Insolvency 2023 Comparisons

The restructuring market in India comprises various processes:

(i) The Insolvency and Bankruptcy Code, 2016 (“Code”) is a comprehensive legislation that provides for the corporate insolvency resolution process (“CIRP”) for all companies (excluding financial service providers (“FSPs”)), individuals and partnership firms. However, provisions relating to partnership firms have not yet been notified and those relating to individuals have only been operationalised to include personal guarantors of the corporate debtor (“CD”). Further, the government has extended the application of the Code to non-banking financial institutions with asset size above INR500 crores.

Statistics published by the Insolvency and Bankruptcy Board of India (“IBBI”) reveal that by the end of June 2023, a total of 6,815 CIRPs have commenced, of which 4,742 have been concluded. Of the CIRPs concluded, the CD was rescued in 2,622 cases, of which 1,005 cases were closed on appeal or review or settled, 897 cases were withdrawn, and 720 cases ended in approval of resolution plans, while 2,120 ended in orders for liquidation. More than 77% of the CIRPs ending in liquidation were under the erstwhile insolvency regime, and the economic value of most of the CDs had completely eroded before they were even admitted into the CIRP, with the CDs valued at less than 7% of the outstanding debt amount. 

Around 39% of these CIRPs admitted were against manufacturing companies, 21% against real estate companies, 11% against construction companies, 10% against wholesale and retail trade companies, and the remaining against hotel, electricity, transport and other sector corporates.

The Code was amended in 2021 to introduce a pre-packaged insolvency resolution process (“PPIRP”) for companies classified as micro, small and medium enterprises (“MSMEs”) under the Micro, Small and Medium Enterprises Act, 2006. As per information released by IBBI, six PPIRP applications have been admitted as of 30 June 2023 of which one has been withdrawn and a resolution plan has been approved in one.

(ii) The Companies Act, 2013 (“CA-13”) allows for voluntary schemes of arrangement and compromise between a company and its creditors or members and winding up of a company on grounds other than the inability of the company to pay its debts such as, inter alia, if the company has voluntarily decided to be wound up, if it is just and equitable to wind up the company, or if the affairs of the company are being conducted in a fraudulent manner.

(iii) The Reserve Bank of India (“RBI”) periodically issues circulars and notifications for restructuring of stressed assets outside the Code.

Expected Legal Developments

The Ministry of Corporate Affairs (“MCA”), Government of India has undertaken consultations on various proposed reforms to strengthen and streamline the functioning of the Code including recasting the fast-track CIRP mechanism, expanding the scope of the PPIRP, providing an enabling framework for group insolvency and developing an electronic platform for case management.

See 1.1 Market Trends and Changes.

Types of Insolvency Under Indian law

Insolvency proceedings may be initiated against a company either under the Code or under the CA-13. The grounds under which insolvency proceedings may be initiated under these legislations are described below:

CIRP, Fast-Track CIRP, PPIRP and Liquidation Processes Under the Code

The Code focuses on financial and organisational remodelling of the CD in distress and contains mechanisms for the resolution and revival of such CD and the process of liquidation in case resolution of the CD fails. It creates four main institutions to facilitate the processes envisaged thereunder:

(i) Insolvency professionals (“IPs”) and insolvency professional entities responsible for conducting the processes.

(ii) Information utilities, which contain financial information relating to the CD.

(iii) Adjudicating authorities, which are the National Company Law Tribunal (“NCLT”), the National Company Law Appellate Tribunal (“NCLAT”) and the Supreme Court of India.

(iv) IBBI as the statutory regulator.

CIRP

• An application for initiation of a CIRP against a CD may be filed by a financial creditor (“FC”) (which has disbursed debt against the time value of money), by an operational creditor (“OC”) (which has provided goods and services to the CD in exchange for money; this also includes employees and government creditors), or by the CD itself before the NCLT on a default of a minimum amount of INR1,00,00,000 (approximately USD120,000) by the CD.
• The CIRP commences on the date that the NCLT admits the filed application and operates for a limited period of 180 days, extendable first by 90 days. The total number of days may not exceed 330 days; in practice, however, CIRPs have often continued beyond prescribed timelines.
• The powers of the board of directors of the CD are suspended, and the management of the CD vests in the IP appointed as the interim resolution professional (“IRP”). The IRP is responsible for protecting and preserving the assets of the CD and managing the affairs of the CD as a going concern. 
• When the CIRP commences, the NLCT declares a moratorium, which operates until the completion of the CIRP. Actions against the CD and its assets are halted and no legal proceedings can be commenced or continued. However, supply of essential goods and services such as electricity, water, information technology and telecommunication services to the CD is mandatory.
• The IRP makes a public announcement of the initiation of the CIRP and calls for the submission of claims by creditors of the CD. The IRP verifies all claims received and constitutes a committee of creditors (“CoC”) comprising all unrelated FCs of the CD. In the first meeting, the CoC resolves to either appoint another IP as the resolution professional (“RP”) or to retain the IRP as the RP.
• The RP, in consultation with the CoC, invites applicants to submit resolution plans to revive the CD. Certain persons are disqualified from submitting plans, including the incumbent management of the CD in certain instances.
• A resolution plan can propose various measures including a change in capital structure by way of merger, amalgamation, demerger, debt restructuring, one-time settlement, transfer, or sale of assets of the CD.
• The RP examines the plans received for certain mandatory requirements under the Code and places all compliant plans before the CoC. If the RP does not receive any resolution plan for resolving the CD, she may, with the approval of the CoC, invite resolution plans for sale of one or more assets of the CD.
• The CoC by exercising its commercial wisdom selects a plan for the turnaround of the CD by a majority vote of 66% in value terms. The plan is then placed before the NCLT for its final approval, after which it binds all stakeholders of the CD.

Fast-track CIRP

The Code permits CDs, as notified by the Central Government, to undergo a fast-track CIRP that is largely similar to the CIRP but with shortened timelines, ie, 90 days extendable by 45 days. The CDs eligible for fast-track CIRP are small companies as defined under the CA-13, start-ups other than partnership firms, and unlisted companies with a total asset value below INR1,00,00,000 (approximately USD120,000).

PPIRP

See 1.1 Market Trends and Changes.

An MSME that has committed a default of INR10,00,000 (approximately USD12,000) may, with the approval of 66% of its unrelated FCs in value terms and subject to certain other prerequisites, file an application for the initiation of a PPIRP. Prior to seeking approval of the FCs, the CD presents the FCs with a base resolution plan. 

Upon admission of the application, the PPIRP operates for a period of 120 days during which time a limited moratorium prevails which prevents, inter alia, enforcement of security interest by creditors. After commencement of the PPIRP, the CoC may either approve the base plan proposed by the CD if the plan does not impair the claims of the OCs or approve a resolution plan invited from the market.

Liquidation upon failure of the CIRP or PPIRP

A liquidation process can be triggered if:

• the NCLT did not receive or rejected the plan received during the CIRP;
• the CD contravenes the terms of an approved resolution plan after the CIRP; or
• the CoC by a 66% majority in value terms resolves to liquidate the CD during the CIRP.

In case of failure of a PPIRP, liