India: Not Every Bankrupt Will Be A Total Failure!

Last Updated: 3 January 2017
Article by Vikrant Rana and Chanakya Sharma

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "the Code") received the President's assent on May 28, 2016 and has subsequently been brought into force. The Code has an overriding effect on contradicting provisions of Companies Act, 2013, Sick Industrial Companies (Special Provisions) Act, 1985, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Limited Liability Partnership Act, 2008 and provides a simple and cogent Insolvency code.


Nature is ruled by the fundamental phenomenon of 'survival of the fittest'. A corollary of this is that failures and inability to survive will be an inevitable part of an ecosystem- whether biological or economical. In today's optimistic and energized economic environment, when it comes to startup & capital economies, such a statement carries the risk of sounding cynical. However, the unprecedented codification of the laws related to Insolvency and Bankruptcy in India, have induced a notion that not all unsuccessful business or financial projects need to be "failures". The codification brings to India a smooth Insolvency Resolution Process, which will prove to be a win-win situation for creditors and debtors as far as possible.


When a business fails or defaults, the due course of action is to reorganize its human resource, capital and other resources and reintegrate it thereby mitigating the loss caused to the economic ecosystem at large. The BLRC Report1 very rightly captures the need of an efficient insolvency resolution mechanism, "The failure of some business plans is integral to the process of the market economy. When business failure takes place, the best outcome for society is to have a rapid renegotiation between the financiers, to finance the going concern using a new arrangement of liabilities and with a new management team. If this cannot be done, the best outcome for society is a rapid liquidation. When such arrangements can be put into place, the market process of creative destruction will work smoothly, with greater competitive vigor and greater competition."

Erstwhile legislations:

Efforts have been made previously, for smoothening insolvency proceedings and ironing out the creditor's losses by suitable legislations. However, these efforts were directed towards remedying or rectifying the existing laws and filling up their loopholes thereby making only incremental changes. It is noteworthy that in the making of this Code the efforts of the BLR Committee were directed towards creating a new legislation that would provide redressal for all aspects related to insolvency at one station itself. The present Committee2 had taken up the task of drafting a single unified framework which deals with bankruptcy and insolvency by persons other than financial firms. The Committee chose the strategy of repealing many existing laws on bankruptcy and insolvency, and writing a clean modern law which provides a simple, coherent, and effective answer to the problems under Indian conditions.3 This Code not only expedites the process of insolvency resolution, but also facilitates effective and detailed procedure, authorities and powers vested in those authorities.

What does it seek to achieve?

The Code seeks to achieve, "A time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto."4

The value of the creditor's investment will depreciate (value destruction) with the change in such a dynamic economy hence an expedited resolution is necessary. Achieving a high recovery rate is primarily about identifying and combating the sources of delay5, hence, a time-bound resolution is sought.

Creditor's Control on default:

A limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; with the equity owners having no say6. In the Code's provisions a paradigm shift is seen from debtor's control to creditor's control upon default. This shift is vital as there was misuse of the resolution process which was previously used only as an excuse to prolong meeting the creditor's obligations. The recovery rates obtained in India are among the lowest in the world. The BLRC report estimated that when default takes place, broadly speaking, lenders seem to recover 20% of the value of debt, on an NPV basis.

Institutional Infrastructure:

The Code facilitates two Adjudicating Authorities, the National Company Law Tribunal which will preside over matters of companies, limited liability entities and the Debt Recovery Tribunal which will preside over mattes of individuals, unlimited liability partnership firms. An Insolvency and Bankruptcy Board (IBB) will be established by the Code. This Board is similar to SEBI and will be the regulatory authority for insolvency proceedings, the Insolvency Professional Agency (IPA), Insolvency Professional (IP) and the Information Utilities (IU). Appeals can be made to National Company Law Appellate Tribunal and Debt Recovery Appellate Tribunal respectively.

What are IPAs, IPs and IUs?

The Code prescribes establishment of Insolvency Professional Agencies (IPA) which will regulate the Insolvency Professionals (IP). The IPA will prescribe qualifications for the IPs, who will be required to be enrolled with the Agencies for functioning. Once an application for insolvency is admitted, the IPs will take over the administration of the Company and the Board of Directors will cease to have control. The Information Utilities will serve as one single window for information about the company to be available for creditors and debtors as well according to prescribed rules. This ensures transparency and access to untainted information which will be helpful during the Resolution Process/ Liquidation Process.

