Understanding Insolvency Litigation

Insolvency litigation is one of the most important and rapidly growing areas of commercial law. With increasing corporate borrowing, financial stress, and business failures, lawyers who understand insolvency procedures are in high demand. For law students, this field offers exciting opportunities because it combines courtroom advocacy, corporate restructuring, finance, negotiation, and statutory interpretation.

This article explains what insolvency litigation is, when it is triggered, how the process works, who the key players are, and what typically happens in an insolvency case.

What Is Insolvency Litigation?

In simple words, insolvency means a person or company is unable to pay their debts.

Insolvency litigation refers to all legal proceedings that arise when a debtor (individual or company) becomes financially distressed and creditors seek legal remedies. These proceedings often take place under special insolvency laws (for example, the Insolvency and Bankruptcy Code, 2016 in India), which provide structured and time-bound processes for rescuing or liquidating failing businesses.

Insolvency litigation can involve:

• petitions filed by creditors or debtors,

• disputes over defaults,

• challenges to transactions made before insolvency,

• claims filed by different creditors,

• decisions made by insolvency professionals,

• approval or rejection of resolution plans, and

• liquidation proceedings.

Unlike ordinary civil litigation, insolvency matters move quickly and involve multiple parties and regulators, making it dynamic and complex.

When Does Insolvency Litigation Start?

Insolvency litigation usually begins when a default occurs. A default means the debtor fails to pay a financial or operational debt when it is due.

The process usually starts in one of three ways:

1) Creditor-Initiated Insolvency

Financial creditors (banks, NBFCs, lenders) or operational creditors (suppliers, vendors) file a petition before the insolvency tribunal when payment is not received.

2) Debtor-Initiated Insolvency

A company itself may file for insolvency when it realizes it can no longer meet its financial obligations. This is known as “voluntary insolvency.”

3) Regulatory / Legal Triggers

Sometimes regulators like the government or statutory authorities may trigger insolvency to protect public interest or prevent further financial loss.

Once a petition is admitted, the insolvency proceedings formally begin.

What Happens After Insolvency Is Triggered?

Once an insolvency petition is admitted, a series of legal steps follow. Understanding these steps is crucial for any law student.

a) Moratorium Begins

The tribunal (like NCLT in India) declares a moratorium. This means:

• no lawsuits can be filed against the debtor,

• ongoing cases are paused,

• creditors can’t recover or seize assets, and

• no action can be taken to terminate essential services.

The moratorium is meant to give the debtor “breathing space.”

b) Appointment of an Insolvency Professional (IP)

An impartial Insolvency Professional (IP) is appointed. This person:

• takes control of the company,

• manages day-to-day operations,

• investigates financial statements,

• invites creditor claims, and

• finds out what led to the financial failure.

The IP becomes the central figure in the entire process.

c) Constitution of the Committee of Creditors (CoC)

The IP verifies creditor claims and forms the Committee of Creditors, usually consisting of the main financial creditors.

The CoC has enormous power. It decides:

• whether the company should be revived or liquidated,

• which resolution plan should be approved,

• whether the management should be replaced, and

• major commercial decisions during the insolvency process.

d) Invitation of Resolution Plans

Interested investors, companies, or individuals may submit resolution plans which are proposals to revive the debtor company. A resolution plan typically includes:

• how much of the debt the creditor will recover,

• how the business will continue,

• how employees will be protected,

• how existing management will be treated, and

• future financial strategies.

The CoC votes on the plan. If approved, it is sent to the tribunal for final confirmation.

e) Liquidation (if revival fails)

If no resolution plan is approved, the company enters liquidation. This means:

• business operations stop,

• assets are sold,

• proceeds are distributed to creditors according to priority, and

• the company may eventually be dissolved.

Insolvency litigation therefore deals not only with reviving companies but also with closing them down when revival is impossible.

Key Issues That Come Up in Insolvency Litigation

There are several recurring legal disputes that one should be aware of:

a) Whether the debt is “due and payable”

Courts often examine:

• Is the debt legitimate?

• Has there been a real default?

b) Fraudulent and Preferential Transactions

Transactions made before the insolvency period are scrutinized. These include:

• preferential payments to some creditors,

• transfers undervaluing property,

• fraudulent withdrawals of funds.

Lawyers frequently litigate to recover such transactions.

c) Challenges to Resolution Plans

Operational creditors, employees, shareholders, and other parties often challenge resolution plans for being unfair or discriminatory.

d) Disputes over valuation

Valuation of assets is a major area of conflict because it affects how much creditors recover.

e) Rights of minority creditors

Minor creditors sometimes claim their rights have been ignored by the CoC.

Each of these issues requires legal interpretation, case law analysis, and strong advocacy skills.

Who Are the Key Players in Insolvency Litigation?

Insolvency practice requires coordination among all of these major stakeholders involved:

• Corporate Debtor – the company in financial trouble

• Financial Creditors – banks, NBFCs, institutional lenders

• Operational Creditors – suppliers, vendors, service providers

• Insolvency Professional – manages the company during the process

• Committee of Creditors (CoC) – makes major decisions

• Prospective Resolution Applicants – investors or companies proposing revival plans

• NCLT / Insolvency Tribunals – adjudicate disputes

• Appeal Bodies (NCLAT / Supreme Court) – handle appeals

Why Should Law Students Study Insolvency Litigation?

• It is one of the fastest-growing fields in corporate law.

• It offers exposure to finance, business strategy, and courtroom practice.

• Students learn negotiation, restructuring, and legal drafting skills.

• It opens career opportunities in law firms, consulting firms, IP agencies, and insolvency boards.

• It helps students understand how companies fail and how they can be revived.

Insolvency litigation is both challenging and intellectually stimulating because it sits at the intersection of law, finance, and business.

Conclusion

Insolvency litigation is not merely about shutting down failed companies. It is a structured legal process that aims to balance creditor rights, revive distressed businesses when possible, and ensure fairness and transparency. For law students, it is a field full of learning, growth, and career potential.