Bankruptcy is an important legal process that helps people or companies who can no longer pay their debts. In India, the Insolvency and Bankruptcy Code (IBC) of 2016 has transformed how financial distress is handled by providing clear rules for different kinds of debtors. This guide explains the 3 types of bankruptcies in India corporate, personal, and group in a simple and detailed way. Whether you’re a business owner, an individual struggling with debt, or just curious about the law, this explanation will help you understand how these processes work and why they matter in India’s financial system.
Unlock new career opportunities with The Legal School’s Certification in Bankruptcy & Insolvency Law: Corporate Restructuring & Debt Resolution, in collaboration with IndusLaw. This six-month program, led by industry experts, equips you with critical skills in insolvency litigation, financial distress management, and corporate rescue strategies. Earn a prestigious certificate and elevate your expertise in a rapidly evolving field!
What Are the 3 Types of Bankruptcies in India?
Bankruptcy in India is divided into 3 categories based on who the debtor is: companies, individuals, or groups of related companies. Each type has its own rules, mostly guided by the IBC, to address the specific challenges faced by different debtors. Below, we’ll explore each type in detail to make sure you fully understand how they work and what they mean.
1. Corporate Bankruptcy
Corporate bankruptcy happens when a company, like a private limited company or a corporation, cannot pay its debts, such as business loans or other financial obligations. To decide if a company is bankrupt, two tests are used:
Cash-Flow Test: This checks if the company has enough cash to pay its debts when they are due. It focuses on whether the company can keep up with its payments.
Balance Sheet Test: This compares the company’s assets (what it owns) to its liabilities (what it owes) to see if it’s financially healthy overall.
Under the IBC, corporate bankruptcy is handled through a process called the Corporate Insolvency Resolution Process (CIRP). This process either tries to restructure the company’s debts to keep it running or sells its assets to pay creditors if saving the company isn’t possible. Here are the key points about corporate bankruptcy:
How It Starts: The process can be started by a financial creditor (like a bank), an operational creditor (like a supplier), or even the company itself.
Time Limit: The CIRP usually takes up to 330 days, including any extensions, to ensure the process moves quickly.
Who’s in Charge: During the CIRP, the company’s directors lose control, and a resolution professional takes over. A group of financial creditors, called the committee of creditors, makes the big decisions.
Outcome: On average, creditors recover about 41% of what they’re owed, making the CIRP a balanced way to either save the company or fairly distribute its assets.
Corporate bankruptcy is very important for India’s growing corporate bond markets. It provides a clear and predictable system that helps investors and creditors feel confident when lending money to companies.
2. Personal Bankruptcy
Personal bankruptcy is for individuals who can’t pay their debts, like personal loans, credit card bills, or other financial obligations. The goal is to protect the person in debt, fairly divide their assets among creditors, and sometimes free them from further debt responsibilities. As of May 27, 2025, personal bankruptcy in India is still governed by older laws because the IBC’s rules for personal bankruptcy are not yet fully active. These older laws are:
Presidency Towns Insolvency Act, 1909: This applies in big cities like Mumbai, Kolkata, and Chennai.
Provincial Insolvency Act, 1920: This covers the rest of India and requires a minimum debt of ₹500 to file for bankruptcy.
Key things to know about personal bankruptcy include:
Who Can File: Either the person in debt or a creditor can start the process.
Factors Considered: The court looks at things like whether the debtor committed fraud, tried to delay creditors, went to jail, or left their business or home suddenly.
Limitations: Unlike corporate bankruptcy, personal bankruptcy under current laws doesn’t cancel certain debts, like those owed to the government or debts tied to fraud.
Future Changes: The IBC plans to introduce a faster, more organized personal bankruptcy process with an automatic pause on debt collection, but until those rules are fully in place, the older laws apply.
3. Group Bankruptcy
Group bankruptcy deals with the financial distress of interconnected companies, like a parent company and its subsidiaries or affiliates, where one company’s debts might affect the others because of shared operations or financial ties. These ties could include supply chain connections, guarantees between companies, or shared loans. Handling each company’s bankruptcy separately can be expensive and reduce the money creditors get back, so the IBC has ways to manage group bankruptcies together. Here’s what you need to know:
Why It’s Different: Even though each company is legally separate, their financial or operational connections mean their insolvencies need to be handled together.
Challenges: Running separate bankruptcy processes for each company can be inefficient, costly and lead to less money for creditors.
How It Works: The IBC uses court rulings and special rules to coordinate group bankruptcy, ensuring the process is efficient and preserves value for creditors.
