Creditor initiated insolvency under the IBC – A new resolution option for financial creditors

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (“Amendment Act”) introduces a significant change to India’s corporate insolvency architecture, a creditor-initiated insolvency resolution process (“CIIRP”). For banks and other financial institutions, the conceptual shift is important. A conventional corporate insolvency resolution process (“CIRP”) under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC” as amended from time to time) begins with an application to the National Company Law Tribunal (“NCLT”) and commences upon admission. CIIRP is designed differently. An eligible financial creditor may, after obtaining the prescribed creditor approvals and giving the corporate debtor an opportunity to make representations, appoint a resolution professional (“RP”). The process commences upon a public announcement by the RP, rather than an admission order of the NCLT. At the same time, CIIRP does not immediately displace the corporate debtor’s management or automatically impose a moratorium. The existing board remains in control, subject to statutory oversight by the RP, and a moratorium must be separately sought. The result is a hybrid structure, creditor triggered, debtor in possession, professionally supervised and capable of converting into a full CIRP.

Who can use CIIRP?

The framework is deliberately confined to categories that will be identified through subordinate legislation. Under section 58A of the Amendment Act, the Central Government may notify eligible corporate debtors by reference to their assets or income, class of creditors, amount of debt or any other category. CIIRP cannot be initiated where an insolvency resolution or liquidation proceeding under Part II of the IBC is already underway. It is also unavailable where the corporate debtor has undergone CIIRP or a pre-packaged insolvency resolution process, or completed a CIRP, during the preceding three years.

The initiating side is similarly restricted. Under section 58B of the Amendment Act, only a financial creditor belonging to a class of financial institutions notified by the Central Government may initiate CIIRP. The Amendment Act therefore does not make the process available to every financial creditor. The eventual notifications will be particularly important for NBFCs, foreign banks operating in India, offshore lenders, debenture holders and other institutional creditors.

The central innovation - commencement without prior NCLT admission

Before appointing an RP, the initiating creditor must obtain approval from financial creditors belonging to the notified class who represent at least 51% in value of the debt due to such financial creditors. The threshold is not 51% of all financial debt of the corporate debtor and is not necessarily identical to the majority threshold under existing consortium or intercreditor arrangements. It is calculated by reference to debt due to financial creditors belonging to the notified class.

The initiating creditor must then inform the corporate debtor of its intention to initiate CIIRP and give it at least 30 days to make a representation. If a representation is received and the creditor continues to pursue CIIRP after considering it, a second 51% approval must be obtained within 30 days of receiving that representation. If the second approval is not obtained within that period, the creditor must restart the process with fresh approval and repeat the statutory procedure. Where the corporate debtor makes no representation within the permitted period, the creditor may proceed after that period expires.

This creates a meaningful statutory decision point. A credible refinancing, equity infusion, asset sale or restructuring proposal can be assessed before formal insolvency begins. Equally, an inadequate response may reinforce the case for proceeding.

Once the statutory requirements are met, the initiating creditor may appoint an insolvency professional as RP, provided no disciplinary proceedings are pending against that professional. The RP makes the public announcement and communicates it, together with a report on compliance with Sections 58A and 58B of the Amendment Act, to the adjudicating authority and the Insolvency and Bankruptcy Board of India. CIIRP commences on the date of the public announcement. During the CIIRP period, no fresh CIRP or pre-pack application in respect of the corporate debtor may be filed or admitted.

The process begins first, the corporate debtor challenges later

The sequencing is the reverse of Section 7 of the IBC. The NCLT does not first admit the matter. Instead, CIIRP commences and the corporate debtor may object within 30 days of such commencement.

If the NCLT is satisfied that no default occurred, it may declare the commencement void ab initio. Where a default occurred but initiation contravened Section 58A or 58B of the Amendment Act, the NCLT must convert CIIRP into CIRP.

