The Insolvency and Bankruptcy Code (IBC), 2016, is a comprehensive law designed to consolidate and streamline insolvency and bankruptcy proceedings in India. It replaced fragmented, outdated statutes with a time-bound, transparent framework aimed at maximizing asset value, balancing stakeholder interests, and promoting credit discipline. IBC applies to corporate entities, personal guarantors, and, in stages, partnership firms and individuals, including cross-border claims. The process is triggered by default and can be initiated by financial creditors, operational creditors, or the corporate debtor itself, with a minimum default threshold of ₹1 crore for corporates. Creditors are classified as financial or operational, with financial creditors forming the Committee of Creditors (CoC) and having voting rights. Resolution Professionals manage the insolvency process, verify claims, and coordinate with the CoC and NCLT. Outcomes include successful resolution, liquidation, or withdrawal. While IBC has improved speed, transparency, and investor confidence, challenges such as NCLT delays, low recovery rates, and limited rights for operational creditors persist.
1. Introduction
In today’s dynamic business environment, financial stress and corporate defaults have become common realities. With thousands of companies unable to pay debts on time, India needed a robust, transparent, and time-bound law to resolve insolvency. That’s where the Insolvency and Bankruptcy Code (IBC), 2016 comes in — a revolutionary legislation that transformed the landscape of debt recovery, corporate restructuring, and liquidation.
This article will walk you through every essential aspect of the IBC — its definition, applicability, thresholds, the types of creditors, how claims are filed, who Resolution Professionals are, and how the entire process unfolds. Whether you are a business owner, creditor, lawyer, investor, or student, this article will demystify the Code in simple, practical terms.
2. What Is the Insolvency and Bankruptcy Code (IBC)?
The Insolvency and Bankruptcy Code (IBC) is a comprehensive law introduced in 2016 to consolidate and simplify all insolvency and bankruptcy-related matters in India. Before IBC, insolvency proceedings were governed by multiple outdated laws, such as SICA, SARFAESI, and the Companies Act, which made the process lengthy, confusing, and inefficient.
IBC’s primary goals include:
√ Time-bound resolution (180 days + possible extension of 90 days)
√ Maximisation of asset value
√ Balancing of interests among all stakeholders
√ Ensuring credit discipline and reduction of NPAs
√ Boosting investor confidence and ease of doing business
√ With IBC, India introduced a modern insolvency framework aligned with global best practices.
3. Legal Applicability of IBC
IBC applies to several categories of entities and individuals:
A. Corporate Entities
√ IBC governs the insolvency and liquidation of:
√ Private Limited Companies
√ Public Limited Companies
√ LLPs (Limited Liability Partnerships)
√Any other incorporated corporate entities
B. Personal Guarantors to Corporate Debtors
These are individuals who have guaranteed corporate loans. Their insolvency can be initiated under IBC.
C. Partnership Firms & Individuals
These sections are notified in stages and are not fully operational for general individual bankruptcy. But applicable for personal guarantors.
D. Corporate Persons with Cross-Border Claims
IBC supports cross-border cooperation through Sections 234 & 235, though India has not yet adopted the full UNCITRAL model.
4. When Does IBC Come into Action?
IBC is triggered when a default occurs.
A default means:
“Non-payment of debt (whole or part) when due and payable and remains unpaid.”
i. Who can initiate the insolvency process?
IBC allows three routes:
a. Financial Creditor (FC)
Banks, NBFCs, lenders, bondholders, etc.
b. Operational Creditor (OC)
Suppliers, vendors, service providers, employees, government dues, etc.
c. Corporate Debtor (CD) Itself
A company may voluntarily file for insolvency if it realises it cannot pay its debts.
Once an application is admitted by the National Company Law Tribunal (NCLT), a moratorium is declared, management is replaced temporarily, and the insolvency resolution begins.
ii. Monetary Threshold Under IBC: When Can Insolvency Be Filed?
The monetary requirement is crucial to determine whether a creditor can trigger insolvency.
√ Default Threshold for Corporate Insolvency:
₹1 CRORE
This is the minimum default amount required to initiate the Corporate Insolvency Resolution Process (CIRP).
This threshold was increased from ₹1 lakh to ₹1 crore in March 2020 to prevent small claims from overwhelming the tribunal system.
√ Pre-Pack Insolvency for MSMEs (PPIRP):
Minimum default required → ₹10 lakh
√ Personal Guarantors:
Threshold → Aligned with the corporate debtor threshold of ₹1 crore
5. Types of Creditors Under IBC
Understanding creditor types is essential because their rights, priorities, and claim processes differ.
I. Financial Creditors (FCs)
Entities that have given loans or financial credit.
Examples:
- Banks
- NBFCs
- Bond/ Debenture holders
- Financial institutions
> Key Rights:
-
- Form the Committee of Creditors (CoC)
- Have voting powers
- Decide on the approval/rejection of resolution plans
- Generally, have top priority (especially secured FCs)
> How They File Claims:
Financial creditors submit claims in Forms C or CA to the IRP/RP, along with:
♦ Loan agreements
♦ Sanction letters
♦ Account statements
♦ Security documents
They also get representation in CoC meetings and play the biggest role in decision-making.
II. Operational Creditors (OCs)
These are creditors who provide goods, services, or statutory dues.
