Insolvency and Bankruptcy Code for Banks: Section 7 to Section 53

The Insolvency and Bankruptcy Code changed the position of a lender more than any statute since the SARFAESI Act. It gave financial creditors control of the process, made admission turn on proof of default rather than on the merits of a dispute, and shifted the default consequence from recovery against assets to the transfer of the company itself. This note looks at the Code from the bank's side: how it applies, what it may do inside the committee, and where it stands if resolution fails.

1. The Scheme and Its Validity

• What it replaced: a scattered regime of winding up under the company law, sick industrial companies under the Sick Industrial Companies (Special Provisions) Act, 1985, and recovery under the 1993 Act and SARFAESI, none of which dealt with the company as a whole.
• The shift in approach: from debtor in possession to creditor in control. On admission, the board is suspended and an interim resolution professional takes over the management, under the supervision of a committee of creditors.
• The objective: resolution as a going concern, with liquidation as the outcome only if resolution fails. The preamble puts maximisation of the value of assets and balancing the interests of all stakeholders among the objects.
• Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17: the Supreme Court upheld the Code, including the distinction between financial and operational creditors as founded on an intelligible differentia, the composition of the committee of creditors, and Section 29A. It described the Code as working, and defaulting managements as having been displaced.
• Banks are outside it as debtors: financial service providers are excluded from the definition of a corporate person, so a bank cannot itself be taken to the Tribunal as a corporate debtor. Banks appear in the Code only as creditors.

2. Commencing the Process

Figure 1: The corporate insolvency resolution process

• The threshold: a default of ₹1 crore or more, raised from ₹1 lakh by notification of 24 March 2020 to keep small businesses out of the process during the pandemic. The raised threshold has continued.
• Financial creditor (Section 7): a creditor to whom a financial debt is owed, that is a debt disbursed against the consideration for the time value of money. A bank is the paradigm. It may apply on its own or jointly with other financial creditors on the occurrence of a default, and must furnish a record of the default from an information utility or such other evidence as is specified.
• The 2026 amendments: the Insolvency and Bankruptcy Code (Amendment) Act, 2026, which received assent on 6 April 2026 and was largely brought into force from 26 May 2026, requires the Adjudicating Authority to admit or reject a Section 7 application within fourteen days or record its reasons for not doing so, and provides that where the statutory requirements are met, other grounds are not to be considered for rejection. The new creditor initiated insolvency resolution process in Chapter IVA had not been brought into force when those provisions commenced.
• What the Tribunal decides: whether a default has occurred and whether the application is complete. It does not examine whether the debt is disputed, because the existence of a dispute is not a defence to a financial creditor's application.
• Operational creditor (Sections 8 and 9): must first serve a demand notice, and the corporate debtor has ten days to bring to notice the existence of a dispute or the record of payment. An existing dispute defeats the application, which is the principal difference from Section 7.
• Homebuyers and debenture holders: allottees under a real estate project are treated as financial creditors, and they, like holders of securities or deposits represented as a class, must apply jointly, being not less than one hundred of them or ten per cent of the class, whichever is less.
• Section 10A: no application may ever be filed under Sections 7, 9 or 10 for a default arising during the specified pandemic period, which began on 25 March 2020 and ran for one year.

Figure 2: The two kinds of creditor

3. The Moratorium

• Section 14: on the insolvency commencement date the Adjudicating Authority declares a moratorium prohibiting the institution or continuation of suits or proceedings against the corporate debtor; the transfer or disposal of any of its assets; any action to foreclose, recover or enforce any security interest, including under the SARFAESI Act; and the recovery of property by an owner or lessor where it is occupied by the corporate debtor.
• Essential supplies: the supply of essential goods or services to the corporate debtor shall not be terminated, suspended or interrupted during the moratorium, nor may a licence, permit, registration or concession be suspended or terminated for non-payment of dues arising in that period, provided current dues are paid.
• Duration: from the commencement date until the approval of a resolution plan or the order for liquidation.
• It does not reach guarantors: the moratorium protects the corporate debtor and its assets. Proceedings against a personal guarantor are not barred, a position put beyond doubt by amendment, and the approval of a resolution plan does not automatically discharge the guarantor, whose liability rests on a separate contract.
• What it means for a bank: an ongoing SARFAESI enforcement stops, a pending Tribunal application is stayed, and the bank's recovery effort moves inside the insolvency process.

4. The Committee of Creditors

• Constitution (Section 21): the interim resolution professional constitutes a committee comprising all financial creditors of the corporate debtor. A financial creditor who is a related party has no right of representation, participation or voting.
• Only financial creditors: operational creditors do not vote, though where the committee has no financial creditors at all, or only related parties, the Code provides for the largest operational creditors to constitute it.
• Voting share: proportionate to the amount of financial debt owed, so the largest lender has the largest voice. In a consortium a bank's share reflects its exposure.
• Functions: to appoint or replace the resolution professional, to approve interim finance and other significant actions under Section 28, to consider resolution plans and to decide whether to liquidate.
• Approval (Section 30(4)): the committee may approve a resolution plan by a vote of not less than sixty six per cent of the voting share of the financial creditors, after considering its feasibility and viability and the manner of distribution, which may take into account the order of priority among creditors and the value of the security interest.
• Commercial wisdom: in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 the Supreme Court held that the commercial wisdom of the committee is paramount and is not justiciable on its merits; that the committee may differentiate between classes of creditor, including between secured and unsecured, so long as it does not act arbitrarily; and that the Adjudicating Authority has limited jurisdiction confined to the grounds in Section 31.
• Timeline (Section 12): the process must be completed within one hundred and eighty days, extendable once by up to ninety days, with an outer limit of three hundred and thirty days including any time spent in legal proceedings. The outer limit has been read as directory in exceptional cases.