For lenders, this makes the evidentiary record critical. Before initiating CIIRP, the creditor should be able to establish the default, the corporate debtor’s eligibility, the composition of the notified creditor class, the calculation of the 51% threshold and compliance with the notice and approval process. The reduced role of the adjudicating authority at the initiation stage heightens the importance of disciplined compliance with creditor side procedural requirements.

Debtor in possession, but not business as usual

CIIRP does not begin with displacement of the corporate debtor’s board. Management remains vested in the board of directors or partners. However, management control is not unrestricted. The RP must attend meetings of members, the board, board committees or partners and has the right, subject to prescribed conditions and procedure, to reject resolutions passed at those meetings. Once rejected, the resolution cannot be approved. Promoters and personnel must also provide information required for the information memorandum and may incur liability for material omissions or misleading or false information. The structure is therefore better understood as debtor in possession with institutional negative control. For a viable business suffering primarily from excessive leverage, preserving existing management may protect enterprise value better than an immediate transfer of control.

No automatic moratorium

Perhaps the most consequential difference from CIRP is that CIIRP does not automatically produce a moratorium. The RP may apply to the NCLT for a moratorium after obtaining committee of creditors (“CoC”) approval. Before the CoC is constituted, the application may be made with approval from financial creditors belonging to the notified class representing at least 51% in value of the debt due to that class. Once the application is filed, the moratorium takes effect immediately and continues during the CIIRP period. The NCLT may subsequently confirm it if required for the proper and efficient conduct of CIIRP or reject the application.

This makes the moratorium a strategic tool rather than an automatic consequence of commencement. Creditors must assess whether a standstill is necessary to preserve enterprise value or whether immediate restrictions would unnecessarily constrain available remedies.

Speed with a built-in escalation mechanism

CIIRP must ordinarily be completed within 150 days. The NCLT may grant one extension of up to 45 days on an application by the RP approved by at least 66% of the CoC voting share. If no resolution plan reaches the NCLT within the statutory period, the corporate debtor or its personnel fail to cooperate with the RP, or the NCLT rejects the resolution plan, CIIRP must be converted into CIRP. The CoC may also, at any time, resolve by a 66% vote to convert CIIRP into CIRP.

On conversion, the NCLT determines the stage from which CIRP will commence after considering the CoC’s recommendation, may continue the CIIRP RP as the interim resolution professional or resolution professional, declares a Section 14 of the IBC moratorium and treats CIIRP costs as CIRP costs. Any pending avoidance and related proceedings continue notwithstanding the conversion, and the conversion order is treated as an admission order under Section 7 of the IBC.

This avoids the inefficiency of abandoning one process and restarting another from zero. CIIRP is therefore best understood as a first stage resolution track with a built-in escalation mechanism.

A recovery tool or a restructuring tool?

Calling CIIRP a ‘recovery tool’ is useful, but incomplete. Its legal purpose remains resolution. It is not a substitute for enforcement under SARFAESI, debt recovery proceedings or contractual acceleration.

Its commercial value lies elsewhere. CIIRP allows eligible financial creditors to move a defaulted corporate debtor into a formal, collective and time bound resolution process without waiting for an NCLT admission order at the outset. The more accurate description may therefore be a statutory restructuring mechanism backed by the credible possibility of conversion into full insolvency. For lenders, CIIRP is likely to be most useful where the underlying business remains viable, the principal creditors are sufficiently aligned, existing management retains operational value and the capital structure can realistically be resolved within a compressed timetable. It may be less suitable where creditor fragmentation is severe, management cannot be trusted to remain in control or urgent asset protection requires the full consequences of CIRP.

The immediate practical task for banks, NBFCs and foreign banks will be to examine the notifications that determine which corporate debtors and financial institutions fall within the regime. CIIRP represents a significant shift in Indian insolvency law. It creates a potential middle path between consensual restructuring and immediate CIRP, more structured than informal negotiations, but less disruptive than an immediate transfer of management.

Whether it becomes an effective lender remedy will depend on the subordinate legislation and, ultimately, on whether creditors use it as a genuine resolution mechanism rather than merely another step in the recovery playbook.