Debt resolution
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In this article, Raj Dhakan, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the laws relating to debt resolution in India.

What is debt resolution?

Debt can be defined as the loan taken by an individual or an organization from the bank or financial institutions to meet its expenses, start a new business, buy a new house or vehicle etc. The person or organization taking the loan is called as the debtor and the lender is called as a creditor. Many a times the debtor is not able to repay the creditor its principal amount (he may go bankrupt) or the interest amount due to losses in business or due to other possible reasons. In such cases the creditor might try to settle the issue in person or approach the court to intervene and help them recover their money. This process of settlement is called as debt resolution.

Need for Debt Resolution Laws in India

In 2016, besides GST and Demonetization the other thing that made news headlines was the Insolvency & Bankruptcy Code (also known as IBC Code 2016). With the enactment of this Act, India has jumped 30 points and reached 100th rank in Ease of Doing Business world rankings. Before understanding what the code actually means, let us look at why was it needed.

Industrialists in India have started venturing into all the possible directions to expand their business and take huge risks. Private and Public institutions were competing to lend to these industrialists at dirt cheap rates. Companies started investing in long term projects with short term floating interest rates loans. With the global recession, inflation started rising in India and so did the interest rates. Industrialists were now facing it difficult to repay the loans with higher interest rates, from low or steady income stream from those projects. Adding to it, as inflation rose the prices of products started skyrocketing and the income from projects further declined. This was the time when the corporates started defaulting on the loans and the lenders started approaching courts to pave a path out. Banks started getting NPAs on their balance sheets and currently 56% of bad debts on banks’ balance sheets are from Corporates.

Difference between Rehabilitation and Liquidation

Liquidation of a company refers to selling of all the tangible and intangible assets of the company and repaying the creditors with the proceeds. The money received from the proceeds is known as ‘Liquidation value’.

However, the value we might receive from liquidation would be far less as the assets are being sold because they are not in a good state to produce any benefit in future, for example obsolete machines. So, what if the business can be restructured and profits can be generated in future to repay all the debts of the creditors, law gives us an option of creating a rehabilitation plan to revive the business on the principle of ‘Going Concern’.


The timeline for debt resolution laws in India can be stated as below

1956 – Companies Act, 1956

1986 – Sick Industrial Companies Act, 1986

2016 – I&B Code

Old Laws in India

One would argue that why did India not have any laws pertaining to this issue before IBC. The answer is, we did have 2 major laws, but they had some shortcomings.

Section 433 and 434 of the Companies Act, 1956 (later Section 271 of the Companies Act, 2013): This section of the Companies Act dealt with the liquidation of the company. which means selling of the assets of the company and paying the creditors’ with the sale proceeds. Any of the creditor who the company has defaulted can go to the court and demand for liquidation of the company on the grounds of its inability to pay them. It was on the discretion of the court whether the company should be wound up or not. The issue here is that the court would not be savvy enough to evaluate the business, and inhibit an accurate rehabilitation plan for the business.

Sick Industrial Companies Act 1986 (SICA)

To address the above problem of rehabilitation, SICA gave the authority to the managing committee and board of directors of the business to come up with a plan to rejuvenate the business. The key feature of this act was that, while the scheme was being prepared and approved, there was a moratorium of any legal actions against the company by any of its creditors. SICA failed because companies chose to stay in its protection for years without any successful scheme for rehabilitation.

The Insolvency and Bankruptcy Code 2016 (IBC)

The Insolvency and Bankruptcy code was introduced in 2016 due to the failure of the existing laws and the mounting up of NPAs in the public sector banks. IBC gave a new policy structure to the rehabilitation and liquidation process, thus giving a strong exit structure for business and investors.

Under the IBC, there are 5 steps to solve the rehabilitation and liquidation problem.

Step 1 – Application to NCLT

A company is called as an insolvent when it is not able to pay back its debt or losses which are more than the net worth of the company. In such cases a financial creditor, an operational creditor or the company itself (also known as Corporate Debtor) can submit an application to the National Company Law Tribunal (NCLT) to start the insolvency process also known as a Corporate Insolvency Resolution Process (CRIP). NCLT has to accept or reject the application within 14 days of the application submission. The creditor can file the application only if the company’s default in payment is more than 1 lakh rupees. Financial and operational creditors have different criteria for qualifying to submit the application.

Step 2 – Starting of CRIP

Once the application is approved by NCLT or NCLAT, the board of directors are suspended and the management is placed under the control of an Interim Resolution Professional also known as IRP. Management does not have any control over the company while the company is under CRIP. Along with this, a moratorium is applied on the company which prohibits:

(a) the existing or new legal proceedings against the company,

(b) the transfer of its assets,

(c) the collection of any security interest,

(d) the recovery of any property from it by an owner or lessor

(e) the suspension or termination of the supply of essential goods and services to it. The moratorium lasts till the corporate debtor is in CIRP.

Step 3 – Creation of CoC

Once the company is into CRIP, within 30 days of its admission, the IRP has to verify the claims made by all the creditors and form a team of all the Financial creditors (please note it is only Financial creditors and not Operational creditors) called as Committee of Creditors (CoC).

Step 4 – Appointment of Resolution Professional

Once the CoC has been formed, the committee appoints a Resolution Professional known as RP which may be same as the IRP depending upon the discretion of the CoC.

Step 5 – Formulation of Resolution plan or Liquidation

Within 180 days of starting of the CRIP a resolution plan needs to be prepared and approved by 75% of the creditors and the NCLT. The NCLT may extend this time by an additional 90 days. Any person including the former management, or creditors, or RP or a third party can propose a resolution plan and it would be the responsibility of the RP to check its feasibility with the IBC and get it approved by NCLT.

Once approved the plan is binding on all the stakeholders involved in the process of CRIP.

If no plan is approved by the CoC and the NCLT within the stipulated time frame, then the NCLT will order for the liquidation of the company.

Resolution Plan

Under IBC, the resolution plan needs to be approved by at least 75% of the financial debtors forming the CoC and also the RP needs to check whether the plan satisfies the needs of the IBC and the NCLT. Once approved, the plan is binding on all the stakeholders for example – Employees, Creditors, Members, Guarantors and other Stakeholders. In IBC other stakeholders is defined as any person who is liable to receive a compensation on the liquidation of a company.

One major complaint received so far on the working of IBC is that the promoters, CoC and the RP collude together to come up with a resolution plan and get it approved without checking its viability for preventing the liquidation of business. To deal with this issue, the IBC has been amended and in 2017 known as Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) 2017, which limits promoters from submitting resolutions for the corporate debtor.

Liquidation Process

Under Section 33 of the IBC, if no resolution is passed before the expiry of the CRIP or if it rejects the plans because it did not comply with the IBC guidelines, then the NCLT can order the liquidation of the corporate debtor.

Under Section 33(4), NCLT can order the liquidation of the company even if the resolution plan was approved if any of the creditor approaches the court on the grounds of his interests being affected due prejudicial contravention of the plan.

RP will be assigned as the liquidator unless the IBBI appoints someone else explicitly to do the needful.

After the liquidator has been appointed, he will sell the assets of the company part by part. He has to follow the auction method for selling as it is the most transparent price discovery mechanism. However, private sale can be conducted under certain conditions for example if the inventories are highly perishable in nature. Under Section 44(1) of the IBBI, the liquidator should liquidate the debtor within a time period of 2 years.

Section 53 of the IBC states the priority in which the proceeds of the liquidation should be distributed:

Liquidation and insolvency costs.

The following debts which rank equally: (i) workmen’s dues for the period of twenty-four months before the liquidation starting date; and (ii) debts owed to a secured creditor.

Wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

Financial debts owed to unsecured creditors

Ranking equally, (i) any amount due to the Central Government and the State Government in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

  • any remaining debts and dues;
  • preference shareholders
  • equity shareholders or partners.

Advantages of IBC Code over previous laws

A robust and efficient authority to hear the cases.

A regulated profession of insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.

A regulator – the Insolvency and Bankruptcy Board of India (IBBI) – to perform legislative, executive and quasi-judicial functions with respect to the IPs, and IUs and draft regulations for the resolution procedures under IBC.

Challenges for IBC Code

The biggest challenge is to transition existing cases to IBC.

At present there are around 4200 cases pending with the CLB and 4000 cases get added every year, hence it is going to be a challenge for them to clear all of them in the stipulated time period.


After going through the details of IBC, we can conclude that IBC is a more time and deadline based process which helps in quicker resolution to the creditors of the defaulting company while giving ample opportunity for rehabilitation.

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  1. hiii, my friend is pursuing final year b tech, few years back his father got into accident so his mother lended so much of money and made him cure but his father don’t know about the debt, but his other is not very good in finance she couldn’t able to bear the high interest so she started to get some other loan and gave to previous people she had a hope that she can work over time and pay them but it didn’t worked,suddenly his father came to know about the debt her mom told only half amount to his father (just because of fear we should not argue logically in this, she is a typical indian women) and big problem started to arise in their family but the main thing is the remaining half started to grow tremendously because of the high rate of interests now his mom is having nearly 9 lakh debt and she is a middle class tailor and my friend is still a student they don’t have any property or money if the financiers start to pressure more they will end their lives please tell me any legalities regarding this issue what they can do to recover and one more thing is my friend is willing to repay but he needs time, please give me any advice, please, i’m waiting for a reply with so much of hope…