Group bankruptcy is especially important for large business groups with complex structures, like conglomerates, to make sure their insolvency is handled in a way that considers their connections.
Role of the Insolvency and Bankruptcy Code (IBC)
The IBC, introduced in 2016, is a game-changing law that brings together insolvency rules for both companies and individuals. Before the IBC, resolving bankruptcy in India took an average of 4.3 years, compared to just 1 year in the UK and 1.5 years in the US. The IBC made things faster and more organized by introducing:
Committee of Creditors (COC): A group, mostly made up of financial creditors, that makes key decisions during the bankruptcy process.
Adjudicating Authorities: Special courts or tribunals that handle bankruptcy cases quickly and efficiently.
Time-Bound Processes: The CIRP aims to finish within 330 days. In 2021, the IBC added the Pre-Packaged Insolvency Resolution Process (PPIRP), which takes just 120 days and helps creditors recover about 25% of their claims.
The IBC has been widely accepted by banks and creditors, and the government has worked to make it stronger, helping India’s financial system become more reliable.
Comparing India’s Bankruptcy System to Other Countries
Looking at how India’s bankruptcy system compares to other countries helps put it in perspective:
United States: In the US, under Chapter 11, the company’s management often stays in control during bankruptcy, unlike in India’s CIRP, where directors lose control to a resolution professional.
United Kingdom: The UK’s pre-packaged administrations inspired India’s PPIRP, but India’s version is limited to certain debtors and has a shorter timeline.
These differences show that India focuses on giving creditors more control during bankruptcy, balancing debtor protection with faster creditor recovery. However, challenges like delays in fully implementing personal bankruptcy rules under the IBC still remain.
Why Understanding Bankruptcy Types Matters
Knowing about the 3 types of bankruptcies in India is important for different people and reasons:
For Companies: The CIRP offers a clear way to either restructure a struggling business or fairly distribute its assets if it can’t be saved, which supports India’s corporate bond markets and builds trust with investors.
For Individuals: Personal bankruptcy provides a legal way for people drowning in debt to find relief, and once the IBC’s rules are fully active, this process will become even smoother.
For Group Companies: Coordinated group bankruptcy ensures that complex business groups are handled efficiently, protecting the value for creditors and stakeholders.
By using the IBC’s framework, everyone involved businesses, individuals, and creditors can handle financial distress with more clarity and confidence, supporting India’s economic growth.
Summary
India’s 3 types of bankruptcies corporate, personal, and group meet the needs of different debtors and creditors under the Insolvency and Bankruptcy Code. Corporate bankruptcy uses the CIRP to restructure or liquidate companies, personal bankruptcy helps individuals manage debt under older laws (with IBC rules still to come), and group bankruptcy handles interconnected companies to avoid costly, separate processes. As India continues to improve its insolvency laws, these categories create a strong system for dealing with financial distress, making the economy more resilient.
Related Posts:
3 Types of Bankruptcies: FAQs
Q1. What is corporate bankruptcy under Indian law?
Corporate bankruptcy is when a company can’t pay its debts, checked through cash-flow or balance-sheet tests. It’s handled through the Corporate Insolvency Resolution Process (CIRP), started by creditors or the company, aiming to restructure or liquidate within 330 days.
Q2. How does personal bankruptcy work in India?
Personal bankruptcy is for individuals who can’t pay debts and is currently governed by the Presidency Towns Insolvency Act, 1909 (for Mumbai, Kolkata, Chennai) or the Provincial Insolvency Act, 1920 (elsewhere), with a minimum debt of ₹500. The IBC’s faster process is not yet fully active.
Q3. What is group bankruptcy, and why is it important?
Group bankruptcy involves related companies that share financial or operational ties. The IBC coordinates their insolvency to avoid inefficiencies and protect creditor value, which is key for large, complex business groups.
Q4. Who can initiate bankruptcy proceedings under the IBC?
For corporate bankruptcy, financial creditors, operational creditors, or the company can file with the National Company Law Tribunal (NCLT). For personal bankruptcy, the debtor or a creditor can file under current laws, with similar rules planned under the IBC.
Q5. What are the key differences between the 3 types of bankruptcies?
Corporate bankruptcy focuses on restructuring or liquidating companies, personal bankruptcy helps individuals and distributes their assets, and group bankruptcy manages interconnected firms. Corporate processes are more advanced under the IBC, while personal bankruptcy awaits full IBC implementation.
