FAQs: Common questions on insolvency and DRT for laypersons

Insolvency means a person or company cannot pay their debts when they are due. Think of it like being unable to pay your monthly bills because you don't have enough money. For companies, if they owe ₹1 crore or more and cannot pay, they may be considered insolvent.

NCLT stands for National Company Law Tribunal. It's a special court that handles company-related legal matters, especially when businesses cannot pay their debts. If you own a business, are a creditor, or work for a company facing financial trouble, NCLT decisions can directly affect you.

DRT stands for Debt Recovery Tribunal. While NCLT handles company insolvency (₹1 crore+ debts), DRT specifically deals with bank loan recovery cases (₹20 lakh+ debts). Think of DRT as a specialized court where banks go to recover money from borrowers who haven't repaid their loans.

IBC stands for Insolvency and Bankruptcy Code. It's the main law that governs how insolvency cases are handled in India. Passed in 2016, it provides a time-bound process to either revive struggling companies or close them down in an orderly manner, ensuring creditors get maximum recovery.

An insolvency case can be filed when: 1) A company owes ₹1 crore or more, 2) The company has defaulted (not paid) for some time, 3) The creditor (person owed money) has tried to recover the debt but failed. The creditor must first send a demand notice and wait for a response before approaching NCLT.

Banks can file a case in DRT when: 1) You owe ₹20 lakhs or more, 2) You have defaulted on loan payments, 3) The bank has followed proper notice procedures. This usually happens after your loan account becomes a Non-Performing Asset (NPA), typically after 90 days of non-payment.

Yes, this is called 'voluntary insolvency.' You can file if your company cannot pay its debts and you want to either restructure the business or close it down properly. This is often better than waiting for creditors to file, as you maintain some control over the process.

No, insolvency cases are not automatic. Someone must file an application - either a creditor (financial or operational), the company itself, or sometimes the government. The mere fact that a company is losing money or struggling doesn't automatically start insolvency proceedings.

Once filed, NCLT first checks if the case is valid. If accepted, they appoint an Interim Resolution Professional (IRP) who takes control of the company. A moratorium (legal protection) starts, stopping all legal actions against the company. The IRP then works with creditors to either find a buyer/investor or liquidate the company. The entire process has a 180-day deadline (extendable to 330 days).

A Resolution Professional (RP) is like a temporary manager appointed by NCLT to run the company during insolvency. They replace the company's management, try to find buyers or investors, manage day-to-day operations, and work with creditors to maximize recovery. Think of them as a neutral professional trying to save the business or get the best price if it must be sold.

In DRT: 1) Bank files an Original Application with documents, 2) DRT issues notice to borrower, 3) Borrower can file a reply/defense, 4) Both sides present evidence and arguments, 5) DRT gives judgment, 6) If bank wins, they can start recovery proceedings through a Recovery Officer who can attach and sell borrower's assets to recover the debt.

A moratorium is like a legal shield that protects a company during insolvency proceedings. Once NCLT admits the case, creditors cannot: file new lawsuits, take company assets, demand immediate payments, or shut down operations. This gives breathing space to find solutions without constant pressure from creditors.

Yes, usually the company continues operating under the Resolution Professional's management. The goal is to keep the business running while finding a solution. However, the original management loses control, and all major decisions must be approved by the Committee of Creditors.

Liquidation means closing down the company and selling all its assets to pay creditors. It happens when: 1) No viable resolution plan is found within the time limit, 2) The approved resolution plan fails, or 3) Creditors specifically choose liquidation. It's the last resort when the business cannot be saved.

NCLT insolvency proceedings have strict timelines: 180 days for the main process (extendable to 330 days in special cases). If liquidation happens, it can take 1-2 years more. DRT cases typically take 6 months to 2 years depending on complexity and whether the borrower contests the case.

Filing fees for NCLT range from ₹25,000 to ₹5 lakhs depending on the company's assets. Additional costs include: Resolution Professional fees (₹5-25 lakhs), legal fees (₹2-10 lakhs), and other professional costs. For DRT, filing fees are much lower (₹500-₹5,000) but legal costs can still be significant.

Initially, the person filing the case pays the fees. During proceedings, costs are paid from the company's assets. If there are no assets, the applicant bears the costs. In successful cases, costs are usually recovered from the company's assets or the resolution plan.

