Insolvency and Bankruptcy Code, 2016: What It Means for Recovery
Once a company enters insolvency, recovery action stops and claims go through the NCLT process.
The Insolvency and Bankruptcy Code, 2016 (IBC) is the law for what happens when a borrower cannot pay its debts. For a company, it sets up a time-bound process to rescue the business by a resolution plan or, if that fails, to close it and sell its assets (liquidation).
For a recovery agent this matters for one practical reason: once a company is admitted into insolvency, a moratorium (a legal freeze) stops suits and recovery action against it. The lender's claim then goes into the insolvency process, so check with the bank before following up on such an account.
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Words the IBC Uses
- Corporate debtor
- A company or LLP that owes a debt and has defaulted.
- Financial creditor
- A lender whose debt is a financial debt, such as a bank that gave a term loan.
- Operational creditor
- A supplier or service provider owed money for goods or services.
- CIRP
- Corporate insolvency resolution process: the time-bound rescue process for a company.
- NCLT
- National Company Law Tribunal, the adjudicating authority for companies under the IBC.
- Committee of creditors (CoC)
- The group of financial creditors that votes on the company's future.
- Moratorium
- A freeze on suits, recovery and enforcement of security against the company during the CIRP.
Who Can Start Insolvency Against a Company
The minimum default for a company is ₹1 crore (section 4).
Financial creditor (a bank)
Section
7
Key step
Files with the NCLT when a default has occurred; NCLT should decide within 14 days
Operational creditor (a supplier)
Section
9
Key step
First sends a demand notice; the company has 10 days to point out a dispute or show payment
The company itself
Section
10
Key step
The corporate debtor applies for its own insolvency
| Who applies | Section | Key step |
|---|---|---|
| Financial creditor (a bank) | 7 | Files with the NCLT when a default has occurred; NCLT should decide within 14 days |
| Operational creditor (a supplier) | 9 | First sends a demand notice; the company has 10 days to point out a dispute or show payment |
| The company itself | 10 | The corporate debtor applies for its own insolvency |
How the Corporate Process Runs: 180, 90, 330 Days
The CIRP must finish within 180 days of admission. On a 66% CoC vote, the NCLT can extend it once, by up to 90 days. Section 12 sets an outer limit of 330 days from the commencement date, including extensions and time spent in legal proceedings.
- 1
Admission
The NCLT admits the application. The insolvency commencement date is the date of admission.
- 2
Moratorium and public announcement
The NCLT declares a moratorium, appoints an interim resolution professional and announces the process publicly, calling for claims.
- 3
Committee of creditors
Financial creditors form the CoC, which decides on the resolution plan.
- 4
Resolution plan
A plan is approved by at least 66% of the CoC's voting share, then by the NCLT.
- 5
Liquidation if no plan
If no plan is received or approved in time, or the NCLT rejects it, the company goes into liquidation under section 33.
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What the Moratorium Stops
Under section 14, during the CIRP:
- check_circleNew suits, and continuing pending suits or proceedings, against the company, including execution of decrees.
- check_circleAny action to recover or enforce security over the company's property, including action under the SARFAESI Act.
- check_circleThe company transferring or selling its assets.
- check_circleAn owner or lessor taking back property in the company's possession.
- check_circleIt does not protect a surety: a guarantor of the company's loan is outside the moratorium (section 14(3)(b)).
Individuals and Personal Guarantors
Part III of the Code covers insolvency of individuals and partnership firms, with the Debts Recovery Tribunal as the adjudicating authority. So far it has been brought into force only for personal guarantors of companies, from 1 December 2019. For those guarantors, section 60 sends the case to the same NCLT that handles the company.
For an ordinary individual borrower, such as a salaried person with a personal loan, the official text of the Code (read October 2026) shows this part not yet brought into force.
How the DRA Exam Tests This
Typical questions: the year of the Code (2016), the adjudicating authority for companies (NCLT) versus individuals (DRT), the minimum default (₹1 crore), and the 180-day period. The trap is mixing up NCLT and DRT, or picking the old ₹1 lakh default figure, which was replaced in March 2020.
FAQs
Can a bank recover from a company that is under IBC?expand_more
Not by suits or enforcement of security while the moratorium runs. The bank files its claim in the insolvency process and is paid under the resolution plan or in liquidation.
What is the minimum default to start IBC against a company?expand_more
₹1 crore, under section 4 of the Code as amended by notification in March 2020.
Does the IBC moratorium protect the guarantor?expand_more
No. Section 14(3)(b) says the moratorium does not apply to a surety in a contract of guarantee to the company, so the lender can still proceed against the guarantor.
Who decides insolvency cases for individuals?expand_more
The Code names the Debts Recovery Tribunal. However, the individual part is so far in force only for personal guarantors of companies, whose cases go to the NCLT.
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