The Insolvency and Bankruptcy Code: A Strategic Guide for Creditors and Debtors

The IBC Framework: Understanding the Shifting Landscape

Before 2016, creditor recovery in India was a multi-decade exercise in frustration. SICA proceedings took years; BIFR often resulted in referrals that went nowhere; civil suits produced decrees that couldn't be executed against determined defaulters. The IBC changed the fundamental dynamic.

The Code creates a creditor-in-control model during insolvency. Once the Corporate Insolvency Resolution Process commences, existing management loses control. The resolution professional—selected by creditors—runs the company. The Committee of Creditors makes binding decisions on the company's future. Equity shareholders have minimal say.

The timeline is demanding by design. CIRP must complete within 330 days, including litigation time. If resolution fails, liquidation follows. This creates genuine pressure on all stakeholders: creditors must make decisions, resolution applicants must move quickly, and corporate debtors cannot indefinitely postpone reckoning.

The Supreme Court's IBC jurisprudence has evolved substantially. Swiss Ribbons validated the creditor-driven model. Essar Steel established that the CoC's commercial wisdom deserves deference on resolution plan terms. Committee of Creditors of Essar Steel clarified distribution priorities in ways that enhanced operational creditor recoveries. Each major judgment has refined practitioner understanding.

Understanding this evolved framework is essential whether you're filing against a defaulting debtor, defending against an IBC application, or evaluating a distressed asset opportunity. The rules have crystallised, but their application remains highly fact-specific.

Initiating CIRP: Strategic Considerations for Creditors

The decision to file an IBC application should be strategic, not reactive. Filing creates consequences that can't be easily undone, and the process you initiate shapes outcomes for all stakeholders.

Threshold requirements are straightforward: ₹1 crore minimum default for operational creditors, same for financial creditors. But eligibility doesn't mean wisdom. Consider whether CIRP will actually improve your recovery position. If the company has valuable assets, capable management, and temporary distress, resolution may yield better outcomes than the alternatives. If the company is fundamentally unviable, CIRP may merely accelerate the liquidation you could achieve through other means.

Financial creditors typically file under Section 7. The evidence requirements are clear: loan documents, disbursement proof, default documentation, and evidence that accounts have been classified as NPA. The Adjudicating Authority's role is limited to verifying default existence, not evaluating commercial reasonableness of filing.

Operational creditors under Section 9 face additional procedural requirements. The demand notice provisions create a window for the corporate debtor to dispute the debt or demonstrate payment capability. If the debtor raises a credible dispute, the application will be rejected. This makes pre-filing assessment of counter-arguments essential.

Consider the IRP nomination strategically. For financial creditors, you can nominate the interim resolution professional. This person shapes early process dynamics—information gathering, claims verification, CoC constitution. An experienced IRP who understands your industry can meaningfully influence outcomes. Don't treat IRP nomination as administrative detail.

The CIRP Process: Managing Complexity

Once CIRP commences, the company enters a different reality. The moratorium prevents enforcement actions. Existing management steps back. The resolution professional takes control. The Committee of Creditors becomes the decision-making body.

Claims submission and verification determine your seat at the table. File claims completely and accurately within the prescribed timeline. Support claims with documentary evidence. Incomplete claims risk rejection or reduction. If your claim is disputed, engage actively in the verification process—don't assume the RP will automatically credit your position.

CoC dynamics vary dramatically across cases. In some CIRPs, a single financial creditor dominates. In others, fragmented creditor groups must negotiate common positions. Understand the creditor landscape early. Identify potential allies. Anticipate opposition. The CoC's commercial decisions are largely insulated from judicial review—what matters is building voting majorities for your preferred outcomes.

Information asymmetry is a constant challenge. The corporate debtor and its erstwhile management know the business; creditors often don't. Use your CoC rights to demand comprehensive information. Commission due diligence if the RP's information memorandum is inadequate. The better you understand the business, the better you can evaluate resolution options.

Timeline management is critical. Extensions beyond 330 days require litigation and justification. But compressed timelines can produce suboptimal outcomes—inadequate marketing, insufficient bidder development, forced decisions. Balance urgency against thoroughness. Sometimes the right strategy is accepting modest delay to achieve significantly better outcomes.

Resolution Plans: Evaluation and Advocacy

The resolution plan determines creditor recovery and the company's future. Evaluating and influencing resolution plans is perhaps the most consequential CoC function.

Plan evaluation begins with eligibility. Section 29A disqualifies certain persons from submitting plans—wilful defaulters, promoters of NPAs, disqualified directors. Verify eligibility independently. We've seen plans proceed substantially before ineligibility surfaces, wasting time and creating complications.

Financial terms matter most to creditors. What is the upfront payment? What portion is deferred? What are the contingent payments tied to? Discount future and contingent payments to present value—a plan offering ₹100 crore over five years is worth materially less than ₹100 crore today. Compare plans on NPV-adjusted basis.

Implementation feasibility separates realistic plans from wishful thinking. Does the resolution applicant have the capital to fund the proposed payments? Does their business plan for the company make operational sense? What is their track record in similar turnarounds? A high-value plan that won't actually be implemented is worth less than a modest plan with high execution probability.

CoC negotiation with resolution applicants is not just permissible—it's expected. The process is interactive. Initial plans get revised based on CoC feedback. Creditors can request modified payment terms, additional conditions, security interests, or implementation commitments. Advocate for terms that improve your recovery position.

Approval requires 66% CoC voting share. If you're part of the approving majority, ensure the plan terms you negotiated are captured in the final resolution plan approved by the Adjudicating Authority. If you're in the dissenting minority, understand that your options are limited—judicial challenge of CoC commercial wisdom rarely succeeds.

