What is the Insolvency and Bankruptcy Code, 2016, and What Matters Does It Govern?

Introduction

India’s financial system, until recently, grappled with a major problem: ineffective and delayed mechanisms for resolving bad debts and insolvency. Insolvency and debt crises have long posed significant challenges to India’s economic stability. For years, lenders, whether financial institutions or operational creditors, struggled to recover dues from defaulting businesses through a maze of outdated and fragmented laws.

The need for a unified, time-bound mechanism to resolve insolvency and streamline debt recovery in India led to the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC). 

Touted as one of the most transformative reforms in India’s financial and legal landscape, the IBC consolidates various laws related to insolvency and bankruptcy into a single comprehensive framework. It empowers both creditors and debtors by offering structured procedures to resolve financial distress, revive failing businesses, or, where necessary, liquidate assets in an orderly manner. 

This blog breaks down the IBC, 2016, in a simplified and structured manner. We’ll explore what the law is all about, the rationale behind its enactment, and most importantly, who it applies to: be it companies, partnerships, individuals, or financial institutions.

If you’re looking to understand how debt recovery in India has evolved through the IBC, this is your go-to guide. 

Background and Need for the IBC, 2016 

Before the enactment of the Insolvency and Bankruptcy Code in 2016, India’s insolvency framework was plagued by fragmentation, inconsistency, and inefficiency. Multiple legislations governed different aspects of insolvency and debt recovery, including: 

• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), which focused on reviving financially sick companies. 

• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), which allowed banks and financial institutions to recover debts through Debt Recovery Tribunals (DRTs). 

• The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), enables creditors to enforce security interests without court intervention. 

• Provisions under the Companies Act, 1956/2013, which allowed for winding up proceedings. 

  
  

Despite the availability of these laws, debt recovery in India remained sluggish and unpredictable. Each law had a distinct process, separate authorities, and lacked coordination, resulting in prolonged litigation, overlapping jurisdictions, and low recovery rates. Creditors had limited leverage, and debtors often took advantage of legal loopholes to delay repayments.

On average, insolvency cases dragged on for several years, leaving creditors with a fraction of their claims and businesses with no realistic path to revival. 

The economic cost of these inefficiencies was massive. High levels of non-performing assets (NPAs) strained the banking sector, particularly public sector banks, and reduced the flow of credit to viable businesses. Investors were discouraged by the lack of effective remedies, and overall confidence in India’s financial ecosystem suffered. 

To address this crisis, the government enacted the Insolvency and Bankruptcy Code, 2016, with the following key objectives: 

• To consolidate and amend existing laws related to insolvency and bankruptcy; 

• To create a single law for insolvency resolution of corporates, LLPs, partnerships, and individuals; 

• To establish a time-bound process for resolution and liquidation; 

• To maximize the value of assets; 

• To balance the interests of all stakeholders, including creditors, employees, and debtors. 

• To promote entrepreneurship and improve the ease of doing business in India. 

  
  

By centralizing the insolvency process under one unified legal framework and introducing specialized adjudicating authorities like the NCLT and NCLAT, the IBC brought a long-awaited shift in India’s debt resolution landscape.

It aimed not just at liquidation, but also at rescuing and reviving viable businesses, a cornerstone of modern insolvency law. 

What Is the Insolvency and Bankruptcy Code, 2016? 

The Insolvency and Bankruptcy Code, 2016 (IBC), is India’s principal legislation for resolving insolvency and bankruptcy matters in a structured, time-bound, and efficient manner. Enacted by Parliament and brought into force on 28th May 2016, the IBC consolidates various laws relating to the insolvency of companies, limited liability partnerships (LLPs), partnerships, and individuals into a unified legal framework. 

The Code is built on the philosophy of rescue over liquidation, aiming to revive financially distressed entities wherever possible. It empowers both creditors and debtors to initiate insolvency proceedings and ensures that resolutions occur swiftly, typically within 180 to 270 days, to preserve the value of the distressed assets. 

Key Definitions under the IBC 

Understanding the Code begins with a few fundamental definitions: 

• Insolvency: The financial condition where a person or entity is unable to pay its debts as they become due. 

• Bankruptcy: A legal status declared by a competent court wherein an individual is unable to repay outstanding debts, leading to the distribution of assets among creditors. 

• Financial Creditor: Any person or institution to whom a financial debt is owed. This includes banks, non-banking financial companies (NBFCs), bondholders, and other lenders. Financial debt usually involves interest-bearing loans or credit. 

• Operational Creditor: A person or entity to whom an operational debt is owed, such as unpaid dues for goods or services, including employee wages, suppliers, and vendors. 

  
  

These definitions are critical because the IBC prescribes different procedural rights and thresholds for financial creditors and operational creditors, especially during the Corporate Insolvency Resolution Process (CIRP). 

