The Insolvency and Bankruptcy Code Explained: What Creditors and Debtors Must Know

The Indian legal system, while robust in its foundations, presents significant complexity for businesses and individuals seeking to protect their rights and enforce their obligations. Navigating this complexity requires not just legal knowledge but strategic thinking — understanding not only what the law says but how it operates in practice.

As a practicing Advocate at the Delhi High Court and Senior Partner at Unified Chambers And Associates, I have spent years at the intersection of law and business. My clients include banks seeking to recover NPAs, businesses pursuing debt recovery, individuals defending against legal actions, and corporations managing complex regulatory challenges. This article distills that experience into practical guidance.

The Legal Framework

India's legal framework for business disputes spans multiple statutes, tribunals, and courts. The choice of forum, the applicable law, and the procedural strategy all significantly impact the outcome of any legal matter. Understanding these nuances is essential for protecting your interests.

The key principle that governs all legal strategy is this: prevention is always cheaper than cure. Investing in proper legal documentation, regulatory compliance, and risk management upfront costs a fraction of what litigation costs after a dispute arises. Yet many business owners treat legal advice as a cost to be minimised rather than an investment to be optimised.

When disputes do arise, the most effective approach combines aggressive legal action with pragmatic negotiation. The goal is rarely to win at trial — most cases settle before reaching final judgment. The goal is to create sufficient legal pressure to bring the other party to a reasonable settlement.

Procedural Strategy

The procedural aspects of Indian litigation — which forum to approach, what interim reliefs to seek, how to structure the pleadings, what evidence to present — often determine the outcome more than the substantive merits of the case. A strong case badly presented will lose to a weaker case well presented.

The timeline of legal proceedings varies dramatically depending on the forum. Civil suits in district courts can take five to ten years. DRT proceedings typically take one to three years. NCLT proceedings under the IBC must be completed within 330 days. Writ petitions before High Courts can be heard within weeks if urgent interim relief is sought. Arbitration proceedings typically conclude within twelve to eighteen months.

Choosing the right forum and the right procedural strategy from the outset saves time, money, and uncertainty. This is where experienced legal counsel adds the most value — not in arguing the case at trial, but in designing the overall legal strategy that maximises the probability of a favourable outcome.

Documentation and Evidence

In Indian courts, documentation is king. Oral testimony alone is rarely sufficient to establish a claim or defence. Written contracts, correspondence, bank statements, invoices, delivery receipts, and other documentary evidence form the backbone of any successful case.

My standard advice to all business clients is to document everything. Every agreement should be in writing. Every communication should be confirmed in writing. Every payment should be documented with receipts. Every delivery should be acknowledged. This documentation discipline costs almost nothing during normal business operations but becomes invaluable when disputes arise.

The Indian Evidence Act 1872 and the Bharatiya Sakshya Adhiniyam 2023 govern the admissibility and weight of evidence in Indian courts. Electronic evidence — emails, WhatsApp messages, digital records — is admissible under Section 65B of the Evidence Act, subject to proper certification. Given the increasing digitisation of business communications, understanding the requirements for electronic evidence is essential.

Alternative Dispute Resolution

Court litigation should be the last resort, not the first. Alternative dispute resolution mechanisms — mediation, conciliation, and arbitration — offer faster, cheaper, and more confidential pathways to resolving disputes.

Arbitration has become particularly popular for commercial disputes in India following the 2015 and 2019 amendments to the Arbitration and Conciliation Act 1996. The amendments have addressed many of the historical challenges of Indian arbitration, including excessive court interference and prolonged timelines.

Mediation, though less well-established in India's commercial context, is gaining traction following the Mediation Act 2023. For disputes where the parties have an ongoing relationship — supplier-customer disputes, partnership disagreements, landlord-tenant conflicts — mediation often achieves outcomes that are more satisfactory to both parties than adversarial litigation.

Regulatory Compliance

Regulatory compliance is an increasingly critical area for Indian businesses. The GST regime, company law provisions, labour regulations, environmental laws, and sector-specific regulations create a complex compliance landscape that requires systematic management.

Non-compliance can result in penalties, prosecution, and reputational damage that far exceeds the cost of compliance. More importantly, regulatory non-compliance creates vulnerability in commercial disputes — a party that is not in compliance with applicable regulations is at a significant disadvantage in any legal proceeding.

At Unified Chambers And Associates, our practice spans the full spectrum of business legal needs — from routine compliance to complex litigation, from contract drafting to regulatory defence, from debt recovery to corporate restructuring. We bring deep expertise, strategic thinking, and practical commercial sense to every matter we handle.

If you are facing a legal challenge or seeking to strengthen your legal position proactively, a consultation with experienced counsel is the most productive first step. Understanding your options and developing a strategic plan early gives you the best possible foundation for protecting your interests.

Historical Context: Before the IBC

Before the Insolvency and Bankruptcy Code was enacted in 2016, India's insolvency resolution framework was fragmented across multiple legislations — the Sick Industrial Companies Act (SICA), the Recovery of Debts and Bankruptcy Act (RDBA), and the Companies Act, among others. The average time for resolving insolvency in India was 4.3 years, compared to 1-1.5 years in developed economies. This inefficiency resulted in significant value destruction for creditors and the economy.

The IBC was conceived to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The Code established the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) as the adjudicating authorities, with the Insolvency and Bankruptcy Board of India (IBBI) as the regulator.

