What is Insolvency?
Insolvency is a financial state referring to when a person or company
can’t pay their debts on time
It can happen due to poor cash flow, excessive debt, market failure, or
mismanagement
Insolvency can be temporary (Reversible) or permanent (leading to
liquidation)
The Tests of Insolvency
Cash Flow Test – Tests Whether an entity can meets its financial
obligations as they become due?
Balance Sheet Test – Examines whether the company’s total liabilities
exceed its total assets?
Default Test under IBC 2016 – Based on a company or an individual’s
failure to meet its financial obligations when they become due.
Flashcard: Creditor’s Bargain Theory & Collectivity in IBC (India)
🧠 Creditor’s Bargain Theory
- Hypothetical agreement among creditors to act collectively in insolvency.
- Avoids chaotic individual enforcement for maximum asset value recovery.
- Assumes that structured, fair procedures benefit all creditors more than a race to enforce rights.
🤝 Collectivity Principle
- All creditors form a single group once insolvency begins.
- Enforced through moratorium on individual claims/actions.
- Focuses on equal treatment, transparency, and value maximization.
👥 Single Collective Group
- All creditors are treated as part of one unified group.
- Individual enforcement rights are suspended to ensure collective action.
🧱 Prevents Asset Fragmentation
- Stops creditors from seizing assets individually.
- Ensures the debtor’s assets are handled as a whole, preserving value.
⚖️ Systematic and Fair Distribution
- Liquidation proceeds are equitably distributed through a centralized process.
- Avoids favoritism or preferential treatment.
🪙 Pre-Determined Hierarchy (Waterfall Mechanism)
- Payments are made in a fixed statutory order (e.g., insolvency costs → secured creditors → employees → unsecured creditors → shareholders).
- Promotes certainty and transparency in distribution.
⚖️ Relevance to IBC
- Both principles are foundational to the Code.
- IBC prevents creditor fragmentation and prioritizes collective decision-making via the Committee of Creditors (CoC).
- Promotes efficiency, fairness, and business continuity (if revival is possible).
principles and foundations of both Corporate and Individual Insolvency Laws:
🃏 Flashcard: Principles & Foundations of Corporate Insolvency Laws
⚖️ 1. Creditor Protection
- Ensures creditors’ rights are preserved and dues are recovered fairly.
🤝 2. Collective Resolution Process
- All creditors act together, not individually.
- Maximizes value of debtor’s estate.
💼 3. Business Continuity & Revival
- Aims to revive viable businesses through restructuring.
- Liquidation is the last resort.
⏳ 4. Time-Bound Proceedings
- Fast-track resolution to avoid value erosion due to delays (e.g., 180-270 days under IBC).
📜 5. Transparency & Accountability
- Managed by insolvency professionals under strict regulations.
- Information shared with all stakeholders.
⚖️ 6. Balancing Stakeholder Interests
- Balances interests of creditors, employees, shareholders, and society at large.
🃏 Flashcard: Principles & Foundations of Individual Insolvency Laws
🛡️ 1. Fresh Start / Debt Relief
- Offers a chance to discharge unpayable debts and start anew (especially for the poor or distressed individuals).
🔄 2. Equitable Distribution
- Assets are distributed fairly among creditors through a structured process.
⚖️ 3. Fairness Between Debtors & Creditors
- Protects both creditor rights and debtor dignity.
- Prevents abuse from either side.
⏱️ 4. Timely Resolution
- Enables quicker settlement or resolution to reduce prolonged financial distress.
🔍 5. Transparency & Oversight
- Processes are supervised by resolution professionals and adjudicated by the Debt Recovery Tribunal (DRT).
🌐 6. Financial Discipline & Inclusion
- Encourages responsible borrowing and lending.
