[Reader’s Submission] Corporate Insolvency Resolution Process – A Paradigm Shift


by  Adv. Nikhil Gupta & Ms. Kriti Mittal



Existence of multiplicity of laws and various adjudicatory agencies have rendered the entire process of debt recovery redundant. The fragmented legislations do not aid lenders in timely recovery or restructuring of defaulted assets, which ultimately causes undue problem for the entire credit system. Bringing in paradigm shift in the debt recovery laws and confining many archaic legislations to history books, the Insolvency and Bankruptcy Code, 2016 ought to protect creditors in time bound manner. The paper is an attempt to give the overview of the Code. Subsequently, the paper deals with the judicial pronouncements which have interpreted the Code followed by the conundrum which is still prevailing. The authors conclude the paper by penning down few suggestions which may be helpful in achieving the objective sought.  


The progressive rate at which the financial distress mechanism of a country provides relief to insolvent companies and various stakeholders determines the growth of that economy. Myriad laws dealing with insolvency and existence of various adjudicating forums makes the entire credit system suffer from infirmity. This leads to an unwanted situation where creditors or lenders become reluctant to lend for new projects. Until the introduction of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Code”), India’s ranking in Ease of Doing Business issued by World Bank was 130 out of 189, which itself bears testimony to the poor financial distress mechanism of the country. The Code is one of the biggest policy reforms in India and is a consolidated law dealing with insolvency and bankruptcy.


Understanding the concepts of bankruptcy and insolvency are imperative as both are used interchangeably though they differ in meaning. The term ‘insolvency’ means that a debtor does not have sufficient funds to pay off the debts of creditors. The term ‘bankruptcy’ is the formal order passed by the court with respect to insolvency. It is to be noted that there can be cases where company is solvent in balance sheet but insolvent in cash flow. This may happen when there is an illiquid asset which gives the picture of solvency on balance sheet but not in cash flow. The situation can be the other way around when the company is solvent in cash flow and not on balance sheet. This may happen when the company just has sufficient funds to pay off the debts but the business has more liabilities than assets.


India had multiple laws, which were made with the intent to provide justice to the creditors, both timely and transparently, however, the same proved to be otherwise.

In cases where company fails to clear its debt, there are three kinds of legal procedures which areavailable to debtors and creditors that are common to all jurisdictions:

  • foreclosure or enforcement of debt by creditor or group of creditors;
  • liquidation of the corporate debtor and distribution of remaining assets to creditors; and
  • revival of the business or its sale as a going concern.

The first one comes under the scope of debt recovery procedure while the latter two come  within the ambit of corporate insolvency procedures. Debt enforcement refers to a tool which can be used by an individual creditor or group of creditors to recover the debt due typically by enforcing the collateral against which the said creditors advanced the loan. Corporate insolvency procedure, on the other hand, is the collectivemechanism to deal with the company’s overall distress position. Further, it affects the rights ofall stakeholders.In India, the legal framework was very complicated as it was multi-layered, involving a combinationof collective insolvency and debt enforcement laws.


The collective insolvency laws used to exist in two legislations: Sick Industrial Companies(Special Provisions) Act, 1985, (hereinafter referred to as SICA) which dealt withrehabilitation and revival of specified industrial companies and Companies Act, 1956,which dealt with liquidation.

Under SICA, the industrial company in distress used to make a reference to Board for Industrialand Financial Reconstruction (BIFR) which used to consider whether the debtor company was in aviable position or not.If the answer to this was in affirmative then the BIFR used to sanction arehabilitation scheme. In case, if the answer was in negative then the BIFR used to refer thecompany to high court for winding up. SICA had been miserably misused by companies making default trying to siphon off the assets from creditors. The universal condemnation which the Act had invited made the act passed for its repeal in 2002 and it ultimately got repealed in 2017.

The Companies Act, 1956 provided for voluntary and compulsory liquidation. The voluntary winding up option was available to solvent debtors. The term compulsory winding up connotes the situation where the winding up order used to be passed by the high court.The petition for winding up can be filed by either debtor or creditor or if the matter gets referred to high court by BIFR.


