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

The Insolvency and Bankruptcy Code 2016 reorganised how India deals with corporate default. Before it, a creditor faced with a defaulting company had no single, time-bound forum to turn to; the Code consolidated that fragmented landscape into one process, run before one tribunal, on one clock.

This guide explains the Code's architecture — from the default that triggers it to the resolution plan or liquidation that ends it, and the separate framework for personal guarantors. It reflects the Insolvency and Bankruptcy Code (Amendment) Act 2026 (Act 6 of 2026), most of whose provisions, including those on admission, withdrawal, resolution plans and personal guarantors discussed here, came into force on 26 May 2026.

Before the IBC

Before the Code was enacted in 2016, India's insolvency framework was fragmented across several statutes — the Sick Industrial Companies (Special Provisions) Act 1985, the Recovery of Debts Due to Banks and Financial Institutions Act 1993 (renamed the Recovery of Debts and Bankruptcy Act, 1993 by the Code's Fifth Schedule), the SARFAESI Act 2002, the winding-up provisions of the Companies Act, and, for individuals, the Presidency-towns Insolvency Act 1909 and the Provincial Insolvency Act 1920. Resolution was slow, and the delay destroyed value for creditors and the economy.

The IBC was enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. The National Company Law Tribunal and the National Company Law Appellate Tribunal, constituted under the Companies Act 2013, are the Adjudicating Authority and the appellate tribunal for corporate persons under the Code, and the Code itself established the Insolvency and Bankruptcy Board of India as the regulator.

The Code has been upheld against constitutional challenge, including its differential treatment of financial and operational creditors — only financial creditors sit on the committee of creditors under Section 21(2), and operational creditors receive notice of its meetings under Section 24(3)(c) only where their aggregate dues reach ten per cent of total debt. That distinction is a valid classification founded on the different character of the two categories of debt rather than arbitrary discrimination, financial creditors lending against the time value of money and being equipped to assess the viability of the business.

The Trigger: Default, Threshold and Section 6

The IBC operates on an objective trigger — default. Section 6 entitles a financial creditor, an operational creditor, or the corporate debtor itself to initiate the Corporate Insolvency Resolution Process (CIRP) when a corporate debtor commits a default. On a financial creditor's application the question is whether a financial debt is owed and a default has occurred; on an operational creditor's application the Code additionally asks whether there was a pre-existing dispute about the debt.

The minimum default is INR 1 crore. The Code originally permitted initiation at a default of INR 1 lakh, and the figure was raised to INR 1 crore by notification in March 2020. A default below that amount cannot found a CIRP application, which channels smaller claims to other recovery routes.

The application route depends on who is filing. A financial creditor proceeds under Section 7, an operational creditor under Section 9, and the corporate debtor under Section 10. Each route carries its own documentary and procedural requirements, and the choice of section shapes how the admission hearing before the NCLT will run.

Admission

On a financial creditor's application, Section 7(5) as substituted in 2026 requires the NCLT, within fourteen days of receipt, to admit the application if it is satisfied that a default has occurred, the application is complete, and no disciplinary proceeding is pending against the proposed resolution professional; Explanation I provides that no other ground shall be considered to reject it once those requirements are met. The word is now "shall", replacing the earlier "may". Before rejecting, the NCLT must give the applicant seven days to rectify a defect. Arguments about the corporate debtor's solvency, or about a dispute over the debt — a test that belongs to an operational creditor's application under Section 9 — do not answer a Section 7 application. The requirements are set out in the note on Section 7 admission.

Upon admission, the NCLT appoints an Interim Resolution Professional (IRP), in whom the management of the corporate debtor vests, and the moratorium takes effect.

The Clock: 180 Days, Extendable, Within 330

The defining feature of the CIRP is that it is time-bound. Section 12 requires the process to be completed within 180 days of admission, extendable once by up to 90 days on an application supported by a resolution of the Committee of Creditors passed by 66 per cent of the voting share. A 2019 amendment added an outer limit: the process is to be completed within 330 days from the insolvency commencement date, including any extension and the time taken in legal proceedings. Every participant — creditor, debtor and professional — works against that deadline.

The Moratorium

The moratorium under Section 14 prohibits suits and proceedings against the corporate debtor, including execution, transfers of its assets, enforcement of security interests, and recovery of property by owners and lessors, and it protects essential supplies. It does not extend to guarantors; an Explanation to Section 14(3)(b) inserted in 2026 clarifies that it does, however, bar a surety from initiating or continuing action against the corporate debtor under the contract of guarantee. Its scope and limits are set out in the note on the Section 14 moratorium.

The Committee of Creditors

After collating the claims received, the IRP constitutes the Committee of Creditors (CoC) from the financial creditors of the corporate debtor, other than related parties, with voting shares proportional to the financial debt each is owed. At its first meeting the CoC resolves, by 66 per cent of the voting share, either to confirm the IRP as Resolution Professional or to replace them with a Resolution Professional of its choice. How claims reach the committee is set out in the note on filing claims in a CIRP.

The CoC is the commercial decision-maker of the process. The decision on which resolution plan to accept, and on how the amounts payable under it are to be distributed among classes of creditors, belongs to the CoC and not to the Adjudicating Authority. Section 31(1) confines the tribunal's satisfaction to whether the plan meets the requirements of Section 30(2) and, under its proviso, has provisions for its effective implementation; beyond that, the commercial wisdom of the CoC is not open to reappreciation on merits, and a dissatisfied creditor cannot ask the tribunal to redistribute a plan it does not like. Creditors who participate actively in the CoC, rather than passively awaiting outcomes, are better placed to influence the result.

