Chapter 1
1. Concept of Insolvency and Bankruptcy
Insolvency is a financial condition where an individual or entity is unable to meet debt obligations as they
become due. It refers to the insufficiency of cash flow or assets to cover liabilities. Bankruptcy, on the other
hand, is a legal declaration of this inability, applicable to individuals and non-corporate entities. For corporates,
unresolved insolvency leads to liquidation.
Liquidation is the process of selling assets to repay creditors, and it applies only to corporate entities.
Bankruptcy applies to individuals and involves a legal process initiated by either debtor or creditor, where the
debtor’s assets are assessed to pay off liabilities.
There are two types of failure that lead to insolvency:
Financial Failure: When a business has ongoing revenue but still faces cash flow mismatches.
Business Failure: When the business model itself is not generating adequate revenue to cover expenses.
2. Development Journey of the Code
In August 2014, the Ministry of Finance formed the Bankruptcy Law Reforms Committee (BLRC) under Dr.
T.K. Viswanathan to create a new legal framework.
The BLRC submitted its report and draft bill in November 2015.
A Joint Parliamentary Committee (JPC) was constituted, which submitted its report in April 2016.
The Code was passed in May 2016 and came into effect from 28th May 2016.
The BLRC laid down key objectives:
Quick resolution of insolvency
Minimization of loss to creditors
Promotion of diversified and deeper credit markets
3. Introduction to the Insolvency and Bankruptcy Code, 2016 (IBC)
The IBC is a comprehensive law that replaced fragmented and scattered insolvency laws such as:
The Presidency Towns Insolvency Act, 1909
The Provincial Insolvency Act, 1920
Companies Act provisions (Rescue & Winding-up)
SICA (1985), RDDBFI Act (1993), SARFAESI Act (2002)
RBI's SDR and S4A schemes
IBC applies to:
Companies (under Companies Act, 2013 or earlier)
LLPs (under LLP Act, 2008)
Partnership and Proprietorship Firms
Individuals
Other bodies notified by the government
4. Objective of the Code
As per the Preamble, the IBC aims to:
Consolidate and amend insolvency laws
Ensure timely resolution of insolvency
Maximize value of assets
Promote entrepreneurship
Stimulate credit availability
Balance interests of stakeholders (including govt. dues)
Establish the Insolvency and Bankruptcy Board of India (IBBI)
The Supreme Court has upheld IBC’s role in streamlining insolvency processes and reviving viable businesses
rather than merely recovering money for creditors.
IBC is termed a “Code” rather than an “Act” because it consolidates and integrates multiple existing laws into
one framework.
5. Structure of the Code
The IBC is organized into 5 parts, 255 sections and 12 Schedules:
Part I: Preliminary provisions
Part II: Corporate insolvency and liquidation
Part III: Insolvency and bankruptcy for individuals and firms
Part IV: Regulation of professionals, agencies, and information utilities
Part V: Miscellaneous provisions
The Schedules amend various existing laws such as the Income Tax Act, Companies Act, RDDBFI Act, LLP
Act, etc.
6. Institutional Framework
IBC is built on four key pillars:
1. Adjudicating Authorities:
o NCLT for corporate persons
o DRT for individuals/firms
o Appeals lie with NCLAT and DRAT respectively
2. Regulator:
o IBBI, which regulates insolvency professionals, agencies, and information utilities
3. Professionals:
o Insolvency Professionals (IPs) and Insolvency Professional Agencies (IPAs).
o Major IPAs: ICAI, ICSI, ICMA
4. Information Utilities (IUs):
o Store financial and debt information electronically
o Current IU: NeSL (National E-Governance Services Ltd.)
7. Processes Under the Code
For Corporates (Part II)
Corporate Insolvency Resolution Process (CIRP):
Can be initiated by the debtor, financial creditor, or operational creditor.
Initial threshold: ₹1 lakh (later raised to ₹1 crore in March 2020).
Moratorium of 180 days (extendable to 330 days including legal delays).
Fast Track CIRP:
Meant for small corporates, completed within 90 days (extendable by 45 days with 75% CoC approval).
Pre-Packaged Insolvency:
Applicable to MSMEs with minimum default of ₹10 lakh.
Offers a semi-formal resolution with prior agreement between debtor and creditors.
Liquidation Process:
Begins when CIRP fails; involves asset sale and distribution to creditors.
Voluntary Liquidation:
When solvent companies wish to shut down, initiated by company itself.
For Individuals and Partnership Firms (Part III)
Fresh Start Process:
Applicable to extremely poor individuals (income ≤ ₹60,000; assets ≤ ₹20,000; debt ≤ ₹35,000).
Provides debt discharge under strict eligibility.
Insolvency Resolution and Bankruptcy:
Initiated by debtor or creditor.
DRT is adjudicating authority (yet to be notified for most cases).
NCLT handles cases of personal guarantors to corporate debtors.
8. Supremacy Clause (Section 238)
The Code overrides all inconsistent provisions of any other prevailing laws.
9. Amendments to the Code
IBC has been amended 6 times to fix practical challenges:
2018 (2 amendments)
2019
2020 (2 amendments)
2021
10. Key Exam Facts (MCQs)
Trigger for IBC: Default
Who can initiate CIRP: Financial, Operational Creditor or Corporate Debtor
Rules/Regulations:
o Rules: Central Govt.
o Regulations: IBBI
Adjudicators:
o NCLT (Corporates)
o DRT (Individuals/Firms)
Default thresholds:
o ₹1 crore for CIRP
o ₹10 lakh for Pre-pack insolvency