- Supports reintegration of individuals into the formal economy
section 3 definitions
(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed,
undisputed, legal, equitable, secured or unsecured;
(b) right to remedy for breach of contract under any law for the time being in force, if such
breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed,
matured, unmatured, disputed, undisputed, secured or unsecured;
(8) “corporate debtor” means a corporate person who owes a debt to any person;
(11) “debt” means a liability or obligation in respect of a claim which is due from any person and
includes a financial debt and operational debt;
(12) “default” means non-payment of debt when whole or any part or instalment of the amount of
debt has become due and payable and is not 1
[Paid] by the debtor or the corporate debtor, as the case
may be;
(30) “secured creditor” means a creditor in favour of whom security interest is created;
(31) “security interest” means right, title or interest or a claim to property, created in favour of, or
provided for a secured creditor by a transaction which secures payment or performance of an
obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other
agreement or arrangement securing payment or performance of any obligation of any person:
Provided that security interest shall not include a performance guarantee;
section 5 definitions
(5) “corporate applicant” means—
(a) corporate debtor; or
(b) a member or partner of the corporate debtor who is authorised to make an application for
the corporate insolvency resolution process under the constitutional document of the corporate
debtor; or
(c) an individual who is in charge of managing the operations and resources of the corporate
debtor; or
(d) a person who has the control and supervision over the financial affairs of the corporate
debtor;
1
[(5A) “corporate guarantor” means a corporate person who is the surety in a contract of
guarantee to a corporate debtor;]
**(7) “financial creditor” **means any person to whom a financial debt is owed and includes a person
to whom such debt has been legally assigned or transferred to;
(11) “initiation date”means the date on which a financial creditor, corporate applicant or
operational creditor, as the case may be, makes an application to the Adjudicating Authority for
initiating corporate insolvency resolution process;
(12) “insolvency commencement date” means the date of admission of an application for
initiating corporate insolvency resolution process by the Adjudicating Authority under sections 7, 9 or
section 10, as the case may be;
(20) “operational creditor” means a person to whom an operational debt is owed and includes any
person to whom such debt has been legally assigned or transferred;
(21) “operational debt” means a claim in respect of the provision of goods or services including
employment or a debt in respect of the 1
[payment] of dues arising under any law for the time being in
force and payable to the Central Government, any State Government or any local authority;\
INITIATION of CIRP by financial creditor and operational creditor
📘 Flashcard: Section 7 – Initiation of CIRP by Financial Creditor
Who Can File:
- A financial creditor (alone or jointly), or a notified representative on their behalf.
When:
- When a default has occurred in repayment of a financial debt.
Special Conditions:
- For certain classes of financial creditors (like bondholders or real estate allottees):
- Application must be filed jointly by at least 100 creditors or 10% of the total in that class/project, whichever is less.
Transition Clause:
- Applications filed before the 2020 Amendment (and not yet admitted) must comply with the above joint filing rule within 30 days, else they are deemed withdrawn.
Definition of Default:
- Includes default to any financial creditor, not just the applicant.
Filing Requirements:
- Must be filed in the prescribed form, with a fee, and accompanied by:
- Proof of default (via information utility or other evidence),
- Name of proposed Interim Resolution Professional (IRP),
- Other required info.
Adjudicating Authority (NCLT) Duties:
- Must decide within 14 days whether a default exists.
- If delayed, reasons must be recorded in writing.
Outcome:
- If default exists and the application is complete (and no disciplinary case against IRP): Admit.
- Else: Reject, but must first give 7 days’ notice to correct defects.
Effect of Admission:
- Corporate Insolvency Resolution Process (CIRP) starts from date of admission.
Communication:
- NCLT must inform both parties (creditor & debtor) of its decision within 7 days.
📙 Flashcard: Section 8 – Insolvency by Operational Creditor
Who Can Initiate:
- An operational creditor (supplier, service provider, etc.).
Step 1 – Demand Notice:
- On default, send a demand notice or a copy of an unpaid invoice to the corporate debtor, in the prescribed format.
Step 2 – Debtor’s Response (Within 10 Days):
Corporate debtor must respond with either:
(a) Existence of a dispute or ongoing suit/arbitration filed before receiving the notice; OR
(b) Proof of payment, by showing:
- Bank transfer record; OR
- Proof of cheque being encashed.
Definition:
- A demand notice is a formal request for payment of the unpaid operational debt where default has occurred.
section 9 and 10
📘 Flashcard: Section 9 – Application by Operational Creditor
When Can Application Be Filed:
- After 10 days from delivery of demand notice or invoice under Section 8(1), if:
- No payment is received, and
*The default amount must be above the minimum threshold (At Present 1 Cr)
- No payment is received, and
Crucially, there must be no pre-existing dispute regarding the debt.
