Bankruptcy Law In India
Bankruptcy Law In India




What is Bankruptcy?

Bankruptcy is a legal status which is usually imposed by a Court, on an individual or any firm when he (it is) unable to meet debt obligations.

In India, the legal and institutional machinery for dealing with debt default is not as per international standards. The recovery action by creditors, either through:

  • Indian Contract Act, 1872 or
  • through special laws such as:
  • Securitisation and Reconstruction Act, 2002 and
  • Recovery of Debts Due to Banks and Financial Institutions Act, 1993

has not had desired outcomes.


  • the winding up provisions of the Companies Act, 1956 and
  • action through the Sick Industrial Companies (Special Provisions) Act, 1985

have neither been able to aid recovery for lenders nor aid restructuring of firms.


Laws dealing with:

  • individual insolvency,
  • the Provincial Insolvency Act. 1920, and
  • the Presidential Towns insolvency Act, 1909.

are almost a century old.


The Insolvency and Bankruptcy Code, 2016 (IBC) provides for a formal insolvency resolution process (IRP) for business, either:

  • by ensuring the speedy liquidation or
  • by coming up with survival mechanism


The Bill envisages a new regulator, the Insolvency and Bankruptcy Board of India.

The Lok Sabha had passed the Bill on 5th May, 2016 and later, the Rajya Sabha passed it. This is considered as the biggest economic reform after GST.

ICICI Bank v. Innoventive Industries Ltd  

The National Company Law Tribunal (NCLT), Mumbai has admitted the first insolvency proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (Code) by ICICI Bank, against Innoventive Industries Ltd  to commence a ‘corporate insolvency resolution process’.



  1. A business/debtor who has defaulted on dues.
  2. Lenders & creditors to a firm, including employees (secured or unsecured)
  3. When the IRP is on, creditors’ claims are frozen for 180 days and during this period they will hear proposals for revival and decide on their future course of action and three-fourths of the creditors must agree to a revival plan.
  4. The Bill vests the insolvency professionals tasked with the job, with substantial powers.
  5. The Code creates time-bound processes (180 days) for insolvency resolution of companies and individuals.
  6. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.



  • licensed insolvency professionals (IPs) will conduct the resolution processes, who will be members of insolvency professional agencies (IPAs).
  • They will also furnish performance bonds equal to the assets of a company
  • Information utilities (IUs) will be established who will perform functions to:
  • collect,
  • collate and
  • disseminate financial information to facilitate insolvency resolution.
  • Adjudication of the resolution:
  • Debt Recovery Tribunal (DRT) for individuals and
  • National Company Law Tribunal (NCLT) for companies.
  • The Insolvency and Bankruptcy Board of Indiawill be set up. It will regulate functioning of  IUs, IPAs and IPs.



  1. Address cross-border insolvency with other countries through bilateral agreements
  2. Shorter time frames for every step in the insolvency process—
  3. filing a bankruptcy application
  4. the time available for filing claims and
  5. appeals in the debt recovery tribunals (DRTs),
  6. National Company Law Tribunals (NCLTs) and
  7. Ensure time-bound settlement which will enable faster turnaround of businesses.
  8. It also creates a database of serial defaulters.
  9. There is one single law rather than multiple laws and also removes the overlapping jurisdiction.

JM Financial Asset Reconstruction v. the State of Maharashtra & Ors.

In this case, the Bombay High Court held that actions taken under the SARFAESI Act will override the provisions of any notifications issued under the MRU Act.

Thus, a secured creditor will exercise his rights under the SARFAESI Act irrespective of the notifications issued under the MRU, which if enforced will otherwise suspended enforcement of rights against a ‘relief undertaking’.

In another case, M/S Madras Petrochem v. BIFR the apex Court held that provisions of SARFAESI which uphold ‘creditor’s right’ will continue to apply despite the existence of a non-obstante clause in Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, which allowed suspension of all proceedings upon declaration of a company as ‘sick’.




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