Examples:
- Vendors, suppliers
- Utility service providers
- Employees (unpaid salaries > ₹1 crore collectively)
- Government departments (tax dues)
> Rights:
-
- Can file an insolvency application
- Can attend CoC meetings (no voting rights except in specific situations)
- Entitled to receive payment under the resolution plan
> Limitations:
> No voting rights in CoC
> Lower priority in recovery
> Often receive a smaller percentage of dues
> How They File Claims:
OCs must:
i. Send a Demand Notice (Form 3 or 4)
ii. Wait 10 days for payment/dispute reply
iii. If unpaid → File insolvency in Form 5
iv. Submit claim proof to RP with invoices, delivery challans
III. Government / Statutory Creditors
These include:
- Income Tax department
- GST authorities
- EPFO
- Municipal corporations
They fall under “operational creditors,” but their dues have statutory protection and may have priority in the liquidation waterfall depending on the section.
6. Comparison of Creditors — Key Differences
| Feature | Financial Creditor | Operational Creditor |
| Nature of Debt | Loans, financial credit | Goods, services, wages, taxes |
| Voting Rights | Yes, major decision maker | No voting rights (except limited exceptions) |
| Priority in Payment | Higher | Lower |
| Filing Document | Form C / CA | Demand Notice + Form 5 |
| Right to File CIRP | Yes | Yes (after demand notice) |
7. Resolution Professionals (RPs) Under IBC
When insolvency is admitted, the management of the company shifts from directors to an independent professional. There are two types:
A. Interim Resolution Professional (IRP)
Appointed for the first 30 days.
Responsibilities:
√ Take control of the company
√ Make a public announcement
√ Verify claims
√ Constitute the Committee of Creditors (CoC)
√ Ensure the company operates as a going concern
B. Resolution Professional (RP)
Appointed after CoC confirms or replaces the IRP.
Responsibilities:
√ Manage the company during CIRP
√ Invite resolution plans
√ Evaluate plans & present to CoC
√ Ensure compliance with IBC timelines
√ Coordinate between NCLT, CoC, and stakeholders
√ Prevent asset stripping, fraud, or transactions meant to defraud creditors
RPs are licensed professionals supervised by the Insolvency and Bankruptcy Board of India (IBBI).
8. How Claims Are Filed Under IBC — Step-by-Step Process
Every creditor must file a claim with the IRP/RP once the CIRP begins.
Step 1: Public Announcement
IRP issues a public notice asking creditors to submit claims.
Step 2: Submission of Claim Forms
Different creditors file different forms:
- Financial Creditors → Form C / CA
- Operational Creditors → Form B
- Employees & Workmen → Form D / E
- Authorised Representative Creditors → Form F
Step 3: Verification of Claims
IRP verifies all claims using:
- Agreements
- Ledgers
- Bank statements
- Statutory filings
Step 4: Formation of CoC
Based on admitted claims, CoC is formed with only financial creditors.
Step 5: CoC Decisions
CoC votes on:
- Appointment of RP
- Resolution plan approval
- Extension of insolvency timeline
- Liquidation decision
Step 6: Adjudication by NCLT
NCLT approves/rejects plans or orders liquidation.
9. IBC Outcomes: What Can Happen to a Company?
There are only three outcomes after the insolvency process:
a. Successful Resolution
A bidder acquires the company and repays creditors as per the plan.
b. Liquidation
If no resolution is possible, company assets are sold.
c. Withdrawal of CIRP
Allowed under Section 12A if 90% of CoC votes permit.
10. Who Gets Paid First during Liaquidation?
During liquidation, IBC follows a strict priority system:
i. Insolvency resolution process costs
ii. Secured creditors who relinquish security + workmen dues
iii. Employees (other than workmen)
iv. Financial creditors (unsecured)
v. Government dues + remaining secured creditors
vi. Other creditors
vii. Shareholders/owners
This structure protects those who are most involved in the insolvency process.
11. Why the ₹1 Crore Threshold Matters?
The increased threshold:
- Reduces filing of frivolous cases
- Protects MSMEs from insolvency threats over small defaults
- Keeps NCLT workload manageable
- Ensures only serious defaults enter the insolvency system
However, it also creates challenges for small vendors with dues below ₹1 crore.
12. Benefits of IBC
√ Faster resolution
√ Increases credit discipline
√ Improves foreign investor confidence
√ Reduces NPA burden
√ Transparent, rule-based system
√ Encourages restructurings instead of liquidation
13. Challenges in IBC
♦ Delays due to overloaded NCLTs
♦ Limited rights of operational creditors
♦ Low recovery rates in some sectors
♦ Heavy dependence on Resolution Professionals
♦ Litigation causing time extensions
14. Conclusion
The Insolvency and Bankruptcy Code (IBC) is one of India’s most forward-looking economic reforms. It brought clarity, speed, and fairness to the insolvency process — something the earlier legal framework lacked. While challenges remain, IBC continues to evolve, balancing the rights of creditors and struggling companies.
Understanding IBC is essential for all stakeholders — especially as India grows into a more mature, credit-driven economy.
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Disclaimer: The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special, or incidental damage resulting from, arising out of, or in connection with the use of the information.
Author Bio
When CIRP is initiated, the CD is brought under the control of the IRP /RP by the adjudicating authority. Pre CIRP claims are filed before IRP /RP by various types of creditors. The IRP /RP has to settle the dues. On what basis those claims will be settled by IRP/ RP, is not covered in the write up.