The Bank Has Started Insolvency Proceedings. What Happens Now?
For a company that has fallen behind on bank repayments, receiving notice of a Section 7 application under the Insolvency and Bankruptcy Code, 2016 is a serious development. But it does not mean that the company has already entered insolvency proceedings or that its assets are about to be sold.
There is an important distinction between filing an insolvency application and admitting it.
A bank approaches the NCLT as a financial creditor under Section 7. The application is based on the existence of a financial debt and a default. Section 3(12) defines default as non-payment of a debt when it has become due and payable. The Supreme Court has reiterated these as essential elements of a Section 7 application.
That allows the company to examine the bank’s case before CIRP begins.
What Can a Company Challenge?
The fact that money is owed does not, by itself, end the analysis. The company needs to examine the debt relied upon by the bank, the alleged default, the supporting records, and the application filed before the NCLT.
Recent Supreme Court authority has emphasised that admission of a Section 7 application requires an objective assessment of whether the statutory ingredients are actually present.
That makes the period before admission important.
The company should review its loan documents, repayment history, restructuring correspondence, notices issued by the bank and the records supporting the amount claimed. If there is a genuine legal issue concerning the debt or default, it needs to be placed before the NCLT properly and at the appropriate stage.
A company should establish whether it is dealing with a straightforward default, a documentation problem, a dispute over the amount claimed, or a situation where settlement or restructuring remains commercially realistic.
What Happens When the NCLT Admits the Case?
Admission changes the company’s position immediately.
On admission, the NCLT declares the moratorium, orders a public announcement of the CIRP and appoints an Interim Resolution Professional.
The Section 14 moratorium generally stops suits and proceedings against the corporate debtor, enforcement of security interests and certain recovery actions against its property. The protection is statutory and is intended to prevent individual creditors from pursuing separate enforcement while the insolvency process is underway.
The management structure also changes.
Under Section 17, management of the company’s affairs vests in the Interim Resolution Professional and the powers of the board are suspended. Company officers and managers must provide the IRP with the records and information needed to run the process.
That does not necessarily mean the underlying business stops.
The IRP is required to make efforts to preserve the value of the corporate debtor and keep it operating as a going concern.
For promoters and directors, the practical priority after admission is therefore cooperation and preparation. Company records, contracts, assets, receivables, litigation and creditor information need to be identified and properly handed over.
The company has entered a collective insolvency process. The question is no longer simply how to deal with the bank. It is how to protect the company’s position while that process unfolds.
What Rights Does the Company Have Once CIRP Begins?
Once CIRP begins, the company’s rights and responsibilities change. The board’s powers are suspended, the Interim Resolution Professional takes control of the company’s affairs, and the Committee of Creditors begins to shape the resolution process. Sections 17, 18 and 21 of the IBC are central to this transition.
For promoters and directors, however, the process does not mean that they cease to have a role.
The company’s officers and management must cooperate with the IRP and provide the records, information and assistance required to run the CIRP. This includes financial statements, details of assets and liabilities, pending litigation, contracts and other information concerning the company’s business.
Can Promoters Submit a Resolution Plan?
This is one of the most important questions for a distressed company.
The answer depends on the promoter’s eligibility under Section 29A of the IBC. Certain persons are disqualified from submitting resolution plans, including specified wilful defaulters and persons connected with accounts that have remained NPAs for the prescribed period, subject to the statutory exceptions and payment provisions.
A promoter therefore cannot assume that ownership of the company gives them a right to buy it back through CIRP. Eligibility has to be examined separately.
Where an eligible resolution applicant submits a plan, the Committee of Creditors assesses it for feasibility and viability. A resolution plan requires approval by at least 66% of the voting share of financial creditors before it can be submitted to the NCLT for approval under Section 31.
What If Resolution Fails?
CIRP is intended to find a resolution for the corporate debtor. But there is no guarantee that one will be achieved.
If the statutory conditions for liquidation are met and no viable resolution is approved within the applicable framework, the NCLT may order liquidation under Section 33 of the IBC. The company’s assets are then dealt with under the liquidation framework, with distribution governed by the statutory priority under Section 53.
That is why the period during CIRP matters so much. By the time liquidation becomes unavoidable, many of the decisions affecting the company’s value have already been made.
For a company facing bank-led insolvency proceedings, the legal strategy therefore needs to begin before admission and continue through the CIRP. The right response may involve challenging admission, protecting the company’s records and assets, supporting a viable resolution plan, or addressing promoter eligibility at an early stage.
The important point is to understand the company’s position before the process makes those decisions for you.
What Should a Company Do When a Bank Initiates Insolvency Proceedings?
The most important legal right a company has is the opportunity to respond before and during the insolvency process. But that right is only useful if it is exercised early.
Before admission, the company should scrutinise the bank’s Section 7 application, the alleged default, the loan documentation and the evidence relied upon. After admission, the priority changes. The company must cooperate with the Resolution Professional, protect its records and participate properly in the CIRP.
There is another issue that promoters and directors often discover too late: the company’s insolvency does not automatically end their personal exposure.
A personal guarantee given to a bank is a separate obligation. Section 14’s moratorium applies to the corporate debtor and does not, by itself, prevent proceedings against a personal guarantor. The Supreme Court has confirmed that personal guarantors do not receive the protection of the corporate debtor’s Section 14 moratorium.
That makes it important to assess guarantees and other personal obligations alongside the company’s CIRP, rather than treating them as a separate problem to be dealt with later.
Liquidation is not inevitable simply because a bank has initiated insolvency proceedings. The IBC gives eligible resolution applicants an opportunity to pursue a resolution plan. If resolution fails and the statutory conditions are met, the NCLT may pass a liquidation order under Section 33.
The practical lesson is straightforward. Do not wait for admission to start preparing your defence, and do not wait for liquidation to start thinking about resolution. The earlier the company understands its debt position, documentation, promoter eligibility and personal guarantees, the more options it is likely to have.
Frequently Asked Questions
1.Can a bank directly take a company into insolvency proceedings?
A bank must file a Section 7 application before the NCLT. The Corporate Insolvency Resolution Process begins only after the application is admitted. Until admission, the company can challenge the application on legally sustainable grounds and place relevant facts and documents before the Tribunal.
2.Can promoters submit a resolution plan for their own company?
A promoter can submit a resolution plan only if eligible under Section 29A of the IBC. The provision disqualifies specified persons from acting as resolution applicants, subject to statutory exceptions. Ownership or previous management of the company does not, by itself, establish eligibility.
3.Does the company’s moratorium protect a personal guarantor?
No. The moratorium under Section 14 applies to the corporate debtor and does not automatically extend to personal guarantors. Proceedings against a personal guarantor may therefore continue independently, even while the company’s CIRP remains pending before the NCLT.
4.What happens if no resolution plan succeeds?
If CIRP does not result in an approved resolution plan and the statutory conditions for liquidation are satisfied, the NCLT may pass a liquidation order under Section 33. The company’s assets are then dealt with under the liquidation framework, subject to the statutory distribution priorities.