India Insolvency & Bankruptcy Code: Guide for Foreign Creditors & Investors

Why Foreign Creditors Need to Understand India's IBC

India's Insolvency and Bankruptcy Code, 2016 (IBC) fundamentally transformed how distressed companies are resolved in the country. Before the IBC, recovering debts from insolvent Indian companies could take 4 to 12 years through fragmented legal proceedings across multiple forums. The IBC consolidated this into a single, time-bound framework administered by the National Company Law Tribunal (NCLT).

For foreign creditors — whether banks that extended external commercial borrowings, suppliers with unpaid invoices, or investors holding equity in distressed Indian entities — understanding the IBC is not optional. As of March 2025, the Code has rescued 1,194 companies and delivered INR 3.89 lakh crore (approximately USD 44.4 billion) back to creditors. The average recovery rate stands at 32.8% of admitted claims, though creditors recover approximately 94% of the fair value of resolved businesses and 170% of what they would have received through liquidation.

The 2025 IBC Amendment Bill introduces cross-border insolvency provisions, group insolvency frameworks, and a new Creditor-Initiated Insolvency Resolution Process (CIIRP) — all of which directly impact how foreign creditors interact with India's insolvency system.

How the IBC Works: A Structural Overview

The IBC creates a unified legal framework for resolving insolvency across three categories: corporate persons (companies and LLPs), partnership firms and individuals, and personal guarantors to corporate debtors. Foreign creditors most commonly interact with the corporate insolvency resolution process (CIRP).

Key Institutional Architecture

• NCLT (National Company Law Tribunal): The adjudicating authority that admits insolvency applications, approves resolution plans, and orders liquidation. India currently has 30 NCLT benches across the country.
• IBBI (Insolvency and Bankruptcy Board of India): The regulatory body that oversees insolvency professionals, insolvency professional agencies, and information utilities.
• Committee of Creditors (CoC): The decision-making body comprising financial creditors, which evaluates and votes on resolution plans. Approval requires 66% of voting share by value of debt.
• Resolution Professional (RP): The licensed insolvency professional appointed to manage the corporate debtor during CIRP. Of 4,527 registered RPs, only 2,198 (49%) hold active Authorisation for Assignment as of March 2025.

Who Can Trigger Insolvency?

Three categories of applicants can initiate CIRP: financial creditors (Section 7), operational creditors (Section 9), and the corporate debtor itself (Section 10). A foreign creditor qualifies under whichever category applies to the nature of their debt — a foreign bank with a loan qualifies as a financial creditor, while a foreign supplier with unpaid invoices qualifies as an operational creditor.

The minimum threshold for operational creditors to file is INR 1 crore (approximately USD 120,000). Financial creditors have no such minimum, though they must demonstrate a default on a financial debt.

The Corporate Insolvency Resolution Process (CIRP)

Once the NCLT admits an application, CIRP commences from the date of the admission order — this becomes the Insolvency Commencement Date (ICD). The process is meant to be completed within 180 days, extendable by 90 days, with an outer limit of 330 days including litigation time.

CIRP Timeline

The gap between the statutory timeline (330 days) and actual average resolution time (713 days as of March 2025, up from 679 days in March 2024) is the single most significant concern for foreign creditors. Nearly 78% of ongoing CIRP cases have exceeded 270 days post-admission.

The Moratorium Under Section 14

Upon CIRP commencement, a moratorium automatically applies under Section 14. This prohibits the institution or continuation of any legal proceedings against the corporate debtor, transferring or disposing of assets, foreclosing or enforcing any security interest, and recovering any property occupied by the corporate debtor.

For foreign creditors, the moratorium raises critical jurisdictional questions. The Supreme Court has held that arbitration proceedings — both pending and new — are covered by the Section 14 moratorium. However, the applicability of Section 14 to foreign-seated arbitrations remains contested. Where India has no reciprocal enforcement agreement with the relevant jurisdiction, Section 14 may not bar foreign-seated arbitral proceedings. This creates a complex strategic calculus for foreign creditors holding arbitral awards or pursuing arbitration against Indian debtors.

Filing Claims as a Foreign Creditor

Once CIRP is initiated, the Resolution Professional issues a public announcement inviting claims from all creditors. Foreign creditors must file their claims within the stipulated deadline — typically 14 days from the public announcement for financial creditors and 90 days for other creditors.

Types of Creditor Claims

Practical Challenges for Foreign Creditors

Foreign creditors face several hurdles that domestic creditors do not. Claims documentation must comply with Indian evidentiary standards — contracts governed by foreign law may need apostillation or notarisation. Currency conversion of claims must follow RBI reference rates as on the insolvency commencement date. Communication with the RP occurs in English (official NCLT language), but supporting documents in other languages need certified translations. Power of Attorney or authorised representative documentation is required if the foreign creditor is not personally appearing, and this typically requires consularisation.

Foreign financial creditors admitted to the CoC have the same voting rights as domestic financial creditors — proportional to their admitted debt. This means a foreign bank with a significant ECB exposure can have substantial influence over the resolution outcome.

