“Insolvency And Bankruptcy Code (IBC) 2024 What Creditors And Debtors Should Know”

Abstract

The Insolvency and Bankruptcy Code, 2016 (IBC) stands as a landmark reform in India's economic history, fundamentally transforming the creditor-debtor relationship and the corporate resolution landscape. As we move into 2024, the Code, though not entirely new, has evolved significantly through a series of critical amendments, pivotal Supreme Court judgments, and operational maturity. This article provides a meticulous analysis of the IBC framework as it stands in 2024, tailored for its primary stakeholders: creditors and debtors. It delves into the core objectives of the Code, the intricate step-by-step processes of the Corporate Insolvency Resolution Process (CIRP) and Liquidation, and the distinct rights, duties, and strategic considerations for financial creditors, operational creditors, and corporate debtors. The article further examines the latest amendments, key judicial precedents that have shaped interpretation, and the tangible impact of the IBC on recovery rates, ease of doing business, and the culture of credit in India. By synthesizing legal provisions with practical implications, this guide aims to equip both creditors and debtors with the knowledge to navigate the complexities of the IBC, optimize outcomes, and understand the evolving paradigm of insolvency resolution in India.

1. Introduction: A Paradigm Shift in Indian Insolvency Law

Prior to the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India's framework for dealing with corporate distress was fragmented and inefficient. It was governed by a multitude of laws, including the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBI), and the Companies Act, 1956/2013. This multi-regulatory regime led to overlapping jurisdictions, long delays, and low recovery rates for creditors, often dubbed as "holding the debtor's feet to the fire but not too close." The process was heavily tilted in favor of incumbent management, allowing them to delay proceedings indefinitely, leading to erosion of asset value and perpetuation of non-performing assets (NPAs) in the financial system.

The IBC was conceived as a definitive solution to these deep-rooted problems. Its primary objective was to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The fundamental philosophy of the Code is to promote:

» Maximization of Value of Assets: To rescue a viable business as a going concern, thereby preserving jobs and economic value, rather than merely breaking it up for liquidation.

» Time-Bound Resolution: To ensure that the process of resolution is completed within a strict timeline, initially set at 180 days, extendable by 90 days (a total of 270 days), to prevent the value destruction associated with delay.

» Creditor-in-Control: To shift the control of the debtor company from the hands of the delinquent promoters (the "debtor-in-possession" model) to an independent Insolvency Professional (the "creditor-in-possession" model), ensuring a fair and transparent process.

» Balance of Interests: To balance the interests of all stakeholders, including financial creditors, operational creditors, employees, and the corporate debtor itself.

As we analyze the Code in 2024, it is not the 2016 statute in its nascent form. It is a dynamic, living law that has been refined by Parliament through amendments (2018, 2019, 2020, 2021) and, most importantly, by the judiciary through landmark interpretations. For creditors and debtors, understanding this evolved landscape is crucial for strategic decision-making.

2. The Architecture of the IBC: Key Pillars and Institutions

The IBC is not just a law; it is an ecosystem supported by dedicated institutions:

1. The Insolvency and Bankruptcy Board of India (IBBI):

» The apex regulatory body that governs and oversees the functioning of Insolvency Professionals (IPs), Insolvency Professional Agencies (IPAs), and Information Utilities (IUs). It frames regulations, ensures compliance, and promotes the development of the insolvency industry.

2. Adjudicating Authorities (AA):

» National Company Law Tribunal (NCLT): The AA for corporate insolvency and liquidation processes. It admits or rejects applications, approves resolution plans, and orders liquidation.

» National Company Law Appellate Tribunal (NCLAT): The appellate authority for orders passed by the NCLT. Its decisions can be challenged directly in the Supreme Court.

3. Insolvency Professionals (IPs): 

» Licensed professionals who play a central role. They act as Interim Resolution Professionals (IRP) and later as Resolution Professionals (RP) once the CIRP is admitted. They manage the affairs of the corporate debtor during the CIRP, constitute the Committee of Creditors (CoC), and run the process.

4. Committee of Creditors (CoC): 

» Constituted by the RP, the CoC comprises all financial creditors of the corporate debtor. It is the supreme decision-making body during the CIRP. It takes key decisions on the resolution plan by a voting share of no less than 66% (for some decisions) and 51% for others.

