By Nitin Jain

Introduction

Parliament passed amendments to the Insolvency and Bankruptcy Code last week. The headlines focused on faster timelines, a new creditor-initiated framework, and long-overdue provisions on group insolvency. For a particular category of business – mid-market companies carrying meaningful receivables exposure to a customer or counterparty, what matters most in those amendments is: resolution professionals now have enhanced statutory powers to determine the value of claims during CIRP. The discretion that already existed has been formalised and expanded.

If your company has a customer currently under financial stress, that change is worth pausing on.

The inflection point

A counterparty enters insolvency. The public announcement goes out. Your finance team files the claim – invoices attached, outstanding amounts listed, forms submitted on time. The resolution professional publishes the list of admitted creditors. Your company either doesn’t appear on it, or appears in a category that the resolution plan treats as receiving nothing.

At that point, most companies assume the problem is administrative. A missing document. A form error. Something that can be corrected with a follow-up email.

It usually isn’t an administrative problem.

What has actually happened is a classification decision – one that the resolution professional made, often quickly, under significant process pressure, working primarily in service of the Committee of Creditors. And the CoC, dominated by financial creditors with senior positions in the waterfall, has interests that do not necessarily align with yours.

The NCLAT has been consistent on this point. A creditor whose dues were reflected in the corporate debtor’s financial statements as long-term liabilities still had its claim rejected. The resolution professional had no legal obligation to admit a claim merely because the amount appeared on the company’s books. Being owed the money and having the claim admitted in CIRP are different things, and the gap between them is a legal question that most creditors don’t realise they’re carrying until it’s too late to answer it.

Where claims actually fail

The classification fight – financial debt, operational debt, or neither, is where claims are won or lost. Not at the stage of proving the money was owed. At the stage of establishing which statutory category the underlying transaction falls into.

This distinction matters enormously in practice because the IBC’s waterfall determines recovery by category, not by merit. A legitimate claim that lands in the wrong category – or in the residual “other creditors” bucket, can receive zero under a resolution plan that fully satisfies secured financial creditors. The plan is not unfair in a legal sense. It is simply operating on a hierarchy that the creditor didn’t know it was navigating.

Where it gets complicated is in commercial relationships that don’t map cleanly onto the Code’s categories. A vendor who extended credit to a customer but documented it as an advance against future supply has created the classification ambiguity that the RP will resolve against them. A contractor with milestone payments and performance obligations is neither straightforwardly a financial creditor nor a clean operational creditor, the character of the debt depends on how the underlying contract was structured, and the contract was almost certainly drafted without insolvency in mind.

The NCLAT has intervened in cases where the classification decision was legally wrong – where amounts advanced with interest and TDS deductions clearly satisfied the definition of financial debt despite the corporate debtor’s characterisation of them as goods advances.

But NCLAT intervention requires the creditor to have mounted a challenge at the right moment, with the right evidence, through the right legal argument. That combination is less common than it should be, because most creditors arrive at the tribunal at the wrong stage with a merits argument when a procedural and characterisation argument was what the forum required.

The two windows, and when they close

There is a viable challenge window. It runs from the moment a claim is rejected to the moment the Committee of Creditors approves the resolution plan. Inside that window, a creditor can challenge the RP’s classification decision before the NCLT under Section 60(5), supported by evidence on debt characterisation and the applicable legal framework. The challenge is narrow but it is real, and tribunals have been willing to hear it when mounted properly and on time.

After CoC approval, the window narrows sharply. A challenge is still possible, but the grounds shift from the correctness of the classification to procedural irregularity in the process itself, such as:

–   Conflict of interest on the RP’s part

–   Failure of natural justice; or

–   Non-compliance with the Section 30 requirements governing resolution plan approval.

These are harder to establish, and the NCLAT weighs them against the systemic disruption of reopening a CIRP that the CoC has already concluded.

After the plan is implemented, there is effectively no window. The NCLAT has been firm that finality under the IBC means finality. Reopening an implemented plan at the instance of a creditor who failed to act in time is not available, regardless of the merit of the underlying claim.

The IBC Amendment creates one narrow new possibility worth noting: by de-linking distribution from implementation. The Adjudicating Authority will now first approve plan implementation, then approve the distribution mechanism within 30 days (there may be a brief window to contest distribution arrangements after the implementation order but before the distribution order is passed).

Whether that window will provide meaningful relief to a rejected creditor is untested. But it represents the only structural development in the Amendment that could expand rather than contract a mid-market creditor’s options.

Most creditors discover the problem after the first window has already closed. They receive the updated creditor list and call their lawyers. The lawyers review the situation and begin explaining, as carefully as possible, that the more useful conversation should have happened three months earlier.

What this reveals about the underlying relationship

The claim rejection traces back to how the commercial relationship was documented at the outset. Not how the claim was filed.

The contract that looked adequate when the customer was paying on time becomes the primary evidence inside a CIRP. The materials the RP works with when deciding how to classify the claim:

–   The characterisation of payments,

–   the treatment of outstanding balances,

–   the language around advances and credit terms.

If those materials are ambiguous, the RP will resolve the ambiguity in the direction of administrative convenience, which generally means a lower-priority classification.

This is not a CIRP-specific problem. It is a documentation problem that only becomes visible when a counterparty enters financial stress.

For a company currently holding a rejected or at-risk claim in an active CIRP, the question is timing. Where in the process is the matter?

If the CoC has not yet voted, the classification challenge is still viable and mounting it properly means establishing the legal characterisation of the debt, putting the RP on notice of the correct category, and filing the Section 60(5) application before the vote concludes.

This is not complex litigation. But it requires recognising that the problem is legal, not administrative, and responding to it on that basis.

If the CoC has voted but the plan is not yet implemented, the available challenge depends on whether there is a procedural ground. Procedural grounds require different evidence than a merits argument. The creditor needs to examine the process, not just the outcome.

If the plan is implemented, the honest answer is that recovery through the CIRP route is no longer realistic, and the conversation shifts to what other remedies, if any, exist against the resolution of professional or related parties for process failures.

What determines which option is viable is not the strength of the underlying claim. It is almost entirely the stage at which the creditor first sought competent advice about what the process actually required.

The exercise worth doing now

The companies that navigate this well are not the ones with better lawyers inside the CIRP. They are the ones who asked, before the CIRP, a question their counterparts didn’t: if this customer entered insolvency tomorrow, how would our receivable be classified?

That question typically surfaces two or three commercial relationships where the documentation is ambiguous, the characterisation is unclear, and the recovery under the statutory waterfall would be poor regardless of the merit of the underlying claim. Addressing those gaps proactively is inexpensive.

Addressing them from inside a CIRP, under timeline pressure, against an RP with expanded statutory powers and a CoC that has already formed its view, is a different problem entirely.