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Insolvency and Bankruptcy - Law and Practice · Introduction to Insolvency and Bankruptcy Code

Key Definitions and Applicability of the Insolvency and Bankruptcy Code

Updated 11 October 2026 · Fact-checked

Section 3 of the IBC defines the terms every insolvency answer depends on: corporate person, corporate debtor, creditor, claim, debt and default. A debt is a liability in respect of a claim that is due. Default is non-payment of a due debt, whole or part. You apply these terms to the facts, then conclude who can use the Code.

Understand Key Definitions and Applicability of the Code

The IBC works on one idea: when a person fails to pay a debt that is due, the law steps in. To use the Code you must first be sure of three things: who the debtor is, who the creditor is, and whether there is a default. Section 3 gives the words for each.

Start with the chain of definitions. A claim is a right to payment, whether or not it is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured. It also covers a right to remedy for breach of contract if the breach gives rise to a right to payment. A debt is a liability or obligation in respect of a claim which is due from any person, and it includes financial debt and operational debt. A default is non-payment of debt when the whole or any part or instalment has become due and payable and is not paid by the debtor or the corporate debtor.

Now the parties. A creditor is any person to whom a debt is owed. It includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder. A secured creditor is one in whose favour a security interest is created. Security interest covers mortgage, charge, hypothecation, assignment and encumbrance, but does not include a performance guarantee.

A corporate person is a company under section 2(20) of the Companies Act, 2013, an LLP under the LLP Act, 2008, or any other person incorporated with limited liability under any law. It excludes any financial service provider. A corporate debtor is a corporate person who owes a debt to any person. So a bank or an NBFC registered with a financial sector regulator is not a corporate person under this definition.

For applicability, remember the structure. Corporate persons fall under the corporate insolvency and liquidation provisions, and the NCLT is their Adjudicating Authority. Individuals and partnership firms fall under Part III, where the Debt Recovery Tribunal with territorial jurisdiction is the Adjudicating Authority under section 179. Section 3(23) defines person widely, including individuals, HUFs, companies, trusts, partnerships, LLPs, statutory entities and persons resident outside India. Financial creditor and operational creditor are defined in sections other than section 3, so state them as concepts and keep the section 3 terms precise.

Key rules to remember

Claim (s 3(6))
Claim = right to payment (any kind) + right to remedy for breach of contract that gives a right to payment
Wide meaning. It does not matter whether the right is disputed, unmatured or unsecured.
Debt (s 3(11))
Debt = liability or obligation in respect of a claim that is due; includes financial debt and operational debt
No claim, no debt. No due liability, no debt.
Default (s 3(12))
Default = non-payment of debt when the whole or any part or instalment has become due and payable and is not paid
Part non-payment is enough. The word is 'paid', substituted for 'repaid' in 2018, so it covers operational debt too.
Corporate person (s 3(7))
Company (s 2(20), Companies Act, 2013) + LLP + any other person incorporated with limited liability, excluding financial service providers
Financial service providers are carved out from this definition.
Corporate debtor (s 3(8))
Corporate debtor = corporate person who owes a debt to any person
Both elements are needed: corporate person and a debt owed.
Creditor (s 3(10))
Creditor = any person to whom a debt is owed, including financial, operational, secured, unsecured creditors and decree-holders
A decree-holder is expressly included.
Adjudicating Authority split
Corporate persons: NCLT | Individuals and firms: DRT having territorial jurisdiction (s 179(1))
DRT jurisdiction depends on where the individual debtor actually and voluntarily resides, carries on business or personally works for gain.

How to solve Key Definitions and Applicability of the Code questions

Use this order for any definition or applicability question. It keeps your answer in the provision, analysis, conclusion format.

  1. 1Identify what the question asks: a definition, a distinction, or whether the Code applies to a given entity.
  2. 2Quote the relevant definition from section 3 in plain words, with the clause number only if you are sure of it.
  3. 3Identify the debtor. Is it a company, LLP or other limited liability entity? Is it a financial service provider? Or is it an individual or a firm?
  4. 4Identify the creditor and the nature of the debt: financial, operational, secured, unsecured, or a decree-holder.
  5. 5Test for default: has the whole or any part or instalment of the debt become due and payable, and is it unpaid?
  6. 6Name the Adjudicating Authority: NCLT for corporate persons, DRT for individuals and firms.
  7. 7Conclude in one clear sentence that answers the question asked.
  8. 8Add a practical point, such as proof of default or the record held by an information utility.

Quickest way: Three-question check

When to use it: Use when the question gives short facts and asks if the Code applies or if a default exists.

  1. Who is the debtor: corporate person, financial service provider, individual or firm?
  2. Is there a debt that is due and payable, even in part?
  3. Is it unpaid? If yes, default exists; then name the forum (NCLT or DRT) and conclude.

Common mistakes in Key Definitions and Applicability of the Code

  • Treating every company-like entity as a corporate person, including banks and NBFCs.

    Students remember 'company' and forget the exclusion of financial service providers.

