The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consider the existing framework by creating a single law for insolvency and bankruptcy. Insolvency refers to the inability of the person or any corporate to pay up his outstanding debts to the investors, creditors or lenders is term as insolvent and this state is called Insolvency. Insolvency can be resolved in two ways:

  • By modifying the repayment plan to the creditors or investors.
  • By selling off the assets of the company and return back to the creditors or investors from the sale proceeds of the assets.


There are the following objectives whereas the respective tribunals to resolve the issue of insolvency through the insolvency resolution process as mentioned below:

-To relieve the debtors from the burden of debts.

-To ensure that the profits of resolution get redistributed among the operational and financial creditors.

-To provide a clean slate to the insolvent entities.

-To ensure that the distribution of profits among the creditors is done in an expedited manner.


Before we begin, first we look into the parties involved in the whole process.

-The operational or financial creditors refers to the insolvent entity owes the debt.

-The NCLT refers to the adjudicating authority of National Company Law Tribunal.

-The corporate debtor refers to the insolvent entity.

-The committee of creditors refers to members those are chosen from the creditors the corporate debtor is indebted to.


Corporate Insolvency- A Company is declared insolvent if the company is unable to pay its debts to the creditors. There are two following ways to estimate the corporate insolvency: -

-By cash flow test in which the company presently or in the future, be unable to pay its debts when they fall due to payment.

-Balance sheet test in which the value of the company’s assets less than the number of its liabilities, or taking into account future liabilities.

-Financial Creditors- Financial creditors refer to any bank or financial institution or any other lender or anyone providing loan or credit facility or any other financial assistance.

-Operational Creditors- Operational creditors refers to someone who has been extended payment of credit during business and includes any person to whom such payment has been legally assigned or transferred for goods and services. For examples, vendors and suppliers, employees, government, etc.          HOW THE CODE IS USEFUL FOR RECOVERY OF DEBTS?

Supplier of goods and services

According to this code, any person has supplied goods and services to any debtor and that debtor makes default as non-payment of the debt or non- payment of the installments due or any part of the debt, then the creditor shall entitle to initiate the action against the debtor by filing a petition in the NCLT.

The time period of the recovery

Demand notice will be issued to the debtor by the creditors whereas if the creditors do not receive any amount due within 10 days of the notice then the creditors can file an application in the NCLT for initiating the recovery process. The NCLT within the period of 14 days of receiving the application will either accept or reject the application. Therefore, according to the Insolvency and Bankruptcy Code, within 24 days from the date of issue of the demand notice, the petition filed by the creditors either will be accepted or rejected by the NCLT.


  • First, if there is an occurrence of payment default from the side of the corporate debtors.
  • After that, the creditors can send the demand notice to the debtor under section 8 of the IBC Act, 2016.
  • The debtor has 10 days to respond to the demand notice whereas if there is no response, then the creditors or debtors can file a petition to the NCLT under section 9 of IBC Act to initiate the insolvency resolution process.
  • If the NCLT accepts the application, it proceeds to appoint an insolvency professional.
  • A creditors committee then formed by the creditors.
  • Creditor’s committee confirms the appointment of Resolution professional.
  • Whereas the insolvency professional dives the information utility and creates an information memorandum.
  • After that, the creditors creates a proper resolution plan using the memorandum.
  • Finally, a vote is taken from the committee of creditors as to whether the corporate debtor has to reach or liquidated a resolution.
  • If a resolution is reached, then the company is sold in the market and the resultant profits are divided between the creditors.
  • If there is no resolution, the creditor’s committee votes for the corporate debtor to be liquidated, after that the corporate debtor’s assets are sold in order to repay the creditors.


The following documents are to be required at the time of making application form:

-The information representing its books of accounts and other documents for a period as may be specified by the Broad.

-The information representing the resolution professional which is proposed to be appointed as an interim resolution professional.

-The special resolution is given by the members of the corporate debtor or the resolution adopted by at least three -fourths of the total number of the partners of the corporate debtors, then approving the filling of the application.


eStartIndia Team

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