The Insolvency and Bankruptcy Code: A Guide for Creditors, Debtors, and Small Businesses

1. Who Can Use the IBC?

The IBC covers insolvency of companies, limited liability partnerships (LLPs), and individuals / personal guarantors. It provides two distinct processes:

• Corporate Insolvency Resolution Process (CIRP): For companies and LLPs with defaults above Rs. 1 crore (the current threshold). Triggered when a company cannot pay its debts.
• Bankruptcy Process for Individuals and Personal Guarantors: A separate framework for individuals and unlimited partnership firms.

Key participants:

• Financial Creditors: Banks, NBFCs, debenture holders — creditors who have extended finance to the debtor.
• Operational Creditors: Suppliers of goods and services, employees, and government agencies — creditors who are owed money for operational transactions.
• Corporate Debtor: The company that cannot pay its debts.
• Resolution Professional (RP): A licensed insolvency professional who manages the company during CIRP.

2. How the CIRP Works: Step by Step

• 1. Application to NCLT: A financial creditor, operational creditor, or the corporate debtor itself can file an application before the National Company Law Tribunal (NCLT) for initiation of CIRP. For operational creditors, a demand notice must be sent 10 days before filing.
• 2. Admission and moratorium: Once NCLT admits the application, a 'moratorium' is declared — all legal proceedings, asset transfers, and debt recovery actions against the company are stayed. This gives the company breathing space.
• 3. Appointment of Resolution Professional: An Interim Resolution Professional (IRP) is appointed to manage the company. The RP takes over the board's functions.
• 4. Committee of Creditors (CoC): Financial creditors form a Committee of Creditors, which votes on the resolution plan. Operational creditors above Rs. 1 crore threshold also participate.
• 5. Invitation of Resolution Plans: The RP invites resolution applicants (potential buyers or investors) to submit plans for taking over and reviving the company.
• 6. Approval of Resolution Plan: The CoC approves a plan with 66% voting share. NCLT then approves it.
• 7. Liquidation: If no resolution plan is approved within the timeline (currently 330 days for CIRP), the company is liquidated.

3. Rights of Operational Creditors

Operational creditors — which include small and medium businesses that supplied goods or services to a company that has defaulted — have specific rights under the IBC:

• Right to file for CIRP: An operational creditor can trigger the insolvency process against a company that owes them more than Rs. 1 crore.
• Right to participate in CoC: Operational creditors with claims above Rs. 1 crore can participate (without voting rights) in CoC meetings.
• Right to receive minimum payment: Under the 'waterfall mechanism' of liquidation, operational creditors are paid after financial creditors but before shareholders. They must receive at least as much as they would have in liquidation under any resolution plan.

In practice, operational creditors often receive very low recoveries (or nothing) compared to banks and financial institutions. This remains one of the most significant criticisms of the IBC.

4. Rights of Homebuyers Under IBC

The 2018 amendment to the IBC introduced a significant change: homebuyers who have paid for an apartment in an under-construction project — and whose builder has defaulted on delivery — were recognised as financial creditors. This means:

• Homebuyers can now file applications before NCLT against defaulting real estate developers.
• Homebuyers are represented in the CoC through their representative organisation.
• Under RERA (Real Estate Regulation and Development Act), homebuyers also have remedies — RERA and IBC can be used in parallel.

5. Personal Guarantors: When the Director is Personally Liable

When a company takes a loan and a director or promoter gives a personal guarantee for that loan, the bank can pursue the personal guarantor under the IBC even as the company undergoes CIRP. The IBC has a specific framework for insolvency of personal guarantors to corporate debtors:

• A personal guarantor's insolvency is tried before the NCLT (not the DRT).
• The guarantor cannot simply claim that the company's insolvency discharges their personal liability — the guarantee remains enforceable.
• However, any payment received by the bank in the CIRP reduces the bank's claim against the guarantor proportionally.

6. Pre-packaged Insolvency Resolution (PPIRP): A Faster Route for MSMEs

The 2021 Pre-Packaged Insolvency Resolution Process (PPIRP) was specifically designed for MSMEs — companies with defaults up to Rs. 1 crore. It allows the existing management to negotiate a resolution plan with creditors informally, submit it to NCLT, and get it approved without a full CIRP process. This is faster (90-day timeline) and less disruptive.