5. Information Utilities (IUs): 

» Conceived as entities to store financial information and verify debts electronically to expedite the process. Their use, however, has not become as widespread as initially envisioned.

3. The Corporate Insolvency Resolution Process (CIRP): A Step-by-Step Walkthrough

The CIRP is the heart of the IBC. It is the mechanism through which a distressed corporate debtor is rescued.

A. Initiation of CIRP (Section 6, 7, 9, 10)

Who can apply?

» Financial Creditor (FC) (Section 7): A entity to whom a financial debt is owed (e.g., banks, NBFCs). The default must be at least ₹1 crore (this threshold was increased from ₹1 lakh to avoid frivolous cases).

» Operational Creditor (OC) (Section 9): A entity to whom an operational debt is owed (e.g., suppliers of goods/services, employees). The default must be at least ₹1 crore.

» Corporate Debtor (CD) itself (Section 10): The company itself can apply to initiate CIRP against itself.

Process of Application:

» The creditor must provide evidence of default (e.g., a certificate from a financial institution, an invoice and a demand notice for OCs).

» The application is filed with the NCLT.

» The NCLT must admit or reject the application within 14 days of receipt.

Critical 2024 Update - Pre-packaged Insolvency Resolution Process (PPIRP) for MSMEs: Introduced in 2021, this is a hybrid mechanism specifically for Micro, Small, and Medium Enterprises (MSMEs). The defaulting MSME debtor, with the approval of its financial creditors, can submit a base resolution plan to the NCLT without undergoing a full-blown CIRP. This is faster, cheaper, and allows existing promoters to remain in control during the process, making it a valuable tool for distressed but viable MSMEs in 2024.

B. Moratorium (Section 14)

» Upon admission of the application, the NCLT declares a moratorium.

» What it means: It prohibits:

» Any suit or legal action against the CD.

» Transferring, encumbering, or alienating any of the CD's assets.

» Any action to recover any property by an owner or lessor where such property is occupied by the CD.

Purpose: To provide a "calm period" for the RP to take control of the CD's assets and manage them as a going concern without the threat of fragmentation by multiple legal actions. This shield is crucial for preserving the value of the estate.

C. Public Announcement and Claims Submission

» The IRP makes a public announcement inviting claims from all creditors.

» Financial creditors, operational creditors, and other stakeholders must submit their claims with proof within the stipulated time (usually 14 days).

D. Constitution of Committee of Creditors (CoC)

» The IRP verifies the claims and constitutes the CoC, which consists only of financial creditors.

» Voting Share: The voting share of each financial creditor is in proportion to the debt owed to them. Operational creditors are not part of the CoC but must be paid at least the amount they would have received in liquidation, as per the resolution plan.

E. Appointment of Resolution Professional (RP) and Management of CD

» The CoC can confirm the IRP as the RP or appoint a new one.

» The RP takes over the management of the CD, displaces the board of directors, and is responsible for protecting and preserving the assets of the CD. The RP acts as the custodian of the CD.

F. Information Memorandum and Invitation of Resolution Plans

» The RP prepares an Information Memorandum (IM) with detailed information about the CD's business, assets, liabilities, and other relevant data.

» The RP, with the approval of the CoC, invites resolution plans from prospective resolution applicants.

G. Evaluation and Approval of Resolution Plan

» Prospective resolution applicants submit their plans.

» The RP examines the plans to ensure they meet all requirements of the Code (e.g., provision for payment to OCs, compliance with law).

» The CoC evaluates the plans and approves one by a vote of no less than 66% of the voting share.

» The approved plan is then submitted to the NCLT for final approval.

H. Approval by Adjudicating Authority and Implementation

» The NCLT must ensure the plan is approved by the CoC and meets the legal requirements. It does not act as a commercial court to judge the business decision of the CoC.

» Once approved, the plan is binding on all stakeholders, including the CD, its employees, members, creditors, and the successful resolution applicant.

» The RP implements the plan.

I. Timeline

» The entire CIRP must be completed within 330 days, inclusive of any extension and time taken for litigation. This strict timeline, a result of the 2019 amendment, is a critical feature in 2024 to ensure efficiency.

