Company Insolvency and Bankruptcy in India: A Comprehensive Guide to Legal Procedures
The process of declaring a company insolvent and bankrupt in India is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), which provides a comprehensive, time-bound framework for addressing financial distress in corporate entities. This legislation consolidated multiple existing laws and established clear procedures for resolution, fundamentally transforming India’s approach to corporate insolvency.
Below is a detailed outline and explanation of the procedure for declaring a company insolvent and bankrupt inIndia, as per the Insolvency and Bankruptcy Code, 2016 (IBC). The steps provided here are sequential, streamlined, and incorporate all pertinent requirements and stakeholders.
I. Understanding Insolvency and Bankruptcy
Insolvency is the financial state where a company’s liabilities exceed its assets or it cannot meet debt obligations as they fall due. It is assessed by:
· Cash-flow test: inability to pay debts when due.
· Balance-sheet test: assets worth less than liabilities.
Bankruptcy is a formal legal declaration by the National Company Law Tribunal (NCLT) that an entity is unable to pay its debts.
A. Threshold Requirements
Minimum Default Amount: INR1 crore (USD 115,700) to prevent minor-default petitions.
B. Applicable Entities
Applies to companies under the Companies Act, Limited Liability Partnerships (LLPs), and other corporate persons. Excludes financial service providers under separate frameworks.
C. Initiating the Corporate Insolvency Resolution Process (CIRP)
• Eligible Applicants
Under Sections 7, 9 and10 of the Insolvency and Bankruptcy Code, 2016, three of parties may initiate the Corporate Insolvency Resolution Process (CIRP):
1). Financial Creditors – Banks, financial institutions and bondholders may file a petition under Section 7.
2). Operational Creditors – Suppliers of goods or services, must first serve a demand notice(Form 3 or 4) on the corporate debtor and, if payment is not made within ten days, file a petition under Section 9.
3). Corporate Applicants – The corporate debtor itself may voluntarily commence CIRP by filing a petition under Section 10.
• Application Forms and Required Documentation
Form 1 (Section 7 applications) must include:
– Applicant’s particulars (name, address, PAN/ CIN and authorized signatory).
– Corporate debtor’s particulars (name, CIN, registered office, date of incorporation, share capital).
– Details of the debt and default (nature, amount, date of default).
– Records evidencing the default (loan agreements, statements of account).
– Annexures such as audited financial statements and banker’s book entries.
Form 5 (Section 9 applications) must include:
– Operational debt particulars (invoice or service contract details, amount due, date).
– Demand notice served on the debtor (Form 3 or 4) with proof of delivery.
– Evidence of supply of goods or services (delivery challans, acceptance certificates).
Form 6 (Section 10 applications) must include:
– Statement of affairs of the corporate debtor (assets, liabilities, contingent liabilities).
– Board resolution and power of attorney authorizing the filing.
– The corporate debtor’s last two years’ audited financial statements.
Each petition must be accompanied by proof of payment of the requisite fee and must be filed before the National Company Law Tribunal having jurisdiction over the corporate debtor’s registered office.
D. Timeline and Admission
a. Initial Review Period (14 Days)
Upon receipt of a petition, the National Law Tribunal (NCLT) conducts a preliminary examination within fourteen days to verify the existence of a default of at least INR 1crore (USD 115,700), the completeness and correctness of all supporting documentation, compliance with statutory requirements, and the absence of any disciplinary proceedings against the proposed Resolution Professional.
b. Admission Criteria
The NCLT admits the application only if:
1. The default in payment equals or exceeds INR 1 crore (USD 115,700).
2. All prescribed forms and annexures are accurately completed and annexed.
3. TheResolution Professional proposed meets eligibility and has no pending disciplinary actions.
c. Rejection Grounds
An application may be rejected if:
1. The default amount is below the INR 1 crore (USD 115,700) threshold.
2. Required documents are missing, incomplete, or flawed.
3. The nominated Resolution Professional is subject to disciplinary proceedings.
E. Moratorium and Insolvency Commencement
Once admitted, the NCLT declares the “insolvency commencement date,” which marks the start of the 180-day CIRP period. From that date, an automatic moratorium under Section 14 prohibits new or ongoing legal actions against the corporate debtor, any transferor disposal of its assets, enforcement of security interests by secured creditors, and termination of essential contracts.