Key Institutions under the IBC Framework 

To ensure the effective implementation of the Code, the IBC establishes a specialized ecosystem of adjudicatory and regulatory bodies: 

• National Company Law Tribunal (NCLT): The primary adjudicating authority for insolvency matters involving companies and LLPs. All corporate insolvency proceedings are initiated before the NCLT. 

• National Company Law Appellate Tribunal (NCLAT): Hears appeals from decisions of the NCLT. 

• Insolvency and Bankruptcy Board of India (IBBI): The regulatory body that oversees insolvency proceedings. It sets standards, issues regulations, and governs the functioning of insolvency professionals and information utilities. 

• Insolvency Professionals (IPs): Licensed professionals appointed by the NCLT to manage the debtor’s assets and operations during the resolution process. They play a central role in ensuring transparency, neutrality, and compliance with timelines. 

• Information Utilities (IUs): Entities that collect, collate, and verify financial information from parties to support efficient and accurate decision-making during insolvency proceedings. 

  
  

Together, these bodies work to make the IBC a comprehensive and coordinated mechanism for resolving insolvency. By creating a structured process and enforcing strict timelines, the Code has dramatically improved the efficiency of debt recovery in India, making it more credible, accessible, and predictable. 

Who Can Initiate Insolvency Proceedings? 

One of the key strengths of the  2016 Code is its inclusive design: it empowers not just creditors, but also debtors themselves, to initiate insolvency proceedings. This flexibility ensures that any party involved in a default can trigger the process and work towards either restructuring or resolution of debt. Let’s look at the key categories of persons who can invoke the IBC mechanism. 

 1. Financial Creditors 

A financial creditor is a person or institution to whom a financial debt is owed. This typically includes banks, NBFCs, bondholders, and institutional investors. Under Section 7 of the IBC, a financial creditor can file an application for initiating the Corporate Insolvency Resolution Process (CIRP) against a defaulting corporate debtor before the National Company Law Tribunal (NCLT). 

• Financial creditors can act individually or jointly with other creditors. 

• They are not required to serve a prior demand notice to the debtor. 

• Once admitted, they form the Committee of Creditors (CoC), which plays a decisive role in approving or rejecting resolution plans. 

  
  

This provision has significantly strengthened the hands of lenders and institutional investors in debt recovery in India by providing a formal and time-bound forum for recourse. 

 2. Operational Creditors 

An operational creditor is a person to whom a corporate debtor owes dues arising from the provision of goods or services, including employee salaries and dues to vendors or contractors. Under Section 9 of the IBC, an operational creditor can initiate CIRP if: 

• A default has occurred, and 

• The creditor has served a demand notice, and the debtor has either not responded within 10 days or failed to repay the dues. 

  
  

While operational creditors do not have voting rights in the Committee of Creditors (unless their claims are above a certain threshold), the IBC gives them a clear legal pathway for initiating insolvency proceedings—something that was not available under earlier laws. 

 

 3. Corporate Debtors (Self-Initiated) 

Interestingly, the IBC also allows companies themselves to initiate insolvency proceedings if they are unable to pay their debts. Under Section 10, a corporate debtor can file for CIRP voluntarily when it foresees financial distress or insolvency. 

• This provision encourages early intervention before a business reaches an irretrievable financial state. 

• It helps preserve the value of assets and enables potential revival or restructuring. 

  
  

This debtor-in-possession model shifts to a creditor-in-control model upon admission, wherein the appointed Insolvency Professional takes over the management. 

Threshold Limits for Initiating Insolvency 

To avoid frivolous claims and ensure that only genuine defaults come under scrutiny, the IBC sets a minimum default threshold: 

• As of the latest amendment in 2020, the threshold for initiating insolvency against a corporate debtor has been increased from ₹1 lakh to ₹1 crore. 

• For homebuyers and allottees in a real estate project, at least 100 allottees or 10% of the total allottees (whichever is lower) must file jointly. 

• For MSME debtors, there’s a provision for pre-packaged insolvency, which can be initiated with lesser complexity. 

 

Which Entities Does the IBC Apply To? 

The IBC, 2016, was designed with a wide-ranging scope to ensure that debt resolution is not limited to a particular class of borrowers. It covers various types of entities, allowing creditors to initiate insolvency proceedings against a broad spectrum of debtors. This inclusivity strengthens the framework for debt recovery in India, making it more uniform and accessible. 

Primarily, the IBC applies to companies incorporated under the Companies Act. Whether private or public, these companies fall under the definition of “corporate persons” and can be subjected to the Corporate Insolvency Resolution Process (CIRP) when they default on financial or operational dues.

Proceedings against companies are initiated before the National Company Law Tribunal (NCLT), where a resolution professional is appointed to manage the company’s affairs during the process.