4. Liquidation Process (Section 33)

If the CIRP fails:

» A resolution plan is not received or approved by the CoC within the timeline.

» The CoC resolves to liquidate the CD by a vote of 66%.

The NCLT passes a liquidation order. The RP becomes the Liquidator, whose duty is to take possession and sell the assets of the CD in a manner that maximizes their value (e.g., as a going concern or piecemeal). The proceeds are distributed according to the waterfall mechanism under Section 53 of the IBC:

1. Insolvency resolution process costs and liquidation costs.

2. Secured creditors (who have relinquished their security interest) and workmen's dues for the preceding 24 months.

3. Wages and any unpaid dues to employees (other than workmen) for the preceding 12 months.

4. Financial debts owed to unsecured creditors.

5. Government dues and debts owed to secured creditors who have not relinquished security (to the extent of the shortfall).

6. Any remaining debts and dues.

7. Preference shareholders.

8. Equity shareholders or partners.

5. Rights, Duties, and Strategies for Creditors

A. Financial Creditors (FCs)

Rights:

» Initiate CIRP.

» Form and be part of the all-powerful CoC.

» Vote on every critical decision (e.g., appointment of RP, approval of resolution plan) based on their voting share.

» Approve or reject resolution plans with a 66% majority.

» Decide the fate of the CD – resolution or liquidation.

» Receive regular progress reports from the RP.

Duties/Strategies for 2024:

» Thorough Due Diligence: Before initiating CIRP, assess the viability of the CD. Is there a business to rescue, or is liquidation the only outcome? Initiating CIRP for a fundamentally unviable company may lead to value destruction.

» CoC Collaboration: FCs must collaborate within the CoC. Infighting can delay the process and harm the outcome. Decisions should be commercial and aimed at value maximization.

» Vigilant Oversight: Actively monitor the RP's actions. The CoC can require the RP to seek its approval before undertaking any significant financial transactions.

» Evaluate Plans Commercially: The Supreme Court (K. Sashidhar vs. Indian Overseas Bank & Ors.) has held that the commercial wisdom of the CoC is paramount. The NCLT cannot interfere with the commercial decision of the CoC to approve or reject a plan. FCs must, therefore, make informed, strategic decisions.

» Consider Haircuts: FCs must be realistic. The goal is to maximize recovery, not necessarily to recover 100% of the debt. A timely resolution with a reasonable haircut is often better than a delayed resolution or a liquidation scenario with a steeper haircut.

B. Operational Creditors (OCs)

Rights:

» Initiate CIRP upon evidence of default.

» Submit claims and be heard by the NCLT at the stage of admission of the application.

» Receive a minimum entitlement in a resolution plan: the amount that would be payable to them in a liquidation scenario under Section 53 (the "liquidation value").

» Challenge the resolution plan if it unfairly prejudices their interests.

Duties/Strategies for 2024:

» Act Promptly: The demand notice and application process for OCs is strict. Any error can lead to rejection. Legal assistance is highly recommended.

» Understand the Limited Role: OCs are not part of the CoC. Their primary right is to get the process started and ensure they receive their minimum legal entitlement.

» Monitor the Process: Even though not on the CoC, OCs should track the process and raise objections if they believe the resolution plan is discriminatory or violates the waterfall mechanism of Section 53.

» Negotiate Outside CIRP: Often, the threat of initiating CIRP can be a powerful tool for OCs to negotiate a settlement with the debtor outside of court, saving time and cost.

6. Rights, Duties, and Strategies for Corporate Debtors (Promoters/Management)

The IBC, while creditor-driven, provides certain protections and avenues for debtors.

Rights:

» Right to be Heard: The CD can contest the application for initiation of CIRP on the grounds that a default has not occurred or the application is incomplete.

» Right to Apply for Self-Initiation (Section 10): This allows promoters to proactively seek protection from creditors via the moratorium to restructure the company.

» Right to Participate in Resolution: The promoters, unless ineligible under Section 29A, can submit a resolution plan. However, ineligibility is a major hurdle (see below).

» Right to a Copy of the Resolution Plan: The CD can access the plan approved by the CoC.

Duties/Strategies for 2024:

» The Shadow of Section 29A: This is the most critical provision for promoters. It bars certain persons from submitting a resolution plan, including:

✓ Wilful defaulters.

