Insolvency and Bankruptcy Code, 2016


The Insolvency and Bankruptcy Code, 2016, the new bankruptcy law of India aims to consolidate the existing laws by framing a single law for insolvency and bankruptcy of corporate persons, partnership firms and individuals. With enactment of the code, the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 are repealed. In addition, 11 laws are amended. These include DRT Act 1993, SARFAESI Act 2002, the SICA Repeal Act, 2003, the LLP Act, 2008 and the Companies Act, 2013. Multiple overlapping laws and adjudicating authorities currently operating in India that deal with financial defaults and insolvency of corporate enterprises, partnership firms and individuals give rises to a number of conflicting situations. The existing framework thus does not provide creditors, debtors and other stakeholders with certainty of outcome and the time frame with respect to the resolution process. In this background, the legislation of the code being a part of second generation economic reforms in India, has been designed with a view to solve the existing difficulties with timely settlement of insolvency resolution process. The current legal and institutional framework does not help in effective and timely recovery or restructuring of non-performing assets causing undue strain on the Indian credit system. Recognizing these difficulties, the Code, in its legal framework, aims to complete the entire resolution process in a time bound manner. The Code, if properly utilized, may improve the business environment alleviating distressed credit markets.


In the preamble of the Code, the objective has been made very clear. “An Act to consolidate and amend the laws relating to the organization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all these stakeholders including alteration in the order of the priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”


• The code has five parts. While Part I and Part V has no chapter, each of the other Parts contain seven chapters. Part III which deals with insolvency resolution and bankruptcy for individual and partnership firms, contains maximum number of sections (110) followed by Part II which deals with insolvency resolution and liquidation for corporate persons contains seventy four (74) sections. Part IV which deals with regulation of insolvency professionals, agencies and information utilities contains thirty six (36) sections. Part V which deals with miscellaneous contains thirty two (32). Part I which deals mainly with definitions contains three (3) sections.

• The code does not deal with legal framework for bankruptcy resolution for financial institutions and financial service providers.

• The code has brought in the concept of a few entities for the first time in the Indian insolvency and bankruptcy law. These entities are Insolvency Professional Agencies (IPAs), Insolvency Professionals (IPs), Interim Resolution Professionals (IRPs), Resolution Professionals (RPs), Resolution Applicant (RAs), Information Utility (IU), Committee of Creditors (CCs), Financial Creditor (FCs), Operational Creditor (OCs), Corporate Debtors (CDs).

• Creditors have been classified as financial, operational, secured, unsecured and decree holders.

• The Adjudicating Authority (AA) for corporate persons is NCLT, while the same for partnership firms and individual is DRT.

• The time limit to complete the insolvency resolution process is 180 days with extension of another 90 days – total 270 days.

• The AA would by order declare a moratorium for the entire insolvency resolution process period by virtue of which no coercive action can be taken by any one causing distress to the operation of corporate debtor as a going concern.

• First track corporate insolvency resolution process has been introduced for certain categories of corporate debtors.

• Any person connected with company’s resolution process aggrieved by the order of the AA may prefer an appeal to National Company Law Appellate Tribunal (NCLAT). Concerned person aggrieved by the order of NCLAT may prefer an appeal to the honorable Supreme Court.

• Same for individuals and partnership firm are the Debt Recovery Appellate Tribunal and then to honorable Supreme Court.


1. Financial Creditors (FCs), individually or jointly with the other FCs make application to AA with all required particulars.

2. AA receives application/ rectification of defects.

3. AA sends notice for rectification of defects within 7 days.

4. AA admits application within 14 days subject to compliance of all requirements as per Code and communicates to secured creditor and corporate debtor.

5. Insolvency Resolution process commences (ICD).

6. AA appoints an IRP within 14 days of ICD.

7. IRP takes charge of management of affairs of CD.

8. IRP Collects all necessary information/data/ claims and determines the financial position of CD.

9. IRP constitute a CC.

10. CC either accepts IRP as RP or appoints a new RP through AA.

11. A resolution plan is submitted by RA.

12. RP examines the plan and submits before CC for approval.

After this two situations can arise.

Situation 1:

1. CC approves the plan by a vote of not less than 75% of voting share of FC.

2. RP submits the approved plan to AA.

3. AA approves the plan which shall be binding on the CD and other stake holders including guarantors.


3. AA rejects the plan and orders for liquidation.

4. Liquidation process commences, RP undertakes all the steps for liquidating the company as per provisions of the code.

Situation 2:

1. CC rejects the plan by majority voting share.

2. AA orders for Liquidation.

3. Liquidation process commences, RP undertakes all the steps for liquidating the company as per provisions of the code.

In the case of operational creditor, the steps are almost same excepting documents to be submitted to AA are different. In case of corporate client, the steps are almost same as that of financial creditors.


In any economy, favorable industrial climate must provide favorable situation in doing business and for speedy exit route in the event of an industrial unit not performing well. In the early 1980s, when the government realized it, it started relaxing the control over the industries. The incompetent industries, which were getting protection from the government, came for serious discussion. Nationalization as a solution was agreed to be ineffective. At the same time, in the absence of proper bankruptcy laws and exit policy, restructuring through market driven forces was also found to be inoperative in the country. Due to pressure from various political quarters, the government ultimately opted for a middle path. The enactment of SICA, 1985 was the outcome of such a policy resolution at the level of the central government. BIFR which was constituted to operationalize the provisions of SICA did not, however, function as it was expected by the policy makers. SICA was abused heavily by the corporate debtors to the extent that it was utilized as a protective shield for not meeting commitments to the creditors. This was mainly due to provisions contained in the Section 22 of the SICA, 1985. In the mean time, other acts namely, DRT Act, 1993, SARFAESI Act, 2002 were enacted mainly not with a view to restructure and rehabilitate the sick companies but with the main objectives of recovering dues of secured creditors. Even then, there was no tangible outcome either with respect to revival or in the recovery of defaulted debts. Result was steep increase in the growth of NPAs. In such an economic environment, investors did not show much interest in investing in India. The government was also under pressure from international agencies, namely, IMF and World Bank to go for second generation economic reforms. The outcome was enactment of the Insolvency and Bankruptcy Code, 2016.


India’s rank in respect of resolving insolvency is 136 out of 189 countries. It takes about 4.3 years for resolving insolvency in India as against world average of 2.6 years. World Bank data shows that, there is a positive correlation between the recovery rate for creditors and strength of the legal framework for insolvency. In this perspective, the code promises to bring about far-reaching reforms with a focus on creditor-driven insolvency resolution process. Notwithstanding the code, which is a unified law, envisaging structured and time-bound process for insolvency resolution and liquidation, it is to be seen over a period of time whether the various provisions and steps incorporated in the Code will at all make any difference in tackling the growing problem of industrial sickness. When a specialized body of experts, i.e. BIFR has failed, it has to be seen how the NCLT with a combined and composite functions will be effective enough to address the gamut of problems concerning under-performing industrial activities of the country. Moreover, literature review on insolvency system prevailing in the various countries suggests that a well designed insolvency laws does not necessarily guarantee recovery of debts to the extent it is predicted. Again, there are economies that have well designed laws but face challenges in implementing them effectively. Yet, the enactment of the Code which provides for a linear, time bound and collective process for insolvency resolution and liquidation, is a correct step in the right direction.