Where to Apply:
- Application is made to the Adjudicating Authority (NCLT) with the prescribed fee.
Documents to Be Filed With Application:
- Copy of the invoice/demand notice sent to the debtor.
- Affidavit stating that no notice of dispute has been received.
- Bank certificate confirming non-payment (if available).
- Record from information utility (if available) showing non-payment.
- Any other proof of non-payment or documents as prescribed.
Optional:
- Operational creditor may propose a Resolution Professional (RP) to act as Interim RP.
NCLT Decision (Within 14 Days):
- Admit application if:
- It is complete.
- Debt remains unpaid.
- Notice/invoice was delivered.
- No dispute exists.
- No disciplinary proceedings against proposed RP.
- Reject application if any of the above conditions are not met.
> ⚠️ Before rejection, NCLT must give 7 days’ notice to rectify defects in the application.
When CIRP Begins:
- On the date of admission of the application by NCLT.
📙 Flashcard: Section 10 – Application by Corporate Applicant (Debtor Itself)
Who Can Apply:
- The corporate debtor itself, through a corporate applicant, when it has committed a default.
Application Requirements:
- Filed in the prescribed form, with required details, documents, and fee.
Must Include:
- Books of account and other specified documents.
- Details of the proposed Resolution Professional.
- Special resolution by shareholders or approval by 3/4th partners, authorizing the filing.
NCLT Decision (Within 14 Days):
- Admit if:
- Application is complete,
- No disciplinary proceedings pending against proposed RP.
- Reject if:
- Application is incomplete,
- OR disciplinary proceedings are pending.
> ⚠️ NCLT must first give 7 days’ notice to rectify any defects before rejecting.
When CIRP Begins:
- From the date of admission of the application.
Corporate Insolvency Resolution Process starts
Right to Payment: The Right of a Creditor to seek repayment or remedy for
a debt that is owed to them.
Default: The process begins when there is a ‘Default’ in debt repayment.
This ‘Default’ can trigger an application for CIRP.
Acceptance/Rejection: The Adjudicating Authority, which is the NCLT for
corporate insolvency, receives the application for CIRP.
The AA can either ‘Accept’ the application, leading to the initiation of CIRP.
Or, the AA can ‘Reject’ the application.
Withdrawal of Application: An application for CIRP can also be ‘withdrawn’
before its admission.
Admission and Interim Resolution Professional (IRP):If the application is
‘Admitted’, the CIRP formally commences. An ‘IRP’ (Interim Resolution
Professional) is appointed. NCLT has 14 days from date of application.
Initially, the IRP is appointed by NCLT, based on the name proposed by the
applicant.
moratorium and COC
Moratorium Begins: Upon commencement of CIRP, ‘Moratorium’ is
declared. Actions against the CD, such as filing or continuation of suits,
enforcement of security interests, etc., are prohibited.
IRP Forms the COC:
Public Announcement: The IRP’s first major step is to make a ‘Public
Announcement’ to creditors, informing them about the initiation of CIRP and
inviting them to submit their claims.
Collection and Verification of Claims: The IRP then receives and reviews the claims
submitted by all creditors. This involves checking the validity and accuracy of each
claim, a crucial step to prevent fraudulent claims. The IRP may seek assistance from
the company’s management and review financial records to verify the claims.
Constitution of the COC: After verifying the claims, the IRP constitutes the ‘CoC’
(Committee of Creditors). The CoC is comprised primarily of financial creditors
whose claims have been admitted. Operational creditors are typically not part of
the CoC, but they have a right to attend meetings and receive information.
Information memorandum and Resolution plan
IRP as RP & Committee of Creditors (CoC): When the CoC holds its first
meeting, they can either confirm the ‘IRP’ as the permanent ‘RP’
(Resolution Professional) or appoint a new RP.
Information Memorandum (IM): The RP takes control and prepares an ‘IM’
(Information Memorandum) with all relevant details about the company.
