Terms like bankruptcy and corporate insolvency refer to distinct situations involving the financial stability and status of individuals and body corporates. A company or a Limited Liability Partnership (LLP) is said to be insolvent if it is unable to pay its debts once they become due and the company defaults on its repayment. On the other hand, bankruptcy is a legal declaration that a court declares, signifying that an individual or partnership firm is unable to pay their debts until they are formally discharged by the court. In India, individuals and partnership firms are subject to bankruptcy, whereas companies and LLPs are subject to ‘corporate insolvency’.

Critical Factors Leading to Corporate Insolvency

To avoid corporate insolvency, the companies need to identify and address the contributors of their financial difficulties. Through early detection of risks and leaks, companies may enhance their operational resilience, fortify their financials, and adjust to dynamic market and economic conditions. This strategy will ensure a long-term financial stability and progress in addition to addressing current issues.

Key factors leading to corporate insolvency are as below:

  1. Cash Flow Issues: Inadequate capital for critical operations might result from poor cash flow management and mounting debt.
  2. Excessive Debt: Relying excessively on borrowing, especially to expand business, might leave a company susceptible to financial setbacks.
  3. Economic and Market Changes: A company’s demand for its goods or services may see a decline because of recession, amendments/changes in governmental regulations, or shifts in the competitive field.
  4. Inadequate Risk Management: Severe financial losses may occur from a failure to recognize and manage risks like disturbances in the supply chain, market fluctuations or natural disasters.
  5. Inaccurate Financial Reporting: Timely intervention might be delayed by disregarding warning indications and reliance on ambiguous financial statements.
  6. Legal and Regulatory Challenges: Violating the law, facing litigation, or delayed compliance filings can result in penalties and damage company’s reputation.

Corporate Insolvency: Legal frameworks for Resolution and Restructuring

Corporate Resolution under the aegis of the Insolvency and Bankruptcy Code, 2016 and allied Regulations

The legislative framework in India for the regulation of the corporate insolvency resolution process for companies and LLPs is the Insolvency and Bankruptcy Code, 2016 (Code). To revive the corporate debtor, the Code allows both creditors and indebted companies to initiate the corporate insolvency resolution process. The objective of the Code is to provide a methodical framework for reviving the indebted company or, as a last resort trigger liquidation after all the alternative remedies are exhausted.

Below is a detailed overview of the multiple avenues to revive a corporate debtor under the Code:

1. Corporate Insolvency Resolution Process
The financial creditors, operational creditors, and the corporate debtor may initiate the corporate insolvency resolution process by filing an application before the National Company Law Tribunal (NCLT). Subject to the conditions outlined in Sections 7, 9, and 10 of the Code, they may initiate when a corporate debtor owes more than INR 1 crore and the debt becomes due and payable.

Note: As per Section 4 of the Code, the threshold to initiate CIRP is INR 1 lakh. Subsequently, the Ministry of Corporate Affairs (MCA) released a notification for S.O. 1205(E) dated 24th March, increasing the threshold to INR 1 crore.

Upon receipt of the application, the NCLT provides an opportunity for the corporate debtor to contest it, and the parties may amicably settle the matter before it is admitted. On satisfaction of the existence of a default, the NCLT may (not mandatory) order to initiate the CIRP, impose a moratorium, and appoint an Interim Resolution Professional (IRP) to manage the company and the existing Board of Directors is suspended.

A public announcement is then published immediately, and the IRP invites and verifies claims. Subsequently, the IRP presents a report to the NCLT to form a Committee of Creditors (CoC), which consists of financial and operational creditors. Operational creditors can be part of the CoC only if their debt exceeds 10% of the overall debt of the corporate debtor. However, only financial creditors have the right to vote, and they exercise voting rights in proportion to the amount of debt owed to them by the corporate debtor. The CoC may either confirm the continuation of IRP as the Resolution Professional (RP) or propose for replacement.