The aim is not merely liquidation but also the possibility of revival through an approved resolution plan.

Several high-profile insolvency cases like Essar Steel, DHFL, and Jet Airways have demonstrated the Code’s effectiveness in resolving corporate defaults. 

The IBC also extends to Limited Liability Partnerships (LLPs), which, like companies, are treated as corporate entities under the Code. Insolvency proceedings against LLPs follow the same process and procedural rules as those for companies, and are likewise adjudicated by the NCLT.

This ensures consistency in how different types of incorporated business entities are treated under the insolvency regime. 

Apart from companies and LLPs, the Code also includes provisions for partnership firms and sole proprietorships, though these have not yet been fully notified. These entities fall under Part III of the IBC, which deals with insolvency and bankruptcy for individuals and partnership firms. Once operational, such cases will be handled by Debt Recovery Tribunals (DRTs), unlike corporate insolvency cases that go before the NCLT. Although these provisions remain inoperative for now, their inclusion reflects the legislature’s intent to provide a complete and comprehensive framework for insolvency resolution across all business forms. 

One of the most significant operational extensions of the IBC has been toward personal guarantors of corporate debtors.

Personal guarantors are often promoters or directors who provide guarantees for corporate loans.

In 2020, the Central Government notified provisions under Part III of the Code to bring personal guarantors within its ambit.  

While individual insolvency cases are typically adjudicated by the DRT, those involving personal guarantors to corporate debtors are heard by the NCLT to ensure cohesion with the underlying corporate insolvency. 

Key Processes Under the IBC 

The IBC, 2016 (IBC) outlines several core processes to resolve financial distress, the most significant being the Corporate Insolvency Resolution Process (CIRP). When a company defaults on debt of ₹1 crore or more, CIRP can be initiated by a financial or operational creditor, or by the debtor itself. Once admitted by the National Company Law Tribunal (NCLT), a moratorium is imposed on legal proceedings, and an Insolvency Professional (IP) takes control of the company.

The Committee of Creditors (CoC), composed of financial creditors, evaluates resolution plans and must approve one by at least a 66% majority within 180–330 days. 

If no plan is approved, the company proceeds to liquidation, where its assets are sold and distributed as per the Code’s priority list. For simpler cases, the IBC provides a Fast Track Insolvency route, meant to conclude in 90–135 days.

Additionally, for MSMEs, a Pre-packaged Insolvency Resolution Process (PPIRP) allows a debtor to pre-arrange a resolution plan with creditors and seek quick approval from the NCLT.

These structured and time-bound processes have made debt recovery in India more efficient, predictable, and creditor-friendly. 

 

Conclusion 

We hope this blog has helped you understand the fundamentals of the Insolvency and Bankruptcy Code, 2016, and its transformative impact on debt resolution in India. From identifying who can initiate insolvency proceedings to explaining which entities the Code applies to, the IBC offers a time-bound, structured, and creditor-friendly mechanism that was long overdue in India’s financial ecosystem. Whether you’re a business owner, creditor, or legal enthusiast, understanding how the IBC functions is essential in today’s economy, especially when it comes to navigating complex financial distress and ensuring timely debt recovery in India. 

Taking early action, whether through formal insolvency proceedings, negotiated settlements, or pre-packaged resolutions, can often mean the difference between business revival and irreversible loss.

At LegalPay, we support stakeholders at every step of the way with data-driven insights, strategic litigation financing, and expert guidance to help you recover dues efficiently and legally. Because in today’s fast-moving financial world, being proactive about debt recovery isn’t just smart, it’s essential. 

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Frequently Asked Questions (FAQs): 

1. What is the Insolvency and Bankruptcy Code (IBC), 2016? 

The IBC, 2016 is a comprehensive legislation enacted to consolidate and simplify India’s insolvency laws. It provides a time-bound process for resolving the insolvency of companies, LLPs, partnerships, and individuals, while balancing the interests of creditors and debtors. 

2. Who can initiate insolvency proceedings under the IBC? 

Insolvency proceedings can be initiated by financial creditors (like banks and NBFCs), operational creditors (such as vendors or employees), and even the debtor company itself. Each category follows a specific process defined under the Code. 

3. Does the IBC apply to individuals and sole proprietors? 

Yes, the IBC applies to individuals, sole proprietorships, and partnership firms under Part III of the Code. However, currently, only the provisions related to personal guarantors to corporate debtors are operational. The rest are expected to be notified in the future. 

4. How does the IBC improve debt recovery in India? 

The IBC has made debt recovery in India faster, more structured, and creditor-friendly. It sets strict timelines for resolution, introduces a moratorium to prevent asset stripping, and empowers creditors to take control of the resolution process through the Committee of Creditors (CoC).