Section 244 in the Code provides that until the Insolvency and Bankruptcy Board is constituted or a financial sector regulator is designated, its powers shall be exercised by the central government. This provides for early and easy execution of the Code, establishment of the entire infrastructure and eco-systems need not be awaited. The execution is thereby expedited.

What is the IRP?

When there is a default in the business, the financial creditors, the operational creditors or the debtor himself can apply for Resolution to the Adjudicating Authority. Even though the operational creditors have a right to initiate the process by application they cannot form a part of the committee of creditors (CoC), who participate in the Resolution Process. When the application is admitted by the Adjudicating Authority, the IPs will take over control of the Company.

The Insolvency Resolution Process is a platform for communication between the creditors and the debtors to agree on the viability of the business and the future resolution plans. The creditors and debtors will collectively come up with such a Resolution Plan. This plan is to be approved by 75% of the Creditor's Committee. As, the process is time bound, there is a prescribed time limit of 90 days extendable up to 180 days, to come up with agreeable plan.

If however, no agreeable solution is reached by the CoC, then the company will move for liquidation.

Moratorium- The Calm Period:

When the application is admitted, and a public notice is issued, the moratorium begins. The creditor cannot claim his security interests during this period. It provides a calm period for conducting discussions and deliberations at the CoC. During the calm period the status quo of the debtor's assets is to be maintained.

Liquidation: On Priority basis

Before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process, if the Adjudicating Authority does not receive a resolution plan or the same is rejected by an order, the Adjudicating Authority shall pass an order requiring the corporate debtor to issue a public announcement stating that the corporate debtor is in liquidation. The Adjudicating Authority will also issue a notice regarding such liquidation to the corporate debtor.

On the appointment of a liquidator, all powers of the board of directors, key managerial personnel and the partners of the corporate debtor, shall cease to have effect and shall be vested in the liquidator.

Chapter IV provides for fast track liquidation process, which has a resolution time period of 90 days, in accordance with the rules prescribed by the Central Government. Also, the following chapter, Chapter V provides for a voluntary liquidation process.

The waterfall:

The assets will be liquidated according to the priority prescribed under the Code which is as follows:

Priority is given (a) to costs or the IRP followed by (b) secured creditors and workmen and employee dues; further (c) followed by financial debts of unsecured creditors; and lastly (d) dues to be paid to the Central and State Government. After these are cleared, the remaining dues and equity will be satisfied.

The BLR Committee had recommended to keep the right of the Central and State Government in the distribution waterfall in liquidation at a priority below the unsecured financial creditors in addition to all kinds of secured creditors for promoting the availability of credit and developing a market for unsecured financing (including the development of bond markets). In the long run, this would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth. The government also will be the beneficiary of this process as economic growth will increase revenues. Further, efficiency enhancement and consequent greater value capture through the proposed insolvency regime will bring in additional gains to both the economy and the exchequer.7

Fresh Start Proceedings:

A unique feature of the Code is seen in Chapter II. It provides for conditions in which a debtor (only applicable to individual) may be discharged of his qualified debt if the conditions under Section 88 are fulfilled. The Section provides that if any person whose:

  • gross annual income does not exceed sixty thousand rupees;
  • aggregate value of the assets does not exceed twenty thousand rupees;
  • aggregate value of the qualifying debts does not exceed thirty-five thousand rupees;

And who is not an undischarged bankrupt; and does not own a dwelling unit, irrespective of whether it is encumbered or not; and does not have any previous or pending fresh start process against him will be entitled to discharge of debt under the fresh start proceedings. These proceedings will held startups considerably.

The Code prescribes a detailed process for discharging such persons' qualified debt.

Concluding marks:

For attracting investment into the country, the foremost concern of a creditor is that there should be some security for his/her investment. This compels creditors to invest only in reputed businesses. If a creditor has enough trust that if the business fails, his credit can be recovered, he will be encouraged to invest. The modern credit market will prosper significantly when such credit is easily accessible.

With so many budding and emerging startups and small industries in the Country, the harness of such an unprecedented legislation is a welcome move for both young business ideas and experienced investors. The access to capital market and a low risk investment mechanism which the Code seeks to establish, will surely contribute to more resource and capital inflow in the market thereby contributing significantly to the Indian economy.


 1 Bankruptcy Law Reforms Committee Report, Vol I ("BLRC Report")

2 Bankruptcy Law Reforms Committee chaired by T.K. Vishwanathan

3 Bankruptcy Law Reforms Committee Report, Vol I ("BLRC Report")

4 ibid

5 ibid

6 ibid

7 ibid

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Vikrant Rana
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions