IBC 2016 — Insolvency Process Questions
What is the minimum default amount required to file a CIRP application under the IBC?
The Central Government, by notification dated 24 March 2020, raised the minimum threshold for initiating CIRP to Rs. 1 crore (from the original Rs. 1 lakh). This means a financial creditor under Section 7 or an operational creditor under Section 9 can only file if the default amount is at least Rs. 1 crore. For amounts below Rs. 1 crore, creditors must pursue remedies before the DRT (under RDBA, 1993), civil courts, or through SARFAESI enforcement. The Rs. 1 crore threshold was introduced to reduce misuse of the IBC mechanism for small disputes and to reserve the NCLT forum for significant insolvency cases.
What is the time limit for completing the CIRP process under the IBC?
The CIRP must be completed within 180 days from the date of admission of the application. The NCLT may, on an application by the resolution professional and with CoC approval, extend this by a further 90 days — making the maximum period 270 days. However, the 2019 Amendment inserted an outer limit of 330 days (including litigation time) beyond which CIRP automatically results in liquidation. In practice, most large CIRP cases have taken significantly longer due to litigation at NCLAT and the Supreme Court — the 330-day limit has been interpreted by courts to exclude time spent in litigation, creating a practical exception to the outer limit.
What happens to pending DRT and SARFAESI proceedings once a CIRP is admitted?
On the admission of a CIRP application, the moratorium under Section 14 automatically comes into effect, staying all pending DRT proceedings, SARFAESI enforcement actions (including auction proceedings, possession notices under Section 13(4)), civil suits, arbitration proceedings, and execution of decrees against the corporate debtor. However, the moratorium does not apply to proceedings against personal guarantors or corporate guarantors — banks can continue pursuing guarantors even while the borrower company is in CIRP. Banks should file their financial creditor claim with the IRP/RP within the claim-filing window to preserve their rights in the CIRP process alongside suspended DRT proceedings.
Can a corporate debtor's promoter submit a resolution plan for his own company under the IBC?
No. Section 29A specifically disqualifies promoters, directors, and connected persons of the corporate debtor from submitting resolution plans in most circumstances. Specifically, a person who is a promoter or in management of the corporate debtor, or a wilful defaulter, or has an NPA account classified as such for over a year (unless the default is repaid before submission), or is convicted of certain offences, is ineligible. The intent is to prevent promoters from using the IBC to gain a discount on debts they owe to financial creditors. Section 29A was introduced by the 2017 Ordinance following criticism that the Code was being used for "back-door entry" by promoters at the expense of creditors.
How does voting work in the Committee of Creditors, and what decisions require what majority?
The CoC operates on a proportional voting system — each financial creditor's voting share equals the percentage of total financial debt owed to them in the corporate debtor. Two thresholds apply: a simple majority (51% of voting share present and voting) for routine decisions such as approving fees, extending CIRP, taking major business decisions of the corporate debtor, and replacing the resolution professional; and a supermajority (66% of voting share present and voting) for critical decisions including approval of the resolution plan, liquidation, and certain complex transactions. CoC meetings require a quorum of 33% of voting share. Creditors can also vote by electronic means between meetings for decisions requiring their approval.
What is the waterfall under Section 53 of the IBC, and where do banks rank in liquidation?
Section 53 mandates a strict priority order for distributing liquidation proceeds: first, CIRP and liquidation costs (including RP fees, professional costs, and interim financing); second (ranked equally), 24-month workmen's dues and secured financial creditors who have relinquished their security to the liquidation estate; third, 12-month employee wages; fourth, unsecured financial creditors; fifth (ranked equally), two-year Central and State government dues and the unsecured shortfall of secured creditors who enforced security independently. Banks with secured credit facilities have the option under Section 52 to enforce their security independently outside the liquidation estate, but any shortfall after enforcement falls to the fifth priority bucket. This is why the IBC strongly incentivises resolution over liquidation for secured creditors.
Can banks simultaneously pursue SARFAESI enforcement and file a CIRP application under the IBC?
Yes — before admission of the CIRP application. A bank can simultaneously enforce SARFAESI (issue Section 13(2) demand notice, take possession, initiate auction) and file a Section 7 CIRP application before the NCLT. However, upon admission of the CIRP application, the Section 14 moratorium automatically stays the SARFAESI enforcement. Banks typically use parallel proceedings strategically: SARFAESI for immovable asset enforcement (faster recovery for smaller accounts) while CIRP is used where the business has resolution value. Once a CIRP is pending, filing a SARFAESI enforcement notice during the moratorium period is a nullity. After a resolution plan is approved, all security interests are restructured as per the plan terms.
How does the IBC treat personal guarantors of corporate debtors?
Personal guarantors to corporate debtors are covered by a dedicated regime under Part III, Sections 94–187, with the DRT (not NCLT) as the adjudicating authority for personal guarantors' insolvency. Banks can simultaneously proceed against the corporate debtor under Part II (CIRP before NCLT) and the personal guarantor under Part III (before the DRT). The Section 14 moratorium protecting the corporate debtor during CIRP does not extend to personal guarantors — the Supreme Court confirmed this in State Bank of India v. V. Ramakrishnan (2018). An approved CIRP resolution plan that compromises the corporate debt does not automatically extinguish the personal guarantor's liability unless the plan explicitly provides for it or the guarantee contract contains specific discharge provisions.
What is the difference between resolution and liquidation under the IBC, and which gives better recovery for banks?
Resolution (under Sections 30-31) means the corporate debtor continues as a going concern under a new management (the resolution applicant) after the CoC approves a resolution plan — creditors receive a negotiated payment (often involving haircuts) but recover more than liquidation value. Liquidation (under Sections 33-55) means the company is wound up, assets are sold, and proceeds are distributed in the Section 53 waterfall order. Resolution consistently yields better recovery for financial creditors — the Supreme Court in Essar Steel and subsequent cases has affirmed that going-concern value exceeds liquidation value in most cases. The RBI's data shows resolution gives banks approximately 30-45% recovery on average, while liquidation gives 10-15%. This is why the Code prioritises resolution over liquidation and why the CoC fights hard to attract viable resolution plans.
Can a creditor challenge an approved resolution plan if they are unhappy with their recovery amount?
Commercial dissatisfaction alone is not a valid ground to challenge an approved resolution plan. Section 61(4) strictly limits appeal grounds to: (i) contravention of any law, (ii) material irregularity by the resolution professional, (iii) failure to provide for operational creditors as per IBBI norms, (iv) failure to pay CIRP costs in priority, and (v) non-compliance with IBBI criteria. The Supreme Court in Essar Steel (Committee of Creditors v. Satish Kumar Gupta, 2019) held that NCLAT cannot substitute its commercial judgment for that of the CoC. However, the minimum liquidation value protection (Section 30(2)(b)) means a creditor can challenge if the plan gives them less than they would receive in liquidation — this is a legally cognizable ground. Operational creditors, while excluded from the CoC, retain limited standing to challenge under Section 31 if their floor amount is not provided.
IBC Filing or CIRP Defence?
Whether you are a financial creditor filing under Section 7, an operational creditor filing under Section 9, or a corporate debtor defending an insolvency application, IBC proceedings require specialist counsel. Advocate Subodh Bajpai handles NCLT and NCLAT matters.