F. Appointment of Resolution Professionals
On the insolvency commencement date, the NCLT appoints an Interim Resolution Professional (IRP) either the one proposed in the application if eligible, or one recommended by the Insolvency and Bankruptcy Board of India. The IRP immediately assumes control of the debtor’s assets and records, issues public announcements, constitutes the Committee of Creditors (CoC), prepares theInformation Memorandum, and invites and verifies claims. Within seven days of forming the CoC, members holding at least 66 percent of voting rights vote to confirm the IRP or appoint a new Resolution Professional.
G. Committee of Creditors (CoC) and Decision-Making
The CoC comprises all financial creditors, with voting power proportionate to each creditor’s share of the admitted debt. Meetings require at least 33 percent of voting rights for a quorum.
H. Resolution Plan Process
The IRP issues Form G to publicly invite Expressions of Interest, publishes provisional and final lists of eligible resolution applicants, and provides each with the Information Memorandum and evaluation matrix. Resolution applicants must satisfy Section 29A’s ineligibility criteria which bar wilful defaulters, entities with non-performing asset accounts, convicted persons, disqualified directors, and connected persons, and submit detailed plans addressing CIRP costs, operational creditor claims, post-resolution management, legal compliance, and formats prescribed by the IBBI.
I. Plan Approval and Sanction
A resolution plan requires the approval of at least 66 percent of CoC voting rights. Once the CoC approves, the plan is submitted to the NCLT, which reviews and sanctions it; upon sanction, the plan becomes binding on the corporate debtor, all creditors, employees, guarantors, and other stakeholders.
J. CIRP Timeline and Extensions
The standard CIRP must conclude within 180 days of the insolvency commencement date. The CoC may, by a66 percent majority, request a one-time extension of up to 90 days, subject to an overall outer time limit of 330 days (inclusive of litigation delays). Periods during which the process is stayed by appellate orders, delayed by force majeure, or held up due to adjudicating-authority constraints are excluded from this timeline.
K. Appeals and Reviews
Aggrieved parties may appeal NCLT orders to the National Company Law Appellate Tribunal (NCLAT) within 30 days of the impugned order. Further appeals lie to the Supreme Court of India, whose juris prudence has progressively clarified and refined the interpretation and application of the IBC.
II. When Does a Company Become Bankrupt Under Indian Law?
A company is considered bankrupt only after a formal declaration by the National Company Law Tribunal (NCLT). The procedure is as follows:
1. When a company cannot pay its debts or its liabilities exceed its assets, it is said to be insolvent.
2. An insolvency proceeding called the Corporate Insolvency Resolution Process (CIRP) starts when an eligible party files an application with the NCLT showing that the company has defaulted on a debt of at least ₹1 crore (about $115,700).
3. During CIRP (which lasts 180 days, extendable to a maximum of 330 days), the NCLT, theCommittee of Creditors (CoC), and a resolution professional try to find a way to revive or restructure the company by approving a resolution plan.
4. If no resolution plan is approved and sanctioned by the NCLT within this timeline, or if the company violates an approved plan, the CIRP fails.
5. Only after the CIRP fails, the NCLT passes a liquidation order, which is the formal legal declaration of the company’s bankruptcy. This means the company will be wound up, and its assets liquidated to repay creditors.
Being unable to pay debts makes a company insolvent, but it is legally declared bankrupt only after the NCLT issues a liquidation order post-failure of all resolution attempts through CIRP.
III. Conclusion
The Insolvency and Bankruptcy Code, 2016, provides a clear and time-bound process for resolving corporate insolvency in India. It outlines the initiation of CIRP, moratorium protections, appointment of resolution professionals, and the Committee of Creditors’ role in approving plans. Bankruptcy is declared only after failed resolution attempts, leading to liquidation by the NCLT. This framework promotes efficient insolvency resolution, business revival, and creditor confidence.