✓ Promoters of companies whose accounts have been classified as NPA for over one year.

✓ Undischarged insolvents.

✓ Persons convicted of an offence punishable with imprisonment of two years or more.

✓ Persons who have been promoters of a company that has undergone a CIRP and has not repaid its debts.

✓ This effectively prevents most erstwhile promoters from regaining control of the company unless they clear all dues first. Strategy: Promoters must maintain impeccable corporate governance to avoid falling into the traps of Section 29A.

» Proactive Restructuring: At the first signs of stress, promoters should engage with creditors for a restructuring outside the IBC (e.g., through the RBI's Prudential Framework) or consider pre-packs (for MSMEs).

» Cooperation with RP: Once CIRP is initiated, the existing management is legally obligated to extend all assistance and provide all documents to the RP. Non-cooperation can lead to penalties.

» Settlement: Even after CIRP initiation, the CD can be withdrawn if the applicant creditor and the CoC (with 90% voting share) approve a settlement. This is a potential exit route.

7. Critical Judicial Interpretations Shaping the IBC in 2024

The Supreme Court has been the ultimate architect of the IBC's practical shape.

» Innoventive Industries Ltd. vs. ICICI Bank (2017): Established the primacy of the IBC and the limited scope of NCLT's inquiry at the admission stage—only to check the existence of a default.

» Swiss Ribbons Pvt. Ltd. vs. Union of India (2019): Upheld the constitutional validity of the IBC. Crucially, it affirmed the differential treatment of financial and operational creditors as rational, given the nature of their debts.

» Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. (2019): Held that the CoC's commercial wisdom is supreme and that the NCLT cannot modify the commercial terms of a resolution plan. It also mandated that operational creditors must receive a minimum of the liquidation value or the amount they would get if the resolution plan were applied, whichever is higher, ensuring fairer treatment for OCs.

» Vijaykumar V. Iyer vs. Union of India (2021): Emphasized the importance of the RP's role and the need for a transparent and fair process in the valuation of the CD's assets.

» Manish Kumar vs. Union of India (2021): Upheld the constitutional validity of the 2019 amendment that introduced the 66% voting threshold for the CoC and the strict timeline of 330 days.

8. Impact and the Road Ahead

The IBC has had a transformative impact:

» Improved Recovery Rates: Data from the IBBI shows that financial creditors have realized significantly higher amounts through the IBC compared to previous mechanisms like Debt Recovery Tribunals (DRTs).

» Behavioral Change: The fear of losing control of the company has compelled promoters to settle defaults before the initiation of CIRP. Over 23,000 applications for CIRP have been withdrawn before admission on account of settlement, highlighting the IBC's role as a deterrent.

» Ease of Doing Business: India's rank in the World Bank's "Resolving Insolvency" parameter jumped dramatically, contributing to an overall improvement in the business climate.

Challenges and the Future:

» Delays: Despite the 330-day timeline, cases often get delayed due to litigation at the NCLT and NCLAT levels. Strengthening the bench strength of NCLT is crucial.

» Haircuts: While recovery is better, the haircuts (the difference between the claim admitted and the amount realized) remain significant in many cases, indicating the need for better valuation and market depth.

» Liquidation vs. Resolution: A large number of cases still end in liquidation. The ecosystem needs to develop deeper markets for stressed assets to facilitate more resolutions.

» Operational Creditor Concerns: The balance of power remains heavily tilted towards financial creditors. Ensuring operational creditors get a fair deal in the process is an ongoing area of focus.

9. Conclusion

The Insolvency and Bankruptcy Code, as it stands in 2024, is a robust, tested, and evolving framework. It has successfully altered the dynamics of credit and default in India, moving from a debtor-friendly to a creditor-friendly regime, albeit with necessary safeguards. For financial creditors, it provides a powerful tool to take control of distressed assets and drive value-maximizing outcomes. For operational creditors, it offers a trigger mechanism to initiate action and a legal guarantee of minimum payment. For corporate debtors, it serves as a stern deterrent against profligacy and a mechanism for a fresh start, albeit with strings attached.

The journey of the IBC is a testament to legislative intent and judicial craftsmanship. As the Code continues to mature, its success will depend on the efficient functioning of the NCLT, the ethical practices of IPs, the commercial wisdom of creditors, and the cooperation of debtors. For any stakeholder in the Indian economy, a deep understanding of the IBC is no longer optional; it is an essential component of financial and strategic literacy.

