Insolvency and Bankruptcy in India — Meaning, Process & Legal Remedies

India’s financial system is built on trust—borrowers must repay loans, and creditors must have a remedy if payments stop.
To prevent long legal delays and recover loans efficiently, India enacted the Insolvency and Bankruptcy Code, 2016 (IBC).
IBC has transformed how financial stress is resolved for companies, partnerships, and individuals.

This blog explains:

✔ What is insolvency?
✔ What is bankruptcy?
✔ Difference between both terms
✔ How the insolvency process works under IBC
✔ Rights of financial and operational creditors
✔ Insolvency for individuals and partnerships
✔ Corporate insolvency resolution process (CIRP)
✔ Bankruptcy for individuals

🔹 1. What Is Insolvency?

Insolvency means a person or company is unable to pay debts when they become due.

It is a financial condition, not a legal declaration.

Reasons for insolvency:

• Heavy debt

• Business losses

• Unpaid loans

• Cash flow problems

• Market downturn

• Mismanagement

Insolvency is the stage before bankruptcy.

🔹 2. What Is Bankruptcy?

Bankruptcy is a legal declaration that a person is insolvent and cannot repay debts.
In India, bankruptcy applies to individuals and partnership firms, not companies.

When a person is declared bankrupt:

• A trustee manages their assets

• Assets may be sold to pay creditors

• Debts are discharged after the process

Companies, on the other hand, undergo insolvency resolution or liquidation, not “bankruptcy.”

🔹 3. Difference Between Insolvency and Bankruptcy

• Insolvency = inability to pay debts (financial condition).

• Bankruptcy = legal status after court declares a person insolvent.

• Companies cannot be declared bankrupt; they undergo CIRP or liquidation.

🔹 4. What Is the Insolvency and Bankruptcy Code (IBC), 2016)?

The IBC is India’s modern law to resolve insolvency quickly—within 180 to 330 days.

Its goals:

• Protect creditors

• Revive companies

• Liquidate non-viable companies

• Give fair remedy to lenders and suppliers

• Reduce NPA burden on banks

IBC applies to:

✔ Companies
✔ LLPs
✔ Partnership firms
✔ Individuals

🔹 5. Corporate Insolvency Resolution Process (CIRP)

CIRP is the core mechanism to resolve a company’s insolvency.

Step 1: Default Occurs

When a company fails to repay debt of ₹1 crore or more, creditors can file insolvency.

Step 2: Application to NCLT

Financial or operational creditor files case with the National Company Law Tribunal.

Step 3: Moratorium Begins

Once NCLT admits the case:

• All legal cases stop

• No recovery actions allowed

• No asset transfer permitted

Step 4: Insolvency Professional Takes Charge

An IP (Resolution Professional) replaces the management and controls the company.

Step 5: Committee of Creditors (CoC) Forms

Financial creditors vote on revival plans.

Step 6: Resolution Plan Approval

A new investor may take over the company.

If no plan is approved:

Step 7: Liquidation

Company assets are sold and creditors are paid in priority.

🔹 6. Who Can Initiate Insolvency?

✔ Financial Creditors

(Example: Banks, NBFCs, lenders)

✔ Operational Creditors

(Example: Suppliers, service providers who are unpaid)

✔ The Company Itself

(Voluntary insolvency)

🔹 7. Insolvency for Individuals and Partnership Firms

IBC also covers individual insolvency, especially:

• Personal guarantors to corporate loans

• Small partnership businesses

• Proprietorship firms

Process involves:

• Application to DRT

• Appointment of a resolution professional

• Repayment plan submission

• Possible bankruptcy declaration if the plan fails

This ensures individuals with heavy debts have a structured remedy.

🔹 8. Rights of Creditors Under IBC

Creditors benefit greatly under the code:

• Faster recovery

• Priority in payment

• Transparent process

• Power to take decisions through CoC

• Protection against fraud and diversion of funds

IBC has significantly improved creditor recovery from earlier 20% to nearly 40–45% in many cases.

🔹 9. Benefits of IBC

• Quick resolution of insolvency

• Saves viable businesses

• Reduces NPAs

• Encourages responsible borrowing

• Protects small operational creditors

• Eliminates outdated winding-up procedures

• Improves India’s financial stability

🔹 10. Common Misconceptions About Insolvency & Bankruptcy

❌ “Insolvency means the company is finished.”

Many insolvent companies are revived under new management.

❌ “Bankruptcy is automatic.”

Bankruptcy happens only through court declaration.

❌ “Only banks can file insolvency.”

Suppliers, service providers, landlords—any operational creditor can file.

❌ “Directors go to jail for insolvency.”

No. Insolvency is a civil economic issue, not a criminal offence.

⭐ Conclusion

Insolvency and bankruptcy are important legal mechanisms that help stabilize the financial system.
The Insolvency & Bankruptcy Code (IBC) ensures:

✔ Fair treatment of creditors
✔ Revival of viable companies
✔ Quick liquidation of non-viable businesses
✔ Structured relief for individuals in debt

Whether you are a creditor, investor, business owner, or individual debtor, understanding IBC helps in taking timely and strategic decisions.