The RP invites expressions of interest based on criteria set by the CoC, issues an information memorandum, and requests for resolution plans from prospective resolution applicants (PRAs). PRAs submit their Resolution Plans, and the RP conducts due diligence to ensure that the resolution plans do not violate any laws and comply with all mandatory provisions of the Code and its regulations framed thereunder. The CoC shall evaluate the resolution plans as per evaluation matrix and vote on all resolution plans simultaneously. The resolution plan, which receives the highest votes, but not less than requisite votes i.e., 66 percent shall be considered as approved. Upon approval of the resolution plan by the CoC, the RP shall file an application before the NCLT for approval of the resolution plan. The NCLT shall approve the resolution plan if it conforms to the mandatory contents enumerated in the Code. Once the resolution plan is approved by the NCLT, the successful resolution applicant assumes the control of the corporate debtor with a clean slate unanswerable to any previous criminal or civil liability of the corporate debtor.

The initial deadline for the conclusion of CIRP is 180 days from the Insolvency Commencement Date (ICD). The adjudicating authority may extend the period of CIRP if the resolution process cannot be completed within 180 days. The CIRP must be mandatorily completed within a period of 330 days from the ICD, including any extension of the period of CIRP and time taken in legal proceedings in relation to the resolution process. The CIRP may be withdrawn with a 90 percent majority vote in favor of withdrawal by the CoC at any stage before the NCLT approves the resolution plan.

2. Compromise/arrangement and sale as a going concern under IBBI (Liquidation Process) Regulations, 2016
The IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) provides a backup strategy under regulation 2B of Liquidation Regulations considering liquidation as a last resort. This regulation states that if the CoC had proposed a compromise or arrangement during the CIRP, the liquidator may submit a proposal within 30 days following the liquidation commencement date to the NCLT. The Liquidation Regulations states that the entire procedure must be concluded within 90 days from the liquidation commencement date.

Furthermore, to revive the corporate debtor, the liquidator must endeavor to sell the corporate debtor as a going concern as per Regulation 32(e) and 32A of the Liquidation Regulations. Here, the corporate debtor is not placed under liquidation; instead, it is sold to a buyer while retaining its assets, along with its liabilities and identity.

Restructuring under other legal frameworks in India

1. Pre-insolvency Restructuring: Companies can take measures to address operational inefficiencies and financial challenges before they escalate and result in insolvency proceedings under the Code by implementing pre-insolvency restructuring. This approach aims to avert negative consequences and stigma associated with insolvency by stabilizing the company’s financial and operational structures. The process begins with a thorough assessment of the company’s financial health, focussing on cash flow management, debt levels, operational efficiency, and asset utilisation. Key restructuring actions often involve negotiating with their creditors to modify the terms and conditions of the loan, which is done outside of court proceedings to expedite the decision-making process and maintain friendly business relationships. Additionally, companies may engage in operational restructuring efforts such as cost-cutting measures, refinancing, and informal workouts.

2. Scheme of Compromise or Arrangement under the Companies Act, 2013: Schemes of arrangement or compromise under Chapter XV and Sections 230 to 240 of the Companies Act, 2013, provide an alternative framework for corporate restructuring. These schemes enable companies to reorganize the financial and operational structures, by incorporating debt restructuring, mergers, demergers, amalgamation, extinguish security interest and refinance without necessarily resorting to insolvency proceedings.

To initiate a scheme of arrangement or compromise under the Companies Act 2013, an application can be filed by the following stakeholders before the National Company Law Tribunal (Tribunal):

  • the company
  • a creditor
  • a member
  • Or if the company is undergoing liquidation or winding up, by the liquidator.

This application should be accompanied with full disclosure of all material facts pertaining to the draft scheme and its consequences which is submitted to the Tribunal. The Tribunal may then direct a meeting of creditors and members to discuss the proposed scheme, with detailed notices outlining the scheme and its implications sent to all relevant stakeholders beforehand.

Approval of the scheme requires a majority representing 3/4th in value of the total debt owed to creditors or class of creditors, or of the members or class of members. If the Tribunal finds the scheme fair and equitable, it may sanction the scheme, making it binding on all involved parties. Additionally, under Section 231 of the Companies Act 2013, the Tribunal has the authority to supervise the scheme’s implementation and issue necessary directions to ensure its proper execution, including making required modifications.

3. One-Time Settlement (OTS): A One-Time Settlement is a mechanism where a borrower and lender agree to resolve outstanding dues through a single payment or a structured repayment plan. This process typically involves negotiating a reduced amount that the borrower will pay to settle the debt, requesting for a waiver of interest or repayment of a lesser amount. The motive is to provide a practical solution for borrowers struggling to repay their debts while enabling lenders to recover a portion of the owed debt without the need for prolonged litigation.

