Finance & Insolvency
In theory, the IBC benefits everyone. Creditors get a clear process for resolution of defaulted debts and have collective decision-making rather than individual race to grab assets. Corporate debtors get an opportunity to restructure rather than being dismembered by uncoordinated recovery actions. The economy benefits from productive assets being preserved or redeployed quickly rather than being trapped in endless litigation. In practice across Kolkata and Mumbai, the IBC creates new complexities while solving some old problems. Resolution plans often fail to materialize. Liquidation values are disappointing. The process takes longer than the 180-day timeline the law contemplates. But the IBC has changed leverage dynamics significantly—the credible threat of insolvency proceedings forces borrowers to engage seriously with creditors where previously they could delay indefinitely.
Corporate insolvency resolution proceedings get initiated when creditors or the corporate debtor itself files an application with the National Company Law Tribunal. Once admitted, a moratorium comes into effect prohibiting all legal proceedings against the corporate debtor. Control passes from existing management to a resolution professional. Creditors form a committee that must approve any resolution plan. The resolution professional attempts to find buyers willing to take over the business or at least its valuable assets. If a resolution plan is approved by the requisite percentage of creditors, it gets implemented. If no plan emerges, the company goes into liquidation. This process sounds orderly. The reality involves intense negotiations, conflicting creditor interests, promoters attempting to retain control, buyers conducting extensive due diligence while time pressure mounts, and legal challenges at every stage.
Financial creditors and operational creditors face different treatment under the IBC, creating different strategic positions. Financial creditors like banks and financial institutions have votes in the committee of creditors and can approve or reject resolution plans. Operational creditors like suppliers and service providers don't get votes unless their claims exceed specific thresholds. This differential treatment makes sense given that financial creditors typically have larger exposures. But it creates situations where operational creditors get forced to accept whatever terms the resolution plan provides while having no say in whether to accept the plan. We've seen operational creditors who would rather force liquidation than accept a resolution plan that pays them minimal amounts, but they lack voting power to influence the outcome.
The moratorium period during insolvency proceedings provides breathing space for resolution but creates complications. During moratorium, creditors cannot take recovery action. Ongoing contracts continue unless specifically terminated under IBC provisions. This means the company continues operations under the resolution professional's management while resolution is attempted. But suppliers become reluctant to provide goods or services on credit to a company in insolvency proceedings. Employees worry about whether they'll be paid. Customers hesitate to place orders. The business often deteriorates during the insolvency process, reducing its value to potential resolution applicants. The moratorium protects the company from creditor actions but doesn't protect it from loss of business confidence.
Resolution plans reveal the tensions between different stakeholder groups. A resolution plan might propose significant haircuts to creditor claims while providing some amount to creditors, preserving employee jobs, and allowing the business to continue. Creditors must decide whether to accept this discounted recovery or reject the plan and force liquidation which might yield even less. Different creditors have different preferences. Secured creditors with good collateral might prefer liquidation where they can realize their security. Unsecured creditors might prefer any resolution plan that provides some recovery over liquidation where they'll receive little or nothing. Operational creditors want resolution plans that ensure their ongoing relationship with the company continues. These conflicting interests make achieving the required majority for plan approval difficult.
Personal guarantees complicate insolvency resolution in ways the IBC drafters perhaps didn't fully anticipate. Many corporate loans include personal guarantees from promoters. When the corporate debtor enters insolvency proceedings and a resolution plan is approved that writes down the debt, what happens to the personal guarantees? Initially, there was confusion about whether resolution of corporate debt automatically discharged personal guarantees. Courts have now clarified that resolution of corporate debt doesn't automatically discharge personal guarantors—creditors can still pursue the guarantors for the original debt even after accepting discounted recovery through the resolution plan. This creates obvious tension. Guarantors whose guaranteed company got resolved paying creditors thirty percent still face personal liability for the full original debt.
Individual insolvency provisions under the IBC exist but have not been operationalized. The framework exists for individuals facing overwhelming debt to file for insolvency and obtain discharge. But the notification of these provisions has been delayed repeatedly. Until individual insolvency provisions are operational, individuals have no similar protection to what corporate debtors get under the IBC. This creates strategic considerations for how personal guarantees and personal borrowing are structured. Once individual insolvency provisions are operational, the dynamics of personal guarantees and personal loan recovery will change significantly.
Pre-packaged insolvency resolution introduced recently provides an alternative process for micro, small and medium enterprises. Instead of creditors initiating insolvency against an unwilling corporate debtor, the corporate debtor and creditors together develop a resolution plan before formally entering insolvency proceedings. Once the pre-agreed plan is submitted to NCLT, the formal insolvency process is abbreviated since the resolution plan already exists. This should be faster and less disruptive than traditional CIRP. But it requires cooperation between the corporate debtor and at least sixty-six percent of creditors before initiating proceedings. In situations where relationships have completely broken down, achieving this pre-insolvency cooperation is impossible.
Individual insolvency provisions under the IBC exist but have not been operationalized. The framework exists for individuals facing overwhelming debt to file for insolvency and obtain discharge. But the notification of these provisions has been delayed repeatedly. Until individual insolvency provisions are operational, individuals have no similar protection to what corporate debtors get under the IBC. This creates strategic considerations for how personal guarantees and personal borrowing are structured. Once individual insolvency provisions are operational, the dynamics of personal guarantees and personal loan recovery will change significantly.
Pre-packaged insolvency resolution introduced recently provides an alternative process for micro, small and medium enterprises. Instead of creditors initiating insolvency against an unwilling corporate debtor, the corporate debtor and creditors together develop a resolution plan before formally entering insolvency proceedings. Once the pre-agreed plan is submitted to NCLT, the formal insolvency process is abbreviated since the resolution plan already exists. This should be faster and less disruptive than traditional CIRP. But it requires cooperation between the corporate debtor and at least sixty-six percent of creditors before initiating proceedings. In situations where relationships have completely broken down, achieving this pre-insolvency cooperation is impossible.
The practice of insolvency law requires different skills than traditional commercial litigation or transaction work. Insolvency proceedings move fast compared to normal court proceedings. Multiple stakeholders with conflicting interests need to be coordinated. Business and financial analysis matters as much as legal arguments. Lawyers representing creditors, corporate debtors, or resolution professionals need to understand not just IBC provisions but also corporate finance, business operations, and negotiation strategy. The lawyer who approaches insolvency as pure legal work will be ineffective. The lawyer who understands insolvency as a business restructuring process that happens to involve legal proceedings will deliver better outcomes for clients. Finance and insolvency is ultimately about salvaging value from financial distress. The legal framework provides the structure. Results come from understanding business realities and stakeholder incentives.