Liquidation: When Resolution Fails

Liquidation is not failure—it's the mechanism that extracts residual value when resolution is impossible. Understanding liquidation dynamics helps creditors make realistic assessments throughout CIRP.

Liquidation commences when CIRP doesn't yield a viable resolution plan within the prescribed timeline, or when the CoC affirmatively resolves for liquidation, or when the resolution plan is contravened. The transition from CIRP to liquidation is typically swift.

The waterfall under Section 53 determines distribution priority. Insolvency resolution process costs come first. Then secured creditors and workmen dues (sharing pari passu up to the secured creditors' security value). Then employee wages. Then unsecured creditors. Then government dues. Then remaining claims.

Practical liquidation recoveries disappoint more often than not. Asset sales under time pressure rarely achieve optimal values. Claims exceed assets in most liquidations. Operational creditors and unsecured financial creditors frequently receive nothing. The liquidation waterfall is the creditors' reality check.

Going concern sales during liquidation can preserve more value than piecemeal asset sales. The liquidator can sell the business as a whole if a buyer will pay more than the sum of asset disposals. This avenue is worth exploring, particularly for businesses with intangible value—customer relationships, trained workforce, operational systems—that would be destroyed by dismemberment.

Creditors should monitor liquidation actively. The stakeholders' consultation committee provides oversight. Asset valuations, sale processes, and distribution proposals deserve scrutiny. The liquidator's decisions affect your recovery; passive acceptance is not in your interest.

Operational Creditors: Maximising a Weaker Position

Operational creditors—suppliers, vendors, service providers—have structural disadvantages in the IBC framework. No CoC membership. No voting rights on resolution plans. Distribution priority below financial creditors and workmen. The Code assumes operational creditors can price credit risk into transactions; financial creditors cannot.

Despite these limitations, strategic approaches can improve operational creditor outcomes.

File CIRP applications where appropriate. Operational creditors can initiate insolvency proceedings. While this doesn't change distribution priority, it provides leverage. The threat of CIRP commencement can motivate payment to avoid the consequences of insolvency.

Claim verification requires active engagement. Ensure your claims are properly documented and filed within timelines. Dispute reductions vigorously. The verified claim amount determines your distribution base.

Resolution plan terms can include operational creditor provisions. While the CoC negotiates, operational creditors can advocate—through formal submissions to the RP—for resolution plans that include payment of operational debt, continued business relationships, or other terms that improve their position.

Minimum payment provisions provide some floor. Section 30(2)(b) requires resolution plans to provide for payment of debts owed to operational creditors in a manner not less than the liquidation value they would receive. This ensures some recovery even when resolution plans heavily favour financial creditors.

Related-party operational creditors face additional challenges. They don't vote on resolution plans even if their claims are undisputed. Their claims may receive enhanced scrutiny. If your operational credit relationship has related-party dimensions, factor this into your strategy.

Corporate Debtors: Managing the Process

For companies facing insolvency proceedings, the IBC creates a controlled process that can, paradoxically, be an opportunity. Resolution preserves the company as a going concern. Liquidation provides orderly wind-down. Either is preferable to uncontrolled collapse.

Pre-filing preparation matters. If you anticipate IBC proceedings—whether initiated by creditors or as a strategic choice—prepare before the application. Organise financial records. Document asset positions. Prepare information that will be needed during CIRP. The better prepared you are, the smoother the process.

Contesting frivolous applications is appropriate. If claims are disputed on genuine grounds, if default hasn't actually occurred, or if the applicant is using IBC for coercive rather than recovery purposes, defend vigorously. The Adjudicating Authority can reject applications that don't meet statutory requirements.

Cooperation with the resolution professional is both legally required and strategically sensible. The company's management must provide information, access, and assistance. Obstruction can result in personal liability. Beyond legal obligation, cooperation positions management as potentially valuable to resolution applicants, which may preserve jobs and influence.

The pre-packaged insolvency process offers an alternative for eligible companies. If you can achieve consensus with creditors on a resolution plan before filing, the pre-pack process provides a streamlined CIRP. This requires significant pre-filing work but can produce faster, less disruptive resolution.

Directors' personal liability extends through the IBC process. Fraudulent trading, wrongful trading, or breach of duties during the twilight period before insolvency can create personal exposure. Conduct during this period deserves careful attention.

Cross-Border Insolvency: The Emerging Dimension

Indian businesses increasingly have international dimensions—foreign assets, overseas subsidiaries, multinational creditors. The IBC's cross-border provisions remain underdeveloped, but the issues are real.

Part III of the IBC, dealing with cross-border insolvency and adopting UNCITRAL model law principles, is yet to be notified. In its absence, cross-border recognition and cooperation rely on common law principles, letters of request, and case-specific court orders.

Foreign assets of Indian corporate debtors present recovery challenges. The moratorium applies to proceedings in India; its effect on foreign proceedings depends on foreign court recognition. Creditors holding security over foreign assets may attempt enforcement outside India, creating parallel recovery tracks.

Indian proceedings involving foreign creditors raise jurisdiction and enforcement questions. Can a foreign financial creditor file CIRP applications? (Generally, yes, if they meet filing requirements.) Will resolution plans be enforceable against foreign guarantors? (Depends on the guarantee terms and foreign jurisdiction.) Practitioners must navigate these uncertainties case by case.

Asset tracing becomes critical when debtors have international operations. Related-party transactions, offshore transfers, and value extraction that occurred before insolvency may be voidable. The resolution professional has avoidance powers, but exercising them against foreign parties requires international legal cooperation.

The direction is clear: India is moving toward UNCITRAL model law adoption. When Part III is notified, cross-border insolvency will have clearer framework. Until then, practitioners must work within limitations while monitoring legislative development.