Common Bankruptcy Mistakes a Bankruptcy Lawyer Can Help You Avoid

The mistakes that matter under India's insolvency regime changed substantially in 2026. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (Act No. 6 of 2026), received presidential assent on 6 April 2026, and the majority of its provisions were brought into force from 26 May 2026. It is the most significant restructuring of the Insolvency and Bankruptcy Code, 2016 (the "Code") since its enactment, and several of the assumptions that guided creditor and debtor conduct before it no longer hold.

Anyone relying on pre-amendment practice is working from a superseded map. The errors set out below are those a bankruptcy lawyer sees most often, on both sides of the table, and several of them now carry consequences they did not carry two years ago.

What Changed in 2026

Three shifts matter most for the mistakes that follow.

Admission became mandatory rather than discretionary. Where a default is established, the adjudicating authority must admit the application, and a Section 7, an application is now subject to a fourteen-day timeline for admission or rejection, with a record of default from an information utility sufficient as evidence. The long preliminary contest at the admission stage, on which many debtors relied, has been curtailed.

Frivolous filing became expensive. Penalties for frivolous or vexatious applications, and for the suppression of material facts, now reach as high as ₹2 crore.

The look-back period for avoidance transactions was extended to two years, and explicit definitions of avoidance transactions and fraudulent trading were inserted into the Code. Transfers made well before insolvency was contemplated are now more readily examinable.

Two frameworks with significant long-term consequences, group insolvency and cross-border insolvency, were introduced as enabling provisions requiring rules to be framed. Their practical shape depends on notifications still emerging, and any advice that treats them as settled operating law is premature.

Mistakes on the Creditor Side

Four errors account for most of the creditor applications that fail before they are heard, and a bankruptcy lawyer will test for each before anything is filed.

Using the Code as a debt recovery tool. This has always been an error of purpose, and it is now an error with a price. The Code exists to resolve insolvency, not to collect debts, and the Supreme Court said so directly in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353. With penalties for frivolous applications now reaching ₹2 crore, a creditor filing to apply commercial pressure rather than to resolve genuine insolvency is exposed in a way it previously was not.

Walking into a pre-existing dispute. Under Mobilox, an application by an operational creditor must be rejected where a dispute genuinely existed before the demand notice was received. The threshold is deliberately low. The tribunal does not weigh the merits of the dispute, and a plausible contention that is neither spurious nor feeble is enough to defeat the application. Creditors regularly file having overlooked an email exchange, a quality complaint, or a reconciliation request that predates the notice. That document ends the application.

A defective demand notice. Service of a demand notice under Section 8, in Form 3 or Form 4, is a precondition, not a formality. Failure to prove delivery, or filing an application filed before the ten-day response period has run, is a straightforward ground for rejection. An advocate may issue the notice on the creditor's behalf, but the procedural requirements themselves remain exacting.

Misjudging the threshold or limitation. The default threshold of ₹1 crore excludes a substantial volume of claims from the Code altogether, and those claims belong in a recovery suit or arbitration instead. Limitation applies to applications under the Code, and a creditor who has allowed the period to run cannot restore it by choosing a different forum.

Mistakes on the Debtor Side

On the debtor side, the pattern differs, and Agarwal Law Chamber sees these four most often.

Moving assets ahead of insolvency. With the look-back period now extended to two years, transfers that a director assumed were beyond examination may not be. Explicit statutory definitions of avoidance transactions and fraudulent trading reduce the room for argument about characterisation, and personal exposure for those responsible follows.

Treating a Section 8 notice as correspondence. The ten-day window following a demand notice is the debtor's opportunity to place a genuine pre-existing dispute on record. A debtor with a real dispute that fails to articulate it in time forfeits the strongest defence available, and a dispute raised for the first time after an application is filed carries far less weight.

Assuming delay at the admission stage. This was previously a viable strategy and is now largely foreclosed. With admission mandatory on proof of default and a fourteen-day timeline attaching to Section 7 applications, a debtor planning to contest admission at length is planning around a regime that no longer operates that way.

Overlooking personal guarantee exposure. Directors and promoters routinely execute personal guarantees and treat them as remote. The 2026 amendment excludes personal guarantors from the benefit of the interim moratorium, which removes a protection some had assumed would apply. Guarantee liability now requires separate assessment rather than being folded into the corporate position.

The Common Thread

Nearly every mistake above shares a cause: acting on a view of the Code formed before the 2026 amendment, or acting without checking the documentary record against what the Code actually requires. Both are avoidable, and both are considerably cheaper to avoid than to correct. Agarwal Law Chamber acts for corporate debtors, financial and operational creditors, and resolution professionals before the NCLT and NCLAT, and the pattern is consistent across all three: the decisions that determine the outcome are usually taken before anything is filed.

Getting the Position Right Early

Insolvency is a jurisdiction where procedure carries unusual weight. An application can be sound on the commercial merits and fail on a demand notice, or a debtor can hold a genuine defence and lose it by responding to correspondence casually. The 2026 amendment has compressed timelines, raised the cost of filing without foundation, and lengthened the period over which past transactions can be examined. Each of those changes rewards preparation and punishes assumption. Establishing where a matter stands before it is commenced, rather than after, is the point at which a bankruptcy lawyer makes the greatest difference to the result, and it is the stage at which the insolvency practice at Agarwal Law Chamber does most of its useful work.

Frequently Asked Questions

1. What are the most common bankruptcy mistakes creditors make in India?

Common mistakes include using the Insolvency and Bankruptcy Code as a debt recovery mechanism, overlooking a pre-existing dispute, issuing a defective Section 8 demand notice, and misjudging the applicable default threshold or limitation period. These procedural and substantive issues can prevent an application from proceeding even where a genuine debt exists.

2. What mistakes should debtors avoid before insolvency proceedings begin?

Debtors should avoid moving or transferring assets without considering whether those transactions could later be examined as avoidance transactions or as fraudulent trading. They should also respond carefully to Section 8 notices, avoid assuming that admission proceedings can be delayed indefinitely, and assess any personal guarantees separately from the company's insolvency position.

3. How has the 2026 amendment changed insolvency proceedings?

The 2026 amendments introduced several significant changes, including mandatory admission where default is established, a fourteen-day timeline for Section 7 applications, higher penalties for frivolous or vexatious applications and suppression of material facts, and an extended two-year look-back period for avoidance transactions. The amendments also introduced enabling provisions for group and cross-border insolvency, although their practical operation depends on further rules and notifications.

4. Can a creditor use the IBC simply to recover an unpaid debt?

No. The IBC is intended to address insolvency and facilitate resolution rather than operate as an ordinary debt-recovery mechanism. Where an application is being used primarily as commercial pressure rather than to address genuine insolvency, the creditor may face serious consequences, particularly given the increased penalties for frivolous or vexatious applications under the 2026 amendments.

5. Why is early legal advice important in insolvency matters?

Insolvency proceedings are highly procedural, and mistakes made before filing can determine whether a case succeeds at all. Reviewing the documentary record, identifying pre-existing disputes, checking limitations, ensuring that demand notices are properly served, and assessing potential avoidance or guarantee exposure before proceedings begin can help prevent problems that are much harder and more expensive to correct later.

This article is for general informational purposes only and does not constitute legal advice. It does not create a lawyer-client relationship, and no person should act or refrain from acting on the basis of its contents without seeking specific professional advice on their own circumstances.