The most common mechanism which is used by creditors to recover the amount due is to file a petition in the civil court of competent jurisdiction. It cannot be denied that Indian courts are clogged with long pending cases. This coupled with the misuse of SICA by corporate debtors made the legislature enact laws for debt recovery for certain specific types of creditors in 1990s and 2000s. The first in the line was Recovery of Debts due to Banks and Financial Institutions Act which was enacted in the year 1993. This was formed so that Banks and Financial institutions could recover their money faster as these have public money with them. The Act is applicable to both secured and unsecured creditors. The Act provided for the formation of Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). Further, any case pending before any court before the establishment of the Tribunal was transferred to DRT provided the said DRT Bench had jurisdiction over the cause of action. Ten years down the line from then, the SARFESI Act was formed in 2002. The Act provides for mechanism for secured creditors who can take the possession of securities and can sell them without the intervention of court or tribunal. Section 13 of the Act provides that secured creditors can enforce their security in respect of any debt of a borrower that is classified as non-performing asset without any court’s involvement if certain conditions enumerated in the Act are met. The debtor, if wants to appeal, can do so within 45 days from the date when enforcement takes place. The formation of SARFESI Act involved an accompanying amendment to SICA. It stated that matter cannot be referred to BIFR once the enforcement action under SARFESI has commenced. Further, with respect to cases already being dealt by BIFR and was pending, such a reference would stand abated if secured creditors holding at least three fourth of the outstanding debt of the corporate debtor commence proceedings under SARFESI.


Besides, the non-clarity of laws being one of the reasons for delay in resolving insolvency related dispute, multiple proceedings in multiple forums also aggravated the situation. Each proceeding was initiated by a different party and the high courts were left with deciding which would take precedence over the other and tried to resolve issues.

The case of BHEL v. Arunachalam Sugar Mills (ASM) would be a good illustration of how ambiguity in law enabled different creditors to take action against corporate debtor in different forums resulting in delay. In this case, ASM and its sister concern defaulted in payment of the loan taken by them and so secured and unsecured creditors initiated numerous proceedings against them, which are  mentioned below:

(a) The main secured creditor i.e. Bank filed an application in DRT for debt recovery.

(b) Another creditor filed a winding up petition under Companies Act.

(c) Another secured creditor who advanced funds to the corporate debtor, entered into a memorandum of undertaking with the bank wherein bank would sell the properties of debtor and pay to the secured creditor out of the proceeds received.

(d) A company who leased machinery to ASM invoked the arbitration clause present in the agreement and filed an application in the high court to restrain the debtor from transferring or selling its assets.

(e) A secured creditor of the sister concern took action under SARFESI Act. Consequently, the creditor took the possession of the assets and sold them via auction.

(f) An unsecured creditor, who supplied a boiler to ASM, filed a civil suit against the debtor for recovery of the due amount by sale of immoveable properties of ASM.

Though this case would be the extreme case involving so many actions, many cases are there where at least two actions have commenced or were filed in minimum two forums. There were cases where the corporate debtor has made an application under SICA and the secured creditor has filed a winding up petition in the high court. The case of Oswal Foods Ltd. bears testimony to it. Again, in the case of BST and PSP Workers Union v. Union of India, secured creditors took action under SARFESI Act while BIFR was considering the viability of the sick company and referred the matter to high court for liquidation.


Against this backdrop, the Insolvency and Bankruptcy Code was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5th May, 2016. It was passed by Rajya Sabha on 11th May, 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act have come into force from 5th August and 19 August 2016. The Insolvency and Bankruptcy Code, 2016 is a comprehensive legislation which is framed to address the issues in context of insolvency and bankruptcy of all companies, partnerships and individuals. The Code, therefore, is one of the biggest legal reform in the country’s legal history. The Code has an impact on 11 other legislations and has consigned few archaic legislations to history books. The Code makes a move from debtor in possession approach to creditors driven insolvency policy. This coupled with strict time deadline is expected to give timely justice to creditors. Since the paper is focused on corporate insolvency, the authors have articulated only corporate insolvency process and liquidation process and not the ones that deal with individual and partnerships.


