Insolvency and Bankruptcy Code (IBC)
Insolvency and Bankruptcy Code (IBC): The Insolvency and Bankruptcy Code, 2016 is India's consolidated insolvency framework. For corporate borrowers a financial creditor can apply to the NCLT once default crosses the ₹1 crore threshold, triggering a time-bound resolution process controlled by a Committee of Creditors.
Why Insolvency and Bankruptcy Code (IBC) matters in credit and collections
- Crucial for high-ticket Corporate Receivable Management.
- Allows operational and financial creditors to trigger the Corporate Insolvency Resolution Process (CIRP).
- Ensures a time-bound resolution mechanism, radically shifting the balance of power back to the creditor.
How a corporate insolvency resolution process runs
A financial creditor applies under Section 7; an operational creditor applies under Section 9 after serving a demand notice. On admission by the NCLT, three things happen at once: a moratorium under Section 14 freezes all parallel recovery action including SARFAESI enforcement and DRT proceedings, the board is displaced and an insolvency professional takes control, and claims are invited and verified.
Verified financial creditors form the Committee of Creditors, voting in proportion to admitted claim value. The CoC evaluates resolution plans and approves one by the prescribed supermajority. If no plan is approved within the statutory timeline, the company goes into liquidation and distribution follows the waterfall in Section 53, where secured creditors rank ahead of unsecured.
The process is deliberately time-bound, with an outer limit including litigation time, and Section 29A disqualifies defaulting promoters and connected parties from bidding for their own company. In practice, the IBC's most important effect on lender behaviour has been the shift in leverage: the threat of losing control of the company changes promoter conduct well before admission.
Regulatory basis
The Code is administered by the Insolvency and Bankruptcy Board of India, with the NCLT as adjudicating authority for corporate insolvency. The minimum default threshold for initiating corporate insolvency was raised to ₹1 crore by notification in March 2020.
Source: Insolvency and Bankruptcy Board of IndiaHow lenders use the IBC
- Reserve it for corporate exposure above the ₹1 crore threshold where the borrower is a going concern worth resolving.
- Remember that admission freezes every other remedy. If SARFAESI enforcement is close to completion, sequencing matters a great deal.
- File and prove claims promptly and accurately — CoC voting weight follows admitted claim value.
- Model the Section 53 liquidation waterfall before supporting a plan. Your recovery depends on where your security ranks.
- Use the credible threat of admission in negotiation. Many defaults resolve once promoters face losing control.
Insolvency and Bankruptcy Code (IBC) — frequently asked questions
Can the IBC be used against an individual or proprietorship borrower?
The corporate insolvency process applies to companies and limited liability partnerships. Provisions for individuals and partnership firms exist within the Code but have been operationalised only in part, so in practice lenders pursue individual borrowers through SARFAESI, DRT, arbitration or Section 138.
What happens to SARFAESI action once an IBC application is admitted?
It stops. The Section 14 moratorium prohibits enforcement of security interest during the resolution process, so possession and sale under SARFAESI cannot continue while the moratorium is in force.