Withdrawal Under Section 12A

An admitted process can be withdrawn only under Section 12A, which was substituted in 2026. The resolution professional applies with the approval of 90 per cent of the CoC's voting share; withdrawal is barred before the CoC is constituted and after the first invitation for resolution plans; and the NCLT is to decide within thirty days. The scheme is explained in the note on Section 12A withdrawal.

Resolution Plans

The resolution professional invites resolution plans from prospective resolution applicants through a time-bound process. Section 29A disqualifies certain persons from submitting resolution plans, including undischarged insolvents, wilful defaulters, persons whose accounts — or the accounts of corporate debtors they control or promote — have been non-performing for a year or more without the overdue amounts being cleared, persons convicted of specified offences, disqualified directors, and persons prohibited by SEBI from dealing in securities or accessing the securities markets. The provision was designed to prevent those responsible for a company's failure from regaining control through the resolution process.

Section 30(2) sets the mandatory content of a plan. It must provide for payment of the insolvency resolution process costs in priority; for payment to operational creditors of not less than the amount they would receive in a liquidation under Section 53, or the amount they would receive if the plan's value were distributed in the Section 53 order, whichever is higher; for payment to dissenting financial creditors of not less than the lower of their liquidation entitlement under Section 53 and the amount they would receive if the plan's value were distributed in the Section 53 order (clause (ba), inserted in 2026, which does not apply to a process in which a plan had been approved by the CoC, or liquidation ordered or resolved upon, on or before 26 May 2026); for management of the corporate debtor's affairs after approval; and for implementation and supervision of the plan, without contravening any law in force. The plan must be approved by the CoC by not less than 66 per cent of the voting share, with reasons recorded for the approval, and then approved by the NCLT under Section 31, which now requires the order within thirty days of receipt of the plan.

The distinction between liquidation value and going-concern value is central to that exercise. A resolution that preserves the business as a going concern can yield more than liquidation would, and the process for inviting expressions of interest and evaluating plans against the criteria the CoC sets is where that value is preserved or lost.

Liquidation: When Resolution Fails

If no resolution plan is received within the maximum period, or the NCLT rejects the plan placed before it, the NCLT orders liquidation under Section 33(1); the CoC may also resolve by 66 per cent of the voting share to liquidate the corporate debtor at any time before a plan is confirmed. Since 2026, before passing a liquidation order on either of those grounds the NCLT must consider an application by the CoC, supported by 66 per cent of the voting share, to restore the CIRP; a process may be restored only once and for not more than 120 days (Section 33(1A) and (1B)), and the liquidation order itself is to be passed within thirty days (Section 33(2A)). Proceeds are distributed under the Section 53 waterfall: first the insolvency resolution process and liquidation costs; then, equally, workmen's dues for the twenty-four months preceding liquidation and the debts of secured creditors who have relinquished their security; then other employees' dues for twelve months; then financial debts owed to unsecured creditors; then government dues for up to two years and any unpaid balance of secured creditors who enforced their security; then remaining debts; and finally preference and equity shareholders.

Personal Guarantor Insolvency

Since 1 December 2019, when the Central Government brought Part III of the Code into force for personal guarantors to corporate debtors, a creditor can initiate an insolvency resolution process against a personal guarantor, including while the CIRP of the principal borrower is ongoing. For a personal guarantor of a corporate debtor the adjudicating authority is the NCLT under Section 60(1); where a CIRP or liquidation of the corporate debtor is pending, Section 60(2) requires the application to be filed before the same NCLT.

The interim moratorium in Section 96 no longer applies in these cases: Section 96(4), inserted with effect from 26 May 2026, provides that the section does not apply where the application concerns a personal guarantor to a corporate debtor, and IBBI Circular No. IBBI/II/106/2026 dated 21 September 2026 records that the interim moratorium under Sections 96 and 124 ceased from 26 May 2026, including for applications then pending. A resolution professional is appointed under Section 97 to examine the application and report, under Section 99 now within twenty-one days, before the NCLT decides whether to admit it, and the moratorium under Section 101 begins on admission. The process may lead to a repayment plan agreed with creditors. If the Adjudicating Authority rejects the repayment plan, or the plan ends prematurely, or no plan is submitted in time and the process is terminated under Section 106(1A), the debtor or a creditor may apply for bankruptcy under Section 121, which involves realisation and distribution of the guarantor's assets. The framework is set out in more detail in the note on personal guarantor insolvency in India.

Practical Points for Creditors and Debtors

Financial creditors should ensure proper documentation of their claims, including loan agreements, security documents, account statements, records of default and, where available, information utility records. Operational creditors should maintain records of invoices, delivery challans, the demand notice under Section 8, and evidence of default, as explained in the note on the Section 9 demand notice. The quality of documentation directly affects the speed of the NCLT application.

For businesses facing insolvency, the alternatives to formal IBC proceedings include one-time settlements, restructuring under the RBI's directions on resolution of stressed assets, and the pre-packaged insolvency resolution process in Chapter III-A of the Code (Sections 54A to 54P), which is available to corporate debtors that are micro, small or medium enterprises.

The Practice Area

IBC proceedings fall within the NPA resolution practice area of Unified Chambers And Associates.

Read more: SARFAESI Act Explained | DRT Guide | Unified Chambers And Associates

This article is general information on the law as it stands and is not legal advice; the course open in any matter depends on its own documents and facts. Queries may be directed through the contact page.