Once the debt becomes due and the corporate debtor commits a default in paying the same, a corporate insolvency resolution process could be commenced by operational creditor or financial creditor or by the corporate debtor itself. The default amount is limited to Rs. 1 lac. The terms ‘financial creditor’ and ‘operational creditor’ are defined in Sections 5(7) and 5(20) of the Code respectively. Financial creditor is the one to whom financial debt is owed and the operational creditor is the one to whom operational debt is owed. The terms ‘financial debt’ and ‘operational debt’ are defined in Sections 5(8) and 5(21) of the Code respectively. In the case of Innoventive Industries Limited v. ICICI Bank Limited, the Hon’ble Supreme Court, while upholding the decision of the Appellate Tribunal that the insolvency application is not maintainable as the same was filed by the erstwhile management of the company, which post commencement of insolvency process, loses that right, also marked the difference between operational creditor and financial creditor. Operational debt is a claim in respect of provision of goods or services and in this case, the operational creditor has to mandatorily issue a demand notice to the corporate debtor under Section 8 of the Code, who in turn is given 10 days’ time to refute the same by proving ‘existence of dispute’ or ‘pendency of suit’. On the other hand, financial debt is a debt (along with interest, if any)[1] which is disbursed against consideration for the time value of money and for which under Section 7 of the Code, the financial creditor does not have to issue any demand notice and just has to maintain records with information utility to prove that default exist. As per (Application to Adjudicating Authority) Rules, 2016. Under Rule 4(3) the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor). The Apex Court, in the case of MacquarieBank Ltd. Vs Shilpi Cable Technologies, answered in affirmative that a demand notice under Section 9 can be issued by lawyer and a foreign financial institution can initiate corporate insolvency resolution process.

Once the demand notice is issued under Section 8 of the Code to the Corporate Debtor, latter is given 10 days’ time to prove ‘pendency of suit’ or ‘existence of dispute’ or “the repayment of unpaid operational debt”. The Hon’ble Supreme Court interpreted the term ‘existence of dispute’ in the case of Mobilox Innovations Pvt. Ltd. Vs Kirusa Software Pvt. Ltd. The issue before the court was whether the usage of the word ‘and’ in Section 8 (2)(a) of the Code suggest that a dispute between the operational creditor and corporate debtor shall exist only when a suit or arbitration proceeding on the dispute is pending before receipt of demand notice under section 8 of the Code. The Court stated that the word ‘and’ must be read as ‘or’ otherwise it would lead to an anomalous situation unwarranted by the legislature as the corporate debtor would then be able to stave off the bankruptcy process only if a dispute is already pending in a suit or arbitration proceedings and not otherwise.The Court explicitly stated that dispute must be pre-existing and while determining the existence of dispute, NCLT needs to seewhether there is “a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.” The Court further stated that there are three questions that needs to be dealt with by NCLT to come to the conclusion regarding existence if dispute and even if answer to one of the question is in negative or does not exist, the application made under Section 9 must be rejected by NCLT. The three questions that need to be dealt with by NCLT are furnished below:

  • Whether there is a operation debt as defined in the Code exceeding Rs. 1 Lakh?
  • Whether the documentary evidence furnished with the application bears testimony that the aforesaid debt is due and payable and the same is yet not paid? and
  • Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding on the dispute filed before the receipt of the Demand Notice?

Unlike the legislations which governed insolvency and bankruptcy earlier without providing timely relief, the Code vide Section 12 provides for 180 days time limit to complete the process with a one-time extension of maximum 90 days with the leave of the Hon’ble NCLT, that too in exceptional cases, failing which the corporate debtor goes for liquidation.

Once the insolvency application is admitted by the NCLT, it declares moratorium under Section 14 of the Code. During the moratorium period, the corporate debtor is prevented from selling, disposing off, transferring or encumbering the assets. It is that time when the future course of action in relation to insolvency process is discussed by the creditors forming part of committee of creditors. Neither any new suit or proceeding can be initiated nor pending suit be continued. The rationale behind declaring moratorium is to give calm period for insolvency resolution where a corporate debtor can negotiate in the assessment of viability without any fear of recovery enforcement mechanism adopted by creditors. The conundrum as to whether the moratorium is applicable to the personal guarantors of the corporate debtor or not, the Hon’ble Supreme Court through its clarificatory amendment (judgement dated 14th August 2018 2018 SCC Online SC 963) in the case of State Bank of India vs Ramakrishnan ruled that moratorium under section 14 of Code does not apply with respect to personal guarantees. One more issue came before the Apex Court as to whether the moratorium would be applicable to proceedings before tax authorities. The Hon’ble Supreme Court in the case of Commissioner of Income Tax Vs. Monnet Ispat and Energy Ltd. re-affirmed the over-riding nature of the Code by resorting to Section 238 of the Code and stated that the Code would override anything inconsistent in any other enactment including Income Tax Act.