Here are some questions and answers on the topic:

1. What is the most significant power shift introduced by the IBC for creditors, and how does it function?

The most significant power shift introduced by the IBC is the transfer of control from the debtor's existing management to the Committee of Creditors (CoC). Under the previous regimes, promoters and directors could delay proceedings indefinitely. The IBC's "creditor-in-control" model mandates that upon the admission of a case, the management is suspended, and an Insolvency Professional takes over the company's operations. The financial creditors then form the CoC, which becomes the supreme decision-making body. This committee, based on its voting share, makes all critical commercial decisions, including evaluating and approving resolution plans, deciding the company's fate, and overseeing the entire process. This ensures that the interests of those with the largest financial stake are paramount in deciding the future of the distressed company.

2. Why is the moratorium period critical during the Corporate Insolvency Resolution Process (CIRP), and what does it protect?

The moratorium period is critical because it creates a shield around the corporate debtor, providing a calm and stable environment for the resolution process to proceed. It is automatically declared by the NCLT upon admitting an application and prohibits any legal actions against the company. This includes the initiation or continuation of lawsuits, the enforcement of security interests, the recovery of property by lessors, and any transfer of the company's assets. This protection is vital as it prevents a chaotic scramble by individual creditors to recover their dues, which would fragment the company's assets and destroy its going concern value. It allows the Resolution Professional to take full control, manage operations, and preserve the company's value as a single entity to maximize returns for all stakeholders.

3. How does Section 29A impact the prospects of a company's existing promoters regaining control?

Section 29A acts as a strict barrier, preventing most existing promoters from regaining control of the company through the submission of a resolution plan. It lists a series of ineligibility criteria designed to exclude certain categories of persons. This includes wilful defaulters, promoters of companies with non-performing assets for over a year, undischarged insolvents, and those convicted of specific offences. Most significantly, it bars persons who are connected to a company that has defaulted and failed to repay its debts. The intent of this provision is to ensure that those who are responsible for the company's distress cannot buy it back at a discounted value through the insolvency process. Therefore, unless the promoters are completely clean and have settled all outstanding dues to creditors, their path to regaining control is effectively blocked by Section 29A.

4. What are the key strategic differences a financial creditor and an operational creditor must consider when approaching the IBC?

A financial creditor, typically a bank or financial institution, must approach the IBC with a strategy focused on value maximization through the Committee of Creditors. Their primary role is active participation: they must collaborate with other financial creditors, vigilantly oversee the Resolution Professional, and use their commercial wisdom to evaluate and vote on resolution plans. Their goal is to choose the plan that offers the best financial recovery, even if it involves accepting a haircut. In contrast, an operational creditor, such as a supplier, has a more limited strategic role. Their main power is the right to initiate the process to recover their dues. However, they are not part of the CoC and do not vote on plans. Their strategy should focus on using the threat of initiation to negotiate a settlement outside of court or, if the process begins, to ensure they receive at least the amount guaranteed to them by law—the liquidation value.

5. Despite the 330-day timeline, why do cases still get delayed, and what is the Pre-Pack mechanism designed to address?

Cases often get delayed beyond the 330-day timeline primarily due to extensive litigation at various stages. Parties frequently challenge the admission of a case, the eligibility of resolution applicants, the approval of resolution plans, and other procedural matters before the NCLT and the NCLAT. This judicial process, while necessary for fairness, adds significant time. To address the specific challenges of delay and cost for smaller enterprises, the Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced for MSMEs. This mechanism allows a distressed MSME debtor, with the approval of its financial creditors, to negotiate a resolution plan with a buyer privately before formally approaching the NCLT. This pre-negotiated plan is then presented to the tribunal for a swift approval. The Pre-Pack is designed to be faster, cheaper, and less disruptive than a full CIRP, as it allows the existing management to remain in control during the process, preserving the business's value.

Disclaimer: The content shared in this blog is intended solely for general informational and educational purposes. It provides only a basic understanding of the subject and should not be considered as professional legal advice. For specific guidance or in-depth legal assistance, readers are strongly advised to consult a qualified legal professional.