days.
4. What happens during the moratorium?: Legal actions and asset recoveries are paused to facilitate resolution.
5. Who can submit a resolution plan?: Anyone not barred under Section 29A, including promoters, investors, third parties.
6. What if no resolution plan is approved?: The company goes into liquidation and assets are sold.
7. How are creditors prioritized in liquidation?: Insolvency costs → secured creditors & workmen → employees → unsecured creditors → government dues → shareholders.
8. Are personal guarantors liable?: Yes, they can be separately proceeded against by NCLT and their assets attached.
9. Is cross-border insolvency recognized in India?: Only partially—through bilateral agreements. A full framework based on UNCITRAL is under consideration.