Insolvency and the IBC for startups

A company is insolvent when it cannot pay its debts as they fall due. The IBC replaced a slow set of older laws with one process run on a clock. Its aim is to rescue a viable business if possible, pay creditors fairly, and sell off the assets if rescue fails.

Cases go to the National Company Law Tribunal (NCLT). An insolvency professional, licensed by the Insolvency and Bankruptcy Board of India (IBBI), runs the company during the case. The old management is set aside for that period, which is a big reason founders fear the process.

Three kinds of applicant can go to the NCLT. A financial creditor, such as a bank or lender, can apply under Section 7 when a loan is in default. An operational creditor, such as a vendor, landlord or employee owed pay, can apply under Section 9 after sending a demand notice. The company itself can apply under Section 10 to start its own case.

The minimum default is ₹1 crore for Sections 7 and 9 and for a company's own application, a figure set in 2020. Small unpaid bills therefore cannot trigger a case, though many together or one large dispute can. A startup with venture debt, large vendor dues or unpaid salaries is most exposed. If a real dispute with the creditor existed before the demand notice, the tribunal can reject the Section 9 claim.

The Corporate Insolvency Resolution Process (CIRP) starts when the tribunal admits an application. Once it does, a moratorium begins: creditors cannot sue, recover loans or seize assets while the process runs. An interim resolution professional takes charge, and a committee of creditors, made up of financial creditors, takes the key decisions.

Outsiders submit plans to buy or revive the business. If creditors holding at least 66% of the voting share approve a plan and the tribunal accepts it, the plan binds everyone. The law sets a limit of 330 days including litigation, but real cases have run far longer. A government research note on a 2025 amendment bill reported cases that ended in a plan took an average of about 600 days. If no plan wins approval, the company goes into liquidation and its assets are sold.

In liquidation the law sets a payment order, called the waterfall. The costs of the process come first, then workmen's dues and secured creditors, then employee wages, then financial creditors that are unsecured, and then the government and remaining creditors. Shareholders come last, and usually receive nothing.

For a startup this means that equity holders, including founders and venture investors, are at the very end of the line. Investors who lent through convertible notes or venture debt may sit higher up than those who bought shares.

A company is a separate legal person, so the founder's own assets are usually safe. Three things change that. A founder who signed a personal guarantee for a loan can face a separate case under the part of the IBC that covers individuals. A director who kept trading when insolvency was clearly coming can be made to contribute to the company's assets for wrongful or fraudulent trading. And a promoter whose company is a wilful defaulter, or has an account classed as non-performing for long, may be barred from bidding for the company under Section 29A.

Directors can also be questioned about transactions made shortly before the case, such as sending money to insiders, selling assets at low prices or paying one creditor ahead of others. The professional can ask the tribunal to reverse them.

India amended the IBC in 2026. Commentary describes three main themes: faster admission of cases where debt and default are clear, a creditor-initiated route that is designed to finish in about 120 days, and a firmer place for the pre-packaged insolvency process, which was earlier open only to micro, small and medium enterprises. A pre-pack lets a company agree a rescue plan with creditors before the tribunal gets involved.

Much of the Act came into force on 26 May 2026, but some parts, such as the creditor-initiated route, depend on separate notifications and IBBI rules, and reports differ on their status, so check the Gazette text and IBBI notices before relying on any one feature. Early reports say uptake of the older pre-pack route was low.

Act early. Talk to lenders and large vendors before a default, and write down any disputes about the amounts owed. Stop paying insiders or selected creditors ahead of others. Take advice before a demand notice turns into a tribunal case. If the business cannot recover, a planned closing may be cleaner than an insolvency case: the guide on shutting down a startup covers that route.

This guide is general information as of October 2026, not legal advice. Insolvency law moves quickly and each case turns on facts, so speak to a qualified insolvency lawyer.