Request for Resolution Plan (RFRP), Expression of Interest (EM) and
Prospective Resolution Applicants: RP invites resolution plans and seeks
‘EM’ (Expression of Interest) from prospective bidders, known as ‘PRA’
(Provisional Resolution Applicants).
Data Room: A ‘DATA ROOM’ is likely maintained by the RP to provide
relevant information to prospective resolution applicants.
Resolution Plan: ‘Resolution Plan’ is submitted by Resolution Applicants.
Vetting and Approval of Resolution Plan:
The Resolution Plan is vetted by the RP for compliance with the IBC.
The COC then ‘Voting’ on the plan. A super-majority of 66% of the voting share of the COC is required for approval.
The Resolution Plan must also comply with Section 29A of the IBC, which specifies eligibility
criteria for Resolution Applicants to prevent errant promoters from regaining control.
AA Approval of Resolution Plan: If the COC approves the Resolution Plan, the RP
submits it to the ‘AA’ for its final ‘Acceptance’ (approval). The ‘PRA’ becomes the
‘SRA’ (Successful Resolution Applicant).
NCLT Order Makes the Resolution Plan Binding: As per Section 31(1), The
resolution plan, once approved, shall be binding on the corporate debtor, its
employees, members, creditors, guarantors, and other stakeholders.
Liquidation: If the Resolution Plan is rejected by the COC or the AA, or if no
resolution plan is received, the AA initiates ‘LIQUIDATION’ proceedings against the
CD.
what does the Successful Resolution Applicant get? what do they have to do ?
What does the SRA Get?
- Control of the corporate debtor as a going concern.
- Rights over assets, operations, employees, and licenses.
- A “clean slate” under Section 32A - immunity from past offences
committed by CD.
What the SRA Must Do:
-Infuse funds as per the resolution plan.
-Pay creditors (usually at a haircut) as per -the approved restructure plan.
- Implement business revival/turnaround strategy.
- Fulfil timelines specified in the plan.
The Application by Operational Creditors:
Sections 8 and 9
two step process?
The Rationale Behind the Two-Step Process:
Why is the process for an operational creditor different from that of a
financial creditor?
The key difference lies in the nature of the debt and the potential for dispute.
A financial debt, such as a loan, is typically well-documented and less prone
to factual disputes. The default is a clear, the money wasn’t paid.
An operational debt, however, often arises from the provision of goods or
services. This leaves room for genuine disagreements. Was the service up to
standard? Was the quality of the goods acceptable? Did they arrive on time?
IBC created a two-step process to filter out these disputes.
The Demand Notice (Section 8)
This is the non-negotiable first step. An operational creditor cannot file a Section 9
application without first going through Section 8.
The operational creditor must send a demand notice to the corporate debtor, demanding payment of the unpaid operational debt. The notice must clearly state the amount of the operational debt, provide the details of
the transaction, and state that the creditor intends to initiate CIRP if the debt is not paid within a specific period.
From the date of delivery of the demand notice, the corporate debtor has 10 days to respond.
CD’s Response to Section 8 Notice
The corporate debtor’s action or inaction within that 10-day window
determines whether the process can proceed.
Payment: The corporate debtor can simply pay the unpaid debt. If this
happens, the process ends,
Raising a Pre-Existing Dispute: The dispute must be real and substantial,
should be Pre-existing (i.e., before the demand notice was issued). There
should be evidence.
CD fails to Reply: If the corporate debtor fails to reply within 10 days, and
Does not pay the operational debt, and Does not raise any pre-existing
dispute, Then the Operational Creditor becomes eligible to file an
application under Section 9.
Mobilox Innovations Pvt. Ltd. v. Kirusa
Software
Kirusa sent a demand notice to Mobilox for unpaid invoices. Mobilox
replied saying there was a breach of a non-disclosure agreement (NDA) and
hence, the debt was disputed.
SC in this matter discussed what constitutes “dispute” under the IBC.?
The SC held that “dispute” is not a patently feeble legal argument or an
assertion of fact unsupported by evidence. He held that the Court does not
need to be satisfied that the defense is likely to succeed. So long as a
dispute truly exists in fact and is not spurious, hypothetical or illusory, the
application has to be rejected.