The Section 53 Waterfall: Priority of Claims in Liquidation

If CIRP fails to produce an approved resolution plan, the NCLT orders liquidation. Section 53 of the IBC prescribes the distribution waterfall — the order in which proceeds from asset sales are distributed to creditors. This is the section every foreign creditor must understand because it determines recovery in the worst-case scenario.

Liquidation Priority Order

1. CIRP costs and liquidation costs — paid in full and first priority
2. Workmen's dues (24 months preceding liquidation) and secured creditors who relinquish security — ranked equally, paid proportionally
3. Employee dues (12 months preceding liquidation) — other than workmen
4. Unsecured financial creditors — foreign banks with unsecured ECBs fall here
5. Government dues — central and state tax arrears, unpaid GST, etc.
6. Remaining debts and dues — operational creditors fall here if not secured
7. Preference shareholders
8. Equity shareholders/partners

The waterfall is strictly sequential — each class is paid only after the preceding class is fully satisfied. Section 53(2) explicitly states that any contractual arrangement between stakeholders of equal ranking that disrupts this priority order must be disregarded by the liquidator. This means shareholder agreements, inter-creditor agreements, or subordination agreements that attempt to jump the queue are void in liquidation.

For foreign investors holding equity in an Indian wholly owned subsidiary that enters liquidation, the practical reality is grim — equity holders are the last in line, behind all creditors and preference shareholders.

The Resolution Plan: How Creditors Recover Value

The resolution plan is the primary mechanism through which creditors recover value in CIRP. A resolution applicant (typically a strategic buyer or turnaround fund) submits a plan to the CoC that must address payment to all creditors (both financial and operational), the future management of the corporate debtor, the treatment of existing contracts, and the implementation timeline and feasibility assessment.

Key Statistics on Resolution Outcomes

The 32.8% headline recovery rate needs context. For cases admitted early in the distress cycle — before asset values deteriorate significantly — recovery rates can be substantially higher. The IBC's real value for creditors is not just the recovery amount but the certainty and time-boundedness of the process compared to pre-IBC alternatives.

A resolution plan approved by the CoC with 66% voting share and sanctioned by the NCLT is binding on all stakeholders, including dissenting creditors, operational creditors, and equity holders. This cramdown provision is one of the IBC's most powerful features — it prevents minority holdouts from blocking value-maximising resolutions.

Cross-Border Insolvency: The 2025 Amendment Framework

India's handling of cross-border insolvency has historically been ad hoc. The IBC as originally enacted in 2016 contained no provisions for cross-border insolvency. The Ministry of Corporate Affairs released draft provisions (Part Z) in 2018 based on the UNCITRAL Model Law on Cross-Border Insolvency, but these were never enacted into law.

The IBC Amendment Bill, 2025 — tabled in the Lok Sabha on August 12, 2025 — changes this significantly. The Bill empowers the central government to prescribe rules for administering and conducting cross-border insolvency proceedings, including recognition of foreign proceedings and cooperation between Indian and foreign courts.

Key Cross-Border Provisions in the 2025 Bill

• Recognition of foreign proceedings: The framework allows NCLT to recognise foreign insolvency proceedings as either main proceedings (where the debtor's centre of main interest, or COMI, is located) or non-main proceedings.
• Foreign representative access: Foreign insolvency practitioners can seek recognition and relief from Indian courts, and Indian practitioners can seek recognition abroad.
• Cooperation mechanisms: Indian courts can cooperate with foreign courts handling related insolvency proceedings, including through joint hearings and coordinated orders.
• Group insolvency: The Bill empowers the central government to formulate rules for conducting group insolvency proceedings, including provisions for a common bench, coordination between proceedings, and a committee of CoCs of the debtors.

The cross-border framework echoes many features of the UNCITRAL Model Law but maintains distinctive elements tailored to India's legal context. For foreign creditors, the most significant practical impact is the ability to seek recognition of foreign insolvency proceedings in India and vice versa — a capability that did not formally exist before.

The New Creditor-Initiated Insolvency Resolution Process (CIIRP)

The 2025 Amendment Bill introduces CIIRP — a parallel track to CIRP that allows creditor-initiated, out-of-court commencement of insolvency proceedings. This is potentially the most significant procedural innovation for financial creditors, including foreign banks and FDI investors with debt exposure.

How CIIRP Differs from CIRP

For foreign creditors, CIIRP offers several advantages: faster resolution (150 days versus 330 days for CIRP), debtor management continuity (reducing operational disruption), and out-of-court initiation (avoiding NCLT queue delays, given the current pendency of nearly 30,600 cases). The requirement for 51% creditor consent means that foreign creditors with significant exposure can participate in initiating CIIRP alongside domestic lenders.

Practical Strategies for Foreign Creditors

Pre-Insolvency Preparation

• Monitor early warning signs: Payment delays, covenant breaches, and regulatory filings (check MCA portal for delayed annual returns) can signal distress before formal insolvency.
• Secure your position: Ensure all security documentation is perfected under Indian law. Register charges with the ROC within 30 days under Section 77 of the Companies Act, 2013. Unregistered charges may be void against the liquidator.
• Preserve documentation: Maintain complete records of all transactions, communications, and contractual arrangements. Claims supported by weak documentation are routinely reduced by RPs during the verification process.