Recovery rates vary widely. In successful resolution cases, creditors might recover 40-80% of their money. In liquidation, recovery is usually much lower (10-30%) because assets are sold at distressed prices. DRT cases can have higher recovery rates if the borrower has sufficient assets.

NCLT insolvency timelines can be extended only in exceptional circumstances, maximum up to 330 days total. DRT cases don't have strict timelines, but courts try to dispose of cases within reasonable time. Delays often happen due to adjournments, appeals, or complex legal issues.

Employees have strong protections: 1) Wages and dues for 24 months before insolvency get priority in payment, 2) They cannot be fired without Resolution Professional's approval, 3) They can continue working and receiving salaries, 4) Provident fund and gratuity dues are protected, 5) They can raise objections if their interests are affected.

Yes, you can challenge by: 1) Filing objections within 7 days of receiving notice, 2) Arguing that the debt doesn't exist or is disputed, 3) Showing that you're not actually in default, 4) Proving the case doesn't meet legal requirements, 5) Settling the debt before NCLT admits the case.

Small creditors (owed less than ₹1 crore) can: 1) File claims and participate in meetings, 2) Receive information about proceedings, 3) Object to resolution plans that don't treat them fairly, 4) Appeal to NCLAT if their rights are violated, 5) Get paid according to the priority order set by law.

Yes, appeals are possible: 1) DRT decisions can be appealed to DRAT (Debt Recovery Appellate Tribunal) within 45 days, 2) NCLT decisions can be appealed to NCLAT (National Company Law Appellate Tribunal) within 30 days, 3) Further appeals to Supreme Court are possible in exceptional cases.

Personal guarantees remain valid even during company insolvency. If you've given a personal guarantee for company debts, creditors can still pursue you personally. However, if the company's debt is settled through the insolvency process, your guarantee liability may be reduced accordingly.

Yes, strongly recommended. These are complex legal proceedings with strict timelines and procedures. A lawyer can help you understand your rights, file proper documents, present your case effectively, and avoid costly mistakes. The legal fees are usually worth it considering the amounts involved.

Keep all loan agreements, correspondence with creditors, payment receipts, financial statements, board resolutions, and any notices received. Also maintain records of assets, insurance policies, and any disputes with creditors. These documents are crucial for defending your case or proving your claims.

Yes, settlement is often the best option. You can negotiate with creditors for reduced payments, extended timelines, or restructured terms. Many cases are settled through mediation or direct negotiation. Settlement saves time, money, and stress for all parties involved.

Your credit score will be negatively affected. Insolvency and DRT proceedings are reported to credit bureaus and remain on your credit report for several years. This makes it difficult to get new loans or credit. However, successfully completing the process and clearing debts can gradually improve your creditworthiness.

Early action is key: 1) Monitor cash flow regularly, 2) Communicate with creditors when problems start, 3) Negotiate payment plans before defaults become serious, 4) Consider voluntary restructuring, 5) Seek professional financial advice early, 6) Don't let any single debt reach ₹1 crore without addressing it.

Several alternatives: 1) Voluntary arrangements with creditors, 2) Assignment for benefit of creditors, 3) Composition schemes, 4) Merger or acquisition by another company, 5) Asset sales to pay debts, 6) Informal workout arrangements. These are often faster and less expensive than formal proceedings.

Yes, but with some restrictions. You may be disqualified from being a director for a certain period. However, you can start a new business, work as an employee, or become a director after the disqualification period ends. Many successful entrepreneurs have bounced back after insolvency.

Consult immediately when: 1) You receive any legal notice about debt recovery, 2) Your business is struggling to pay debts over ₹20 lakhs, 3) Creditors threaten legal action, 4) You're considering filing insolvency, 5) You receive NCLT or DRT notices. Early legal advice can often prevent bigger problems.

Look for: 1) Experience in insolvency/DRT matters, 2) Good track record with similar cases, 3) Clear fee structure, 4) Responsive communication, 5) Local knowledge of courts and procedures, 6) Professional credentials and reputation. Don't just choose based on lowest fees - expertise matters more.

Yes, several options: 1) Legal aid societies provide free or low-cost legal help, 2) Some law schools offer free clinics, 3) Bar associations may have pro bono programs, 4) Government legal aid schemes for eligible persons, 5) Some NGOs provide legal assistance. However, availability may be limited for commercial matters.