    Fix: Always check if the entity is a financial service provider authorised or registered by a financial sector regulator. If yes, it is outside section 3(7).

  • Saying default needs the whole debt to be unpaid.

    Students think of default as total failure to pay.

    Fix: Section 3(12) says whole or any part or instalment. Non-payment of part is default.

  • Saying a disputed claim is not a claim.

    Confusing the definition of claim with the later test of a pre-existing dispute.

    Fix: Section 3(6) covers disputed and undisputed rights. Keep the definition separate from any other ground of rejection.

  • Treating claim, debt and default as the same thing.

    They are used together in questions.

    Fix: Remember the chain: claim leads to debt (when due) leads to default (when unpaid).

  • Naming the NCLT as the Adjudicating Authority for individuals and firms.

    Students link all insolvency with the NCLT.

    Fix: For individuals and firms, section 179 makes the DRT with territorial jurisdiction the Adjudicating Authority.

  • Including a performance guarantee within security interest.

    Students read 'any other arrangement securing performance' too widely.

    Fix: The proviso to section 3(31) excludes a performance guarantee from security interest.

Worked examples

Example 1

Sundaram Textiles Private Limited owes ₹40,00,000 to a supplier under an invoice due on 1 March. It paid ₹15,00,000 on 5 March and nothing more. Is there a default, and who is the corporate debtor?

Show the solution
  1. Provision: default under section 3(12) is non-payment of debt when the whole or any part or instalment has become due and payable and is not paid.
  2. Facts: the invoice amount fell due on 1 March. Only ₹15,00,000 was paid, so ₹25,00,000 (₹40,00,000 minus ₹15,00,000) remains due and unpaid.
  3. Debt: the liability is due in respect of a claim, so it is a debt. As it arises from supply of goods, it is an operational debt in nature.
  4. Debtor: Sundaram Textiles is a company, hence a corporate person. It owes a debt, so it is a corporate debtor under section 3(8). It is not a financial service provider on the facts.
  5. Conclusion: a default of ₹25,00,000 exists because part of a due debt is unpaid.

Answer: Yes. Part payment does not cure default. ₹25,00,000 is due and unpaid, and Sundaram Textiles Private Limited is the corporate debtor.

Example 2

Meera, a trader in Jaipur, owes ₹8,00,000 to a creditor and has defaulted. Rajiv & Sons Finance Limited, a company registered with the RBI to provide loans, also defaults on its debts. Which entity is a corporate person, and which forum would deal with Meera?

Show the solution
  1. Provision: section 3(7) defines corporate person as a company, an LLP or any person incorporated with limited liability, but excludes any financial service provider.
  2. Meera is an individual, not a corporate person. Part III applies to her.
  3. Section 179(1): the Adjudicating Authority for individuals and firms is the Debt Recovery Tribunal with territorial jurisdiction over where she actually and voluntarily resides, carries on business or personally works for gain.
  4. Rajiv & Sons Finance Limited is a company, but it provides financial services under registration by a financial sector regulator. It is a financial service provider and is excluded from the definition of corporate person.
  5. Conclusion: neither is a corporate person for the corporate insolvency provisions.

Answer: Neither is a corporate person under section 3(7): Meera is an individual and the finance company is a financial service provider. Meera's matter goes to the DRT with territorial jurisdiction, which for her is the one covering Jaipur, as the place where she carries on business or resides.

Exam tips

  • Write the definition in near-exact words. Examiners reward the phrase 'whole or any part or instalment' and the exclusion of financial service providers.
  • Apply the definition to the facts in a separate step. Do not just recite the section.
  • For a distinction question, use a short two-column list in bullets: nature of debt, who the creditor is, and the consequence. Keep section 3 terms exact.
  • State the forum for every applicability answer: NCLT for corporate persons, DRT for individuals and firms.
  • Since the paper is open book for electives, mark the section 3 and section 179 pages so you can quote them quickly.

Practice questions from Introduction to Insolvency and Bankruptcy Code

Key Definitions and Applicability of the Code in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Key Definitions and Applicability of the Code: frequently asked questions

What is the difference between claim and debt under the IBC?

A claim is a right to payment or a right to remedy for breach of contract that gives rise to a payment right. A debt is a liability or obligation in respect of a claim that is due. So every debt rests on a claim, but a claim may not yet be a debt.

Is part payment enough to avoid default?

No. Section 3(12) treats non-payment of the whole or any part or instalment of a due debt as default. Part payment reduces the amount but the unpaid portion is still a default.

Does the IBC apply to banks and NBFCs?

The definition of corporate person excludes financial service providers, meaning persons providing financial services under authorisation or registration from a financial sector regulator. So such entities are outside section 3(7). Check the facts and any notified special rules before concluding.

Who decides insolvency matters of individuals and partnership firms?

Under section 179, the Debt Recovery Tribunal with territorial jurisdiction is the Adjudicating Authority. It has jurisdiction over suits, claims and questions of priority arising out of the insolvency of the individual debtor or firm.