Insolvency and Bankruptcy Code India: What Business Owners Need to Know

Business is unpredictable. Companies go through financial stress for many reasons — market downturns, bad debts, mismanagement, economic shocks. When a company can’t pay what it owes, the law needs to step in to bring order.

The Insolvency and Bankruptcy Code, 2016 (IBC) is India’s central law for handling cases where companies, individuals, or partnership firms cannot repay their debts. It was a landmark reform — replacing a patchwork of older laws with one unified, time-bound process.

This guide gives you a practical understanding of how IBC works, what it means for creditors and debtors, and what your options are.

Why Was IBC Introduced?

Before IBC, India had no single, efficient law for resolving business insolvency. There were multiple overlapping laws — the Companies Act, Sick Industrial Companies Act, Securitisation Act (SARFAESI), and others. Cases dragged on for decades. Recovery rates were among the lowest in the world.

IBC changed this by:

Setting strict timelines (originally 180 days, now 330 days including legal challenges)
Creating a single authority — the National Company Law Tribunal (NCLT)
Prioritising resolution over liquidation
Giving creditors, not courts, more control over the outcome

Since IBC’s introduction, recovery rates in India have improved significantly, and the law has been tested and refined through hundreds of important cases.

Key Concepts Under IBC

Operational Creditor (OC): Someone owed money for goods or services supplied. Example: a vendor who hasn’t been paid.

Financial Creditor (FC): Someone who has lent money to the company. Example: a bank that gave a loan.

Corporate Debtor (CD): The company that owes the money.

Insolvency Resolution Professional (IRP): An independent professional appointed to manage the company during the insolvency process.

Committee of Creditors (CoC): A committee formed primarily of financial creditors who control the resolution process and approve the final resolution plan.

Resolution Applicant: A person or entity that submits a resolution plan to take over or restructure the company.

The Corporate Insolvency Resolution Process (CIRP)

The CIRP is the core process under IBC for companies. Here’s how it works:

Step 1: Application to NCLT

Either a financial creditor, operational creditor, or the company itself can file an application to the NCLT to initiate CIRP.

Financial creditor: Can file if there is a default of any amount
Operational creditor: Must send a demand notice 10 days before filing. Minimum default threshold: ₹1 crore (increased from ₹1 lakh during COVID and maintained since)
Corporate Debtor (voluntary): Company itself can apply if it cannot pay its debts

Step 2: Admission and IRP Appointment

If NCLT admits the application, it:

Declares a moratorium — all pending legal proceedings against the company are stayed, no new lawsuits can be filed, assets cannot be sold or encumbered
Appoints an Interim Resolution Professional (IRP)

The moratorium is one of the most powerful features of IBC. It gives breathing space to find a resolution.

Step 3: IRP Takes Control

The IRP takes over management of the company from the existing board. The promoters/directors are suspended but not removed permanently.

The IRP:

Collects all claims from creditors
Constitutes the Committee of Creditors (CoC)
Manages daily operations

Step 4: Resolution Plan Invited

The IRP invites resolution plans from interested parties (resolution applicants). A resolution plan may involve:

A new investor taking over the company
Debt restructuring
Merger with another company

Mergers can actually be an exit route for financially stressed companies. Read our M&A guide to understand how this works.

Step 5: CoC Approves the Plan

The CoC votes on submitted resolution plans. Approval requires at least 66% vote by value of financial creditors.

Step 6: NCLT Approval

Once the CoC approves a plan, NCLT gives its final approval. The approved plan is binding on all stakeholders — creditors, employees, shareholders, and even government departments.

If no valid resolution plan is received within the time limit, the company goes into liquidation.

Liquidation Under IBC

If no resolution plan is approved, or if the CoC votes for liquidation, the company is wound up. The IRP becomes the Liquidator and sells the assets to pay creditors.

Priority of payment in liquidation:

Insolvency resolution costs and liquidator fees
Secured creditors’ dues (up to security value)
Workmen’s dues (24 months’ salary)
Employee dues other than above (12 months)
Central and state government dues
Remaining secured creditors
Unsecured creditors
Trade creditors and other creditors
Shareholders (residual after everything else)

Shareholders typically get very little — or nothing — in liquidation.

Fast Track Resolution

For smaller companies (with assets or income below prescribed thresholds), IBC provides a fast track process with a shorter 90-day timeline.

IBC and Personal Guarantors

If a company director has personally guaranteed a loan, IBC allows creditors to file insolvency proceedings against the personal guarantor as well — separately from the company’s CIRP.

This has important implications for promoters and directors who have signed personal guarantees for company loans. Our insolvency and restructuring legal services team can advise you on your exposure and options.

What Should You Do If You Receive an IBC Notice?

Whether you’re a creditor trying to recover money or a company facing insolvency proceedings, act quickly. IBC has strict timelines. Delays can result in loss of rights.

For creditors:

File your claim correctly and on time with the IRP
Attend CoC meetings (if you’re a financial creditor)
Scrutinise resolution plans — don’t just accept whatever is offered

For company promoters/directors:

Engage a lawyer immediately
Understand your rights under IBC (you can submit resolution plans too in some situations)
Explore pre-pack insolvency or settlement options under Section 12A

Our banking and finance legal team works with both creditors and debtors in IBC matters across India.

Pre-Pack Insolvency (PPIRP) for MSMEs

Introduced in 2021, the Pre-Packaged Insolvency Resolution Process (PPIRP) is specifically for MSMEs (companies with less than ₹25 crore investment and ₹100 crore turnover). It allows a company and its creditors to agree on a base resolution plan before formally filing with NCLT — making the process faster and less disruptive.

Final Thoughts

The Insolvency and Bankruptcy Code India is a powerful tool — for creditors who need to recover dues, and for distressed companies that need a structured resolution. It is not a death sentence for a company. Many businesses have come out of CIRP stronger, under new management, with restructured debt.

But the process is complex, time-sensitive, and involves significant legal strategy. The dispute resolution and insolvency team at Sharma & Sharma Law Chambers LLP has handled IBC matters across multiple NCLT benches.