Post admission of petition against the corporate debtor by the Adjudicating Authority, an Interim Resolution Professional (“IRP”) is appointed in accordance with Section 16 of the Code to manage the affairs of the corporate debtor and the main objective of the IRP is to manage the affairs of the corporate debtor as a going concern and to locate a resolution applicant who could resolve the financial stress of the corporate debtor by providing suitable resolution plan. The management and control of the corporate debtor vests with IRP and aforesaid powers of the erstwhile management/director (/board of directors/partners of the corporate debtor) are suspended during moratorium period. Followed by this, a public announcement is required to be caused inviting claims from all creditors within ten days from the date of publication.

Subsequent to collection and verification of claims, the IRP is under an obligation to constitute a Committee of Creditors (“CoC”) as envisaged in Section 21 of the Code and the first meeting of CoC needs to take place within seven days from the date of its formation as enumerated in Section 22 of the Code. In the first meeting, the CoC by a special majority (i.e., 75% of the voting share of financial creditors) either decide to appoint IRP as the Resolution Professional (“RP”) or to replace the IRP with another RP. The duties to be discharged by the RP find mentioning in Section 25 of the Code. The main objective of RP is to ensure preservation of the assets of the corporate debtor. Regular meetings of CoC are important for smooth functioning of the entire process. The RP is required to appoint valuers for the valuation of assets of corporate debtor. The information memorandum contains the details of all assets of/with the corporate debtor. A detailed resolution plan is chalked out by the RP, which is required to be approved by a majority of 66% in value of both the secured and unsecured creditors, failing which the company shall go into liquidation. Earlier, when the Code was implemented, the resolution was to be approved by a majority of 75% but with a view and objective to encourage resolution as opposed to liquidation, the threshold was reduced to 66%. Once the Adjudicating Authority passes the liquidation order, the RP shall manage the assets distribution and the winding up process of the company. The priority distribution of the assets is defined under section 53 (also known as windfall mechanism) which is as follows: (i) insolvency resolution costs, (ii) workmen’s dues for 24 months and payments due to secured creditors who choose to relinquish their security interest; (iii) payments to employees in the preceding 12 months, (iv) dues to unsecured financial creditors, (v) government dues and payments to secured creditors for any unpaid amounts following enforcement of their security interest, (vi) all remaining debts and dues and (vii) any remaining amounts to equity holders.


The liquidation of corporate debtor may take place in any of the following scenarios:

  • The decision of the 75% i.e., majority of the committee of creditors to liquidate the corporate debtor anytime during the insolvency resolution process but before confirmation of resolution plan.
  • The committee of creditors did not approve the resolution plan within 180 days (or within the extended 90 days).
  • Rejection of resolution plan submitted by NCLT.
  • Contravention of the resolution plan by the debtor and application by the affected person for liquidation.

Once the decision of liquidation is passed by the NCLT, the moratorium period begins on all pending proceedings against the corporate debtor and the assets of the debtor, including the liquidation proceeds, vests with the liquidation estate.


The code has made a drastic change in the infrastructure to resolve insolvency cases:

  • The Insolvency and Bankruptcy Board of India:

The Board shall act as the apex body. Being the insolvency regulator, the Board is entrusted with the task of overseeing the functioning of insolvency intermediaries i.e. insolvency professionals, insolvency professional agencies and information utilities. Further, the Board would regulate the insolvency proceedings.

  • Insolvency Resolution Professionals:

These professionals play the imperative role in the resolution process. The code contemplates them as class of regulated but private professionals having at least minimum standards of professional and ethical conduct (also there should be no disciplinary proceeding pending against a proposed resolution professional or it may lead to rejection of application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred). The responsibility shouldered by them is to verify the claims made by different categories of creditors, constitution of committee of creditors, running the business of corporate debtor during moratorium period etc. They further try to make creditors reach a consensus for revival of the debtor. In cases of liquidation, they become liquidators.  Further, the liquidator shall form liquidation estate and hold the same as a fiduciary for the benefit of all creditors.

