Insolvency proceedings under India’s Insolvency and Bankruptcy Code, 2016 (IBC) are designed to provide a swift and fair resolution to financial distress. However, many corporate debtors find themselves in such proceedings not because of unavoidable misfortune, but due to avoidable compliance failures. Identifying common pitfalls and reinforcing best practices can help businesses stay resilient and ward off the onset of formal insolvency.
A core principle of the IBC is the strict timeline for the Corporate Insolvency Resolution Process (CIRP), initially set at 180 days, extendable up to 330 days, including litigation. However, systemic delays often extend this period well beyond, weakening the firm's ability to resolve distress efficiently and increasing the risk of liquidation.
In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors., the Supreme Court struck down the mandatory 330-day cap as unconstitutional but underscored that timelines must be strictly adhered to save the insolvency process from becoming ineffective.
Beyond this, the Supreme Court’s annulment of JSW Steel's acquisition of Bhushan Power in JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors., highlighted how procedural lapses and delays—even after resolution approval—can jeopardize finality.
Avoidance strategy: Implement a robust project management framework for CIRP compliance, including regular progress tracking, proactive escalation of delays, and legal coordination to ensure adherence to deadlines.
Governance lapses are increasingly triggering insolvency, not merely through default, but through regulatory and reputational harm.
In Union Bank of India v. Era Infra Engineering Ltd., the NCLAT noted that fraudulent diversion of funds by management can significantly influence the course and outcome of CIRP.
Similarly, in the recent BluSmart case, insolvency was precipitated after SEBI barred the co-founder from market participation due to misappropriation of funds from a listed affiliate.
Avoidance strategy: Strengthen internal governance controls, ensure transparent financial practices, and conduct independent audits. Establish clear accountability among promoters to prevent misuse of corporate funds.
Section 186 governs corporate guarantee issuance and loan limits. In Lakshmi Ratan Cotton Mills Co. Ltd. v. JK Jute Mills Co. Ltd., the Court held that even if a transaction violated the Companies Act’s lending limits, the company could still be held liable for admitted financial obligations, meaning statutory violation does not insulate a debtor from IBC action.
Avoidance strategy: Regularly audit inter-corporate transactions. Ensure board approval for significant loans and guarantees, and maintain documentation that reflects compliance with statutory thresholds.
Section 65 of the IBC penalizes the initiation of CIRP with fraudulent or malicious intent. In Sunil Kewalramani v. Kestrel Import & Export Pvt. Ltd., the NCLAT held that proceedings initiated for extraneous purposes could be dismissed with costs.
Avoidance strategy: Exercise careful due diligence before invoking insolvency proceedings and document all efforts at negotiation or resolution. For corporate debtors, maintain transparent communication with creditors to avoid triggering proceedings on dubious grounds.
Asset Reconstruction Companies (ARCs) have occasionally been used by tainted promoters to re-enter businesses post-default. While there is limited direct case law, the RBI’s 2024 supervisory remarks have warned against such misuse. Failure to exercise due diligence in ARC transactions could trigger insolvency or regulatory penalties.
Avoidance strategy: ARCs and creditors must enforce independent scrutiny of promoter credentials and avoid reliance solely on self-declarations.
Poor procedural compliance by Insolvency Professionals (IPs) can undermine CIRP validity. In Viral R Rupani v. SR Ashok Kumar, the NCLAT held that resolution professionals cannot delegate statutory duties without proper authorization.
Avoidance strategy: IPs should adhere strictly to regulatory circulars, ensure proper delegation, and maintain accurate records to demonstrate due diligence.
High-profile governance failures, such as Union of India v. Infrastructure Leasing & Financial Services Ltd., demonstrate how unethical conduct and oversight breakdowns can precede insolvency.
Recent governance lapses in companies like Gensol and BluSmart echo the same theme: weak oversight and unchecked promoter discretion create fertile ground for financial collapse.
Avoidance strategy: Strengthen the role and functionality of independent directors, audit committees, and internal compliance teams.
IBC jurisprudence and statutory amendments evolve rapidly. For instance, the Insolvency and Bankruptcy Code (Amendment) Bill, 2025 introduces enhanced CoC powers during liquidation and re-opening of CIRP under specific conditions. Failing to anticipate such changes can result in strategic missteps, as seen in K. Sashidhar v. Indian Overseas Bank & Ors., where the Supreme Court clarified CoC’s commercial wisdom is non-justiciable, changing the dynamics of resolution planning.
Avoidance Strategy: Stay updated on legislative developments and integrate them into compliance frameworks.
Although not a direct compliance failure, delay in NCLT/ NCLAT adjudication, exacerbated by insufficient benches, often erodes asset value and increases liquidation risk, as observed in Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Co. Ltd.
Avoidance strategy: Prepare strong, timely filings, maintain documentary readiness, and engage experienced professionals to navigate procedural bottlenecks.
Insolvency proceedings often arise from avoidable compliance failures: missed deadlines, governance lapses, statutory violations, and failure to adapt to evolving law. Businesses can significantly reduce insolvency risks by embedding robust compliance protocols, transparent governance, and proactive legislative tracking into their operational DNA.
By focusing on these preventive measures, companies not only safeguard against legal exposure but also strengthen their resilience in a volatile commercial environment.
About the author: Sanchari Chakroborty is the Founder and Managing Partner of SC&A Legal.
Disclaimer: The opinions expressed in this article are those of the author. The opinions presented do not necessarily reflect the views of Bar & Bench.
If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.