4. Strategic Debt Restructuring: The Reserve Bank of India (RBI) has issued guidelines (RBI/2014-15/627, DBR.BP.BC.No.101/21.04.132/2014-15) that allow creditors to convert their debt into equity shares, thereby acquiring more than 51% of the shareholding. This provision also empowers the creditors to change the management of the company, giving them a more active role in the restructuring and recovery process. This strategic move aims to facilitate the rehabilitation of financially distressed companies by enabling creditors to oversee and implement necessary changes to restore the company’s financial health while encompassing the creditors as shareholders.

Understanding the Common Causes of Bankruptcy

Individuals and partnership firms often face the risk of bankruptcy due to various financial and economic challenges. Effective risk management and meticulous financial planning are necessary to overcome these challenges. To maintain financial stability and stay out of bankruptcy, these firms can adopt a pragmatic approach by identifying the causes of their financial challenges and then strategize accordingly by reducing expenditure and increasing savings and investments. The factors leading to bankruptcy include:

  1. Financial Mismanagement: Inadequate budgeting, excessive debt accumulation, overspending, and other poor financial choices, often contributes to unstable finances.
  2. Job Loss or Income Reduction: It can be challenging to satisfy financial obligations in the event of an abrupt job loss or income reduction, which can lead to a growing debt burden.
  3. Business Failure: If businesses fail and business owners are held personally accountable for the debts owed by the firm or proprietorship, then entrepreneurs, sole proprietors, partners and the partnership firms, and small business owners may be forced into bankruptcy.
  4. Decision Making: Disagreements or clashes between partners have the potential to delay decision-making, which could have a detrimental impact on the financials of the firm. These disputes may lead to lost opportunities and difficult to adjust to shifting market conditions.
  5. Operational Inefficiency: Disputes can also affect day-to-day operations, leading to inefficiencies, conflicts, and higher expenses, all of which influence profitability. 

Legal Framework for Bankruptcy

Currently, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 govern the bankruptcy process for both individuals and partnership firms. On August 29, 2017, a press release from the Ministry of Finance, Government of India emphasized that these ancient legislations still govern individuals and partnership firms who are into bankruptcy. The press release states that Section 243 of the Code, which provides for the repeal of these enactments, has not been notified as of now. Additionally, the provisions related to insolvency resolution and bankruptcy for individuals and partnerships contained in Part III of the Code are yet to be notified by the Central Government of India. Therefore, stakeholders intending to pursue their bankruptcy cases should approach the appropriate authority or court under the existing enactments, rather than the Debt Recovery Tribunals.

Specifically, the Presidency Towns Insolvency Act, 1909 applies to the jurisdictions of Bombay, Madras, and Calcutta only, with the bankruptcy case handled by the High Court (single bench). Conversely, the Provincial Insolvency Act, 1920 applies to all other major cities and districts across India, with the jurisdiction vested with the district courts, which can be delegated to the courts of small causes.

The Code has introduced a detailed and a comprehensive approach under Part III, to include a fresh start process, insolvency resolution process, and bankruptcy process for individuals and partnership firms. However, the Part III of the Code has only been notified concerning the personal guarantors to corporate debtor. This indicates that individuals or partnership firms not acting as personal guarantors to a corporate debtor currently cannot benefit from the resolution processes outlined in the Code.


The Code is an important milestone towards streamlining and facilitating the insolvency and bankruptcy process in India. The Code provides an effective and equitable remedy and procedure to resolve the financial challenges through establishing a clear distinction between corporate insolvency and personal bankruptcy, by outlining separate and structured procedures for each. The Code has undergone numerous amendments to guarantee a timebound and equitable resolution procedure for corporate insolvency along with rules and regulations framed thereunder. However, the Central Government of India has not yet notified the insolvency resolution, fresh start, or bankruptcy procedures for the individuals and partnership firms.

Why Choose InCorp Advisory?

It is advisable to seek professional advice and strategic solutions when dealing with corporate insolvency and bankruptcy. Our experienced professionals offer customized, efficient, and effective services to handle resolution and liquidation processes. Trust InCorp to provide comprehensive restructuring services that will assist in stabilizing your financial health and support long-term growth, making us the dependable partner you need during times of financial distress. To learn more about our services, you can write to us at info@incorpadvisory.in or reach out to us at (+91) 77380 66622.

(This blog is authored by Rithvik D)

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