During CIRP

• File claims immediately: Do not wait until the deadline. Claims filed late may be admitted at a reduced value or rejected entirely.
• Appoint a local representative: Having an authorised representative in India who can attend CoC meetings, review resolution plans, and communicate with the RP is essential for active participation.
• Engage Indian insolvency counsel: The IBC's procedural requirements are technical. Experienced insolvency counsel can identify issues with the resolution plan, challenge RP decisions, and protect your voting position in the CoC.
• Evaluate resolution plan haircuts: Compare the resolution plan offer against the liquidation waterfall value. If the plan offers less than your waterfall recovery, vote against it — but be aware that 66% approval by other creditors can still bind you.

Post-Resolution

• Monitor implementation: Resolution plan implementation timelines are frequently missed. The CoC's continuing role in monitoring implementation was reinforced by recent judicial pronouncements in 2025.
• Enforce the plan: An NCLT-approved resolution plan has the force of a court order. Non-implementation can be challenged through contempt proceedings before the NCLT.

Section 29A: Ineligibility of Resolution Applicants

Section 29A of the IBC disqualifies certain persons from submitting resolution plans. This is directly relevant to foreign investors who may want to acquire a distressed Indian company through the CIRP process. Disqualified persons include wilful defaulters, persons with accounts classified as NPA for 12 months or more, persons convicted of offences punishable with imprisonment of two years or more, and persons who have been disqualified as directors under the Companies Act.

The connected persons test under Section 29A extends the disqualification to related parties, group companies, and persons acting in concert. A foreign investor whose affiliate or group company falls under any Section 29A disqualification will itself be barred from submitting a resolution plan. Due diligence on the resolution applicant's connected persons across jurisdictions is therefore essential before submitting a resolution plan.

Notably, financial creditors who convert their debt to equity under a resolution plan are exempt from certain Section 29A restrictions — a provision that benefits foreign banks or financial institutions seeking to acquire equity in the resolved company as part of their debt recovery strategy.

Tax Implications of IBC Proceedings for Foreign Creditors

The tax treatment of recoveries, write-offs, and asset acquisitions under IBC proceedings creates specific considerations for foreign creditors.

Haircut Write-Offs

When a resolution plan involves a haircut (reduction in admitted claims), the amount written off by the creditor may qualify as a bad debt deduction under Section 36(1)(vii) of the Income Tax Act. For foreign creditors, the deductibility depends on whether the debt was connected to a business carried on in India and whether the income from the debt was previously offered to tax in India.

Capital Gains on Equity Conversion

If a foreign creditor's debt is converted to equity as part of a resolution plan, the subsequent sale of that equity may trigger capital gains tax in India. The cost basis for such equity is typically the value assigned in the resolution plan. Long-term capital gains (holding period exceeding 24 months for unlisted shares) are taxed at 12.5% without indexation for transfers on or after 23 July 2024 (down from the earlier 20% with indexation), while short-term gains are taxed at the applicable corporate rate.

Withholding on Distributions

Distributions to foreign creditors under a resolution plan may attract TDS (Tax Deducted at Source) depending on the characterisation of the payment. Interest payments attract TDS at 20% (or lower DTAA rate), while principal repayments generally do not. The authorised dealer bank processing the outward remittance will require Form 15CA/15CB certification before releasing funds.

FEMA and RBI Considerations for Foreign Creditors

Foreign creditors must navigate FEMA regulations alongside the IBC. Key considerations include the following.

Repatriation of recovery proceeds requires compliance with FEMA current account and capital account rules. Distributions to foreign creditors under an approved resolution plan generally qualify as permissible current account transactions, but the authorised dealer bank may require Form 15CA/15CB certification for withholding tax purposes.

DTAA benefits may apply to recovery amounts depending on the characterisation of the payment (interest, principal, or capital gains) and the applicable double taxation avoidance agreement between India and the creditor's home country.

Foreign creditors who acquire equity in the corporate debtor through a resolution plan must comply with FDI sectoral caps, pricing guidelines, and reporting requirements including FC-GPR filing within 30 days of share allotment.

Key Takeaways

• File claims early and comprehensively — late or poorly documented claims are routinely rejected by Resolution Professionals, and the deadline is strictly enforced
• Understand the Section 53 waterfall — your position in the creditor hierarchy determines your recovery in liquidation, and contractual subordination arrangements are disregarded
• Monitor the 2025 cross-border provisions — once rules are notified, foreign creditors will have formal mechanisms to seek recognition of foreign proceedings in India and coordinate multi-jurisdictional insolvencies
• CIIRP may be faster and less disruptive — the new creditor-initiated process offers a 150-day resolution timeline with debtor management continuity, but requires 51% creditor consent to initiate
• Engage local counsel and representatives — active CoC participation through an authorised Indian representative significantly improves recovery outcomes compared to passive claim filing

For foreign companies evaluating or managing investments in India, understanding the IBC framework is essential risk management. Our FEMA and RBI compliance services can help you navigate the intersection of insolvency and foreign exchange regulations, while our tax advisory team ensures optimal tax treatment of any recovery proceeds.