The Corporate Insolvency Resolution Process (CIRP) in Detail

The CIRP begins with an application to the NCLT, which can be filed by the corporate debtor itself (Section 10), a financial creditor (Section 7), or an operational creditor (Section 9). The threshold for filing has been raised to INR 1 crore from the original INR 1 lakh, which has helped reduce frivolous filings while maintaining access for genuine claimants.

Upon admission, the NCLT appoints an Interim Resolution Professional (IRP) who takes over the management of the corporate debtor. The IRP constitutes the Committee of Creditors (CoC), which is composed of financial creditors with voting rights proportional to their debt. The CoC then either confirms the IRP or replaces them with a Resolution Professional (RP) of their choice.

The moratorium under Section 14 is one of the most powerful provisions of the IBC. It prohibits any action against the corporate debtor including suits, execution proceedings, recovery of assets, and termination of essential contracts. This breathing space allows the resolution process to proceed without disruption from individual creditor actions.

Resolution Plan: Requirements and Evaluation

The RP invites resolution plans from prospective resolution applicants through a transparent, time-bound process. Section 29A disqualifies certain persons from submitting resolution plans, including willful defaulters, promoters of NPAs, undischarged insolvents, persons convicted of offenses, and persons debarred by SEBI. This provision was designed to prevent errant promoters from regaining control of their companies through the back door.

A resolution plan must provide for payment of CIRP costs as a priority, followed by workmen's dues for 24 months preceding the commencement date, then debts owed to operational creditors, and finally, financial creditors based on the CoC's decision. The plan must be approved by the CoC with a vote of not less than 66% of voting share and subsequently sanctioned by the NCLT.

Liquidation: When Resolution Fails

If no resolution plan is approved within the prescribed timeline, or if the CoC decides by a 66% vote to liquidate the corporate debtor, the NCLT orders liquidation. The liquidation process follows a waterfall mechanism under Section 53, with CIRP costs and workmen's dues having the highest priority, followed by secured creditors, employee dues, unsecured creditors, and finally, equity shareholders.

Key Judicial Precedents

Several landmark Supreme Court judgments have shaped the interpretation and implementation of the IBC. The Essar Steel case (Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta) established that the CoC has primacy in commercial decisions regarding the resolution plan. The Swiss Ribbons case upheld the constitutional validity of the IBC and its differential treatment of financial and operational creditors. The Vidarbha Industries case clarified that the NCLT has discretion to reject an application under Section 7 even if a default is established.

The Role of Vulture Funds Under IBC

Distressed asset funds (often called Vulture Funds) have emerged as significant participants in the IBC ecosystem. These funds acquire NPAs from banks at a discount and either submit resolution plans as resolution applicants or participate in the liquidation process through asset acquisition. This creates a market for distressed assets, improving recovery rates for banks and providing fresh capital to revive distressed businesses.

Subodh Bajpai has been a pioneer in bringing the Vulture Fund concept to India's funding ecosystem. Through Unified Capital and Investments, his approach involves identifying fundamentally viable businesses that are distressed due to overleveraging or temporary market conditions, acquiring their debt at a discount, and restructuring the business for long-term success.

Practical Guide for Creditors

Financial creditors should ensure proper documentation of their claims, including loan agreements, security documents, account statements, and default notices. Operational creditors should maintain records of invoices, delivery challengers, demand notices under Section 8, and evidence of default. The quality of documentation directly impacts the speed and success of the NCLT application.

For businesses facing insolvency, early engagement with experienced insolvency professionals can help explore alternatives to formal IBC proceedings, including one-time settlements, restructuring under the RBI framework, and pre-packaged insolvency resolution (Section 54A-J) which offers a faster, less disruptive process for MSMEs.

Contact Unified Chambers And Associates at subodhbajpai.22@gmail.com for expert guidance on IBC proceedings, whether you are a creditor seeking recovery or a business navigating financial distress.

Maximising Value Through the CIRP Process

The effectiveness of CIRP proceedings depends heavily on the quality of the resolution professional, the cooperation of the Committee of Creditors, and the competitive dynamics of the resolution plan bidding process. Creditors who actively participate in the CoC, rather than passively awaiting outcomes, typically achieve better recovery rates.

Key strategies for maximising value include early expression of interest marketing to potential resolution applicants, transparent and competitive bidding processes, and creative deal structuring that maximises both recovery and going-concern value. The distinction between liquidation value and going-concern value is critical — resolution plans must offer creditors at least the liquidation value, but successful CIRPs achieve significantly higher recovery through preservation of the business as a going concern.

Personal Guarantor Insolvency Under IBC

The 2019 amendments extending IBC provisions to personal guarantors of corporate debtors have significantly expanded the scope of the code. Creditors can now initiate insolvency proceedings against personal guarantors even while CIRP for the principal borrower is ongoing, creating additional recovery avenues and personal accountability for promoters.

The personal guarantor insolvency process involves a resolution framework that may include repayment plans negotiated between the debtor and creditors. If a repayment plan is not approved, the process moves to bankruptcy, which involves realisation and distribution of the personal guarantor's assets. This framework has fundamentally changed the dynamics of NPA resolution in India, as promoters can no longer shield personal assets behind corporate structures while defaulting on guaranteed corporate debts.