  • Information Utilities:

One of the noteworthy introduction made by the code is the formation of information utilities which is responsible to collect, authenticate and disseminate financial information of debtors in centralized electronic databases. The court further mandates financial information to be provided by creditors on regular basis to multiple utilities. These information would be available to all creditors, resolution professionals, liquidators and other stakeholders. The main purpose of this provision is to remove any dependency on the management of corporate debtor so that the entire process is resolved swiftly.

  • Adjudicating Authority:

The adjudicating authority in cases of corporate insolvency and bankruptcy is the NCLT constituted under Section 408 of the Companies Act, 2013. The appeals from the decision of the NCLT is made to the National Company Law Appellate Tribunal (NCLAT). Further, the appeal from NCLAT could be made to the Supreme Court. The role of adjudicating authority is limited to ensure that the due process enumerated in the code is followed rather than deciding the case on merits. The rationale behind this is to make sure that the insolvency resolution is commercially and professionally carried on.


The conundrum as to whether the Limitation Act is applicable on insolvency applications filed by creditors or not was resolved by the Hon’ble Supreme Court in the case of B.K.Educational Services Private Limited vs. Parag Gupta and Associates, vide judgment dated 11th October 2018, wherein while quashing the order of the NCLAT, the court held that the Limitation Act will continue to apply to applications filed by creditors, and if three years have passed since the date of default, the application would be barred. Section 238-A was introduced in the Code via an amendment dated 06.06.2018 which states that Limitation Act shall be applicable

The Hon’ble Supreme Court interpreted the meaning of the expression “debt due” as mentioned in the Code as “due and payable” in law, i.e., the debts that are not time-barred.In this regard, the Hon’ble Supreme Court has referred to its judgment in Innoventive Industries Ltd. v. ICICI Bank & Anr., wherein it had held that “a debt may not be due if it is not payable in law or in fact.”

The NCLAT in a recent case of Suresh Narayan Singh vs Tayo Rolls Ltd., stated that under the Code there were provisions for the financial creditors to file a joint application against the debtor. Then Appellate Tribunal ruled out thatthe workmen of a Company come within the meaning of ‘Operational Creditor’. If Sections 8 &9 are read with Form-5, it wouldbe clear that the person authorized to act on behalf of the ‘Operational Creditor’ is entitled to file an application under Section 9. Therefore, where workmen/employees are ‘Operational Creditors’, the application may be made either by an ‘Operational Creditor’ in an individual capacity or as a joint capacity by one of them who areduly authorized for such purpose.

Through the Code’s second amendment Billthe homebuyers were to be counted in financial creditors under section 7 who shall take part in deciding the fate of the defaulting builders. However, whether they shall be treated as secured or unsecured financial creditors shall be decided on case to case basis by the courts and the resolution professionals.

The Mumbai bench of NCLT in the case of Standard Charted Bank DSB Bank V Ruchi Soya Industries ruled out that the suspended directors were not entitled to the confidential information which is in possession of the Committee of Creditors and Resolution Professional. The Tribunal clarified that such disbursement of information shall be detrimental to the interest of the creditors in maximization of the value of the assets.


The unified Code has facilitated a faster debt recovery process as also the fact that debt ridden companies can now look forward to be resolved within a year. The paradigm shift from fragmented legislations to consolidated code has improved India’s ranking in Ease of Doing Business issued by World Bank. However, to make sure that the Code is successful in achieving the objectives sought, it is imperative that the open ends regarding implementation of the Code be clarified so that the entire process remains smooth.

Undoubtedly, earlier legislations were also drafted with the intention to make sure that the entire insolvency and bankruptcy process remains smooth and meets the ends of justice. However, the same were misused and the processes prescribed were made mere formalities. As such, caution needs to be taken not to reduce this unified code into another piece of comprehensive legislation.

Adoption of UNICTRAL Model Law on Cross-Border Insolvency is the need. The proposal on cross border insolvency was also made by N. L. Mitra Committee but the same was never accepted or bought into force. This needs to be done in priority to address the needs of Indian Economy.

Unanimous participation of lenders and borrower towards reviving the company or providing for viable resolution plan would make the Code successful.


[1] Section 5(8) of the Insolvency and Bankruptcy Code, 2016

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