5. Eligibility, Approval and Liquidation

• Section 29A: a person is ineligible to submit a resolution plan if he is an undischarged insolvent, a wilful defaulter, the holder of an account classified as non-performing for one year or more unless the dues are cleared before submission, a person convicted of an offence punishable with two years or more under the laws listed in the Twelfth Schedule, or seven years or more under any law, a person disqualified as a director, a person prohibited by a securities regulator, a person who has been a promoter or in the management of a corporate debtor in which a preferential, undervalued, extortionate or fraudulent transaction has been found, or a person who has executed a guarantee in favour of a creditor of the corporate debtor which has been invoked and remains unpaid. The bar extends to connected persons.
• Why it exists: to prevent a defaulting promoter from buying back his own company at a discount after the creditors have taken the loss. Swiss Ribbons upheld it, and an exception exists for micro, small and medium enterprises, where the promoter is often the only realistic buyer.
• Approval (Section 31): where the Adjudicating Authority is satisfied that the plan meets the requirements of Section 30(2), it approves it, and the plan is then binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders, including the Central Government, a State Government and any local authority to whom a statutory due is owed.
• A clean slate: on approval, claims not part of the plan stand extinguished, and no person may initiate proceedings in respect of a claim not dealt with by it (Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657). The successful applicant takes the company free of its past liabilities, and the 2026 amendment writes the principle into Section 31.
• Liquidation (Section 33): ordered where no plan is received or approved within the period, where the committee resolves to liquidate, or where the plan is contravened.
• The waterfall (Section 53): proceeds are distributed in the order: insolvency resolution process costs and liquidation costs; then workmen's dues for twenty four months and debts owed to a secured creditor who has relinquished his security, ranking equally; then wages of other employees for twelve months; then unsecured financial creditors; then government dues for two years and the debts of a secured creditor who enforced his security but fell short, ranking equally; then any remaining debts; then preference shareholders; and last equity shareholders or partners.
• The choice for a secured creditor: to relinquish the security to the liquidation estate and rank high in the waterfall alongside workmen, or to stand outside and enforce the security itself, taking the risk that any shortfall ranks low. Since the 2026 amendment, an explanation to Section 53 treats a secured creditor as secured only to the extent of the security it relinquishes, and as unsecured for the balance.

6. Questions Arising

Why can a financial creditor apply without meeting a dispute?

Because the two kinds of debt are proved differently. A financial debt is evidenced by a loan agreement, a record with an information utility and the bank's own books, so default can be established objectively on documents. An operational debt arises from goods or services whose quality, quantity or delivery is commonly in dispute, and admitting such a claim without examining the dispute would turn the Code into a debt collection device. Swiss Ribbons upheld the distinction as resting on an intelligible differentia with a rational relation to the object of the Code.

Can a court review the commercial decision of the committee of creditors?

Only within narrow limits. Essar Steel held that the committee's commercial wisdom in approving or rejecting a plan is non-justiciable, and that the Adjudicating Authority's jurisdiction is confined to satisfying itself that the plan meets the requirements of Section 30(2). What remains reviewable is whether the committee considered feasibility and viability, whether the distribution was arbitrary or discriminatory between similarly placed creditors, and whether the statutory procedure was followed. The merits of the price are for the creditors.

7. Quick Revision

8. Frequently Asked Questions

What is the threshold for initiating insolvency against a company?

A default of ₹1 crore or more. The threshold was raised from ₹1 lakh by notification dated 24 March 2020, to keep smaller businesses out of the process, and the higher figure has continued since.

What is the difference between a financial and an operational creditor?

A financial debt is one disbursed against the consideration for the time value of money, such as a bank loan; an operational debt arises from the provision of goods or services, employment or statutory dues. A financial creditor applies under Section 7 and a dispute is no defence; an operational creditor must serve a demand notice under Section 8, and an existing dispute defeats the application. Only financial creditors sit on the committee of creditors.

What does the moratorium under Section 14 prohibit?

The institution or continuation of suits and proceedings against the corporate debtor; the transfer or disposal of its assets; any action to foreclose, recover or enforce a security interest, including under the SARFAESI Act; and recovery of property by an owner or lessor. Essential supplies may not be cut off. It does not bar proceedings against a personal guarantor.

What majority approves a resolution plan?

Sixty six per cent of the voting share of the financial creditors in the committee, under Section 30(4), after considering the plan's feasibility and viability and the manner of distribution, which may account for the order of priority and the value of the security interest.

Where does a bank stand in liquidation?

It depends on its choice. A secured creditor that relinquishes its security to the liquidation estate ranks in the second tier of Section 53, equally with workmen's dues for twenty four months and after process costs. One that enforces its security stands outside, keeps what it realises, but any shortfall ranks much lower, alongside government dues for two years. Unsecured financial creditors rank between the two.

9. Related Topics and Provisions

• The SARFAESI Act and enforcement of security interest
• Recovery of Debts and Bankruptcy Act, 1993
• Resolution of stressed assets and wilful defaulters
• Guarantee and indemnity in bank lending
• Non-performing assets: classification and provisioning