When the NCLT receives the Section 9 application, it performs a limited
scrutiny, often called the ‘Mobilox Test.’ The NCLT’s job is not to resolve
the dispute but to determine if one exists.
Innoventive Industries Ltd. v. ICICI Bank
Innoventive Industries Ltd. (CD) had borrowed funds from a consortium of banks and financial
institutions, with ICICI Bank being the lead lender. When the company defaulted on its payments, the consortium of lenders, led by ICICI Bank, initiated CIRP by filing an application under Section 7
of IBC, 2016.
CD, opposed the application. They argued that the default had occurred under the provisions of the
Maharashtra Relief Undertakings (Special Provisions) Act, 1958, which granted a moratorium on legal proceedings against the company. They contended that this state law should prevail and
prevent the CIRP application from being admitted.
SC delivered a landmark judgment that clarified several key aspects of the IBC, particularly the role of the NCLT in admitting an application under Section 7 and the supremacy of the IBC over other
laws.
SC held that Section 238 of the IBC gives the Code an overriding effect over any other law that is
inconsistent with its provisions.
SC held that unlike the process for an operational creditor under Section 9,** a corporate debtor cannot raise a “dispute” to oppose a Section 7 application. SC noted that the legislative intent was to make the process for a financial creditor, whose debt is typically well-documented, swift and efficient.**
.Swiss Ribbons Pvt. Ltd. v. Union of India
Swiss Ribbons Pvt. Ltd. was an OC that challenged the constitutional
validity of several provisions of IBC.
Discrimination between FC and OC: They argued that the IBC was
discriminatory because it gave more power and a different, more streamlined process to FC compared to OC. They highlighted that OC
were not part of the COC and were treated differently in the waterfall
mechanism for distributing assets.
Procedural Difference: They questioned why a pre-existing dispute
could be a defense against a Section 9 application but not a Section 7
application.
Swiss Ribbons Pvt. Ltd. v. Union of India
SC upheld the constitutional validity of the challenged provisions of the IBC.
SC held that the classification of creditors into “financial” and “operational” is a valid and
reasonable one, based on the fundamental differences in their relationship with the CD.
FC are those who lend money with the “time value of money” in mind. They are typically
experts in assessing the financial health and viability of a company. Their primary goal is the
resolution of the company as a ‘going concern’ because that maximizes their long-term
recovery.
OC are suppliers or service providers whose interest is typically limited to receiving
payment for their specific goods or services. They may not have the expertise or incentive to take a long-term view of the corporate debtor’s business.
Supremacy of the Committee of Creditors (CoC): SC affirmed that the COC, comprising financial creditors, holds the “commercial wisdom” to make decisions about the resolution of the corporate debtor. This is because they have the most to gain or lose from the outcome and are best placed to assess the viability of a resolution plan.
Moratorium under Section 14
Cessio Bonorum:
Cessio Bonorum:
(“a cession of goods” or “a surrender of property”)
Moratorium means temporary stay or suspension of activities. Any
action against CD stands suspended.
Institution of New Suits or Continuation of Pending Suits:
One cannot file a new lawsuit or continue an existing one against the corporate
debtor. This applies to civil suits, debt recovery actions, and arbitration proceedings.
The goal is to free the company from the burden of litigation and allow the RP to
focus on the resolution.
Transferring, Encumbering, Alienating, or Disposing of Assets:
The corporate debtor cannot sell, mortgage, lease, or dispose of any of its assets.
This prohibition is crucial for preserving the value of the company and preventing
management from fraudulently selling off assets before the CIRP.
The RP takes control of all assets, and they are held in a trust for the benefit of all
creditors.
Moratorium (Section 14)
Action to Foreclose, Recover, or Enforce any Security Interest:
Secured creditors are barred from taking any action to seize or sell the assets
on which they hold a security interest.
The moratorium effectively freezes these individual recovery actions and
brings them into the collective fold of the CIRP.
This is a significant deviation from laws like the SARFAESI Act.
Recovery of Property by the Owner or Lessor:
An owner or lessor of property cannot take back possession of a property,
even if the lease agreement has expired.
This ensures that the corporate debtor’s business operations are not
disrupted by a loss of a key asset, such as a factory or office space.
Exceptions to Moratorium under Section 14
Moratorium is not absolute.
Important exceptions to ensure the moratorium is not misused and
does not protect wrongdoers.
Proceedings against Directors/Promoters (Natural Persons):
Moratorium under Section 14 only applies to the corporate debtor (the
company).
It does not protect the individual directors, promoters, or guarantors of the
company.
Criminal Proceedings:
The moratorium does not extend to criminal proceedings or regulatory actions.
This is an important public policy consideration. One cannot use the IBC to escape the consequences
of a criminal offense.
Third-Party Claims for the Benefit of the Corporate Debtor:
The purpose of the moratorium is to preserve the corporate debtor’s value. Therefore, if a legal
proceeding or arbitration is initiated by the corporate debtor to recover money from a third party, it
can continue.
The moratorium only bars actions against the corporate debtor.
Actions by the Statutory Authorities:
While the moratorium stops creditors, it may not stop a government agency from performing its
statutory duties, E.g. cancelling a license.
However, the moratorium does prevent government bodies from initiating recovery actions for unpaid dues.
Essential Services under Section 14 (2)
Section 14(2) of the IBC is a crucial provision that states:
The supply of essential goods or services to the corporate debtor “shall not
be terminated or suspended or interrupted” during the moratorium period.
The law prevents service providers from using an unpaid bill as a reason to
cut off a service.
This is a deliberate measure to prevent the company’s value from being
destroyed by a disruption in its most fundamental operations.
Electricity
Water
Telecommunication
IT Services
The Condition: Past Vs. Present Dues
While the moratorium protects the company from having its services cut
off for unpaid bills from before the CIRP began, it does not protect the
company from paying for services used during the moratorium period
itself.
Past Dues:
Dues that were incurred prior to the Insolvency Commencement Date are
considered part of the CD’s total debt. The service provider, in this case, would be
an OC and would have to submit a claim to the RP.
Current Dues:
Dues for services consumed after the CIRP has started (i.e., during the moratorium)
are treated as Insolvency Resolution Process Costs. These costs have a high priority
for payment and must be paid by the Resolution Professional.
Mr. Anand Rao Korada v. M/s. Varsha Fabrics (P) Ltd. & Ors.
Issue:
In this case, the property of a corporate debtor was scheduled for auction by
a High Court. The auction was to proceed even after the Corporate Insolvency
Resolution Process (CIRP) had commenced and a moratorium order was in
effect.
Held:
The Supreme Court unequivocally held that the High Court ought not to have
proceeded with the auction once the moratorium was declared by the
National Company Law Tribunal (NCLT).
Anjali Rathi v. Today Homes & Infrastructure Private Limited
Issue:
The core question was whether the moratorium under Section 14 of the IBC
protects not just the CD (the company) but also its management, such as
promoters, directors, and key managerial personnel (KMPs), from legal
proceedings.
Held:
The Supreme Court observed that the moratorium under Section 14 of the
IBC is not applicable to the promoters, directors, KMPs, or officers of the
corporate debtor. The moratorium is not a blanket immunity for the
individuals who manage it.
Narinder Garg v. Kotak Mahindra Bank Ltd.
Issue:
The specific issue in this case was whether a moratorium on a corporate
debtor would prevent a creditor from taking action against the company’s
directors for a cheque bounce under Section 138 of the Negotiable
Instruments Act.
Held:
The Supreme Court held that the bar under Section 14 of the IBC applies only
to the CD and not to the directors, who are natural persons.
Consequently, the directors remain liable for cheque bounce cases, and
creditors can continue legal proceedings against them even while the
corporate debtor is under a moratorium.
Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.
The Issue:
The central question was whether a moratorium would bar the continuation of an
arbitration proceeding that was initiated by the corporate debtor to claim an
amount from a third party.
Held:
The Supreme Court held that the moratorium under Section 14 of the IBC does not
prevent an arbitration from continuing, particularly when the claim is for the
benefit of the Corporate Debtor (CD).
If the CD is the claimant in an arbitration and it is a means for the CD to recover
money then this recovery would increase the assets of the CD, which is in line with
the primary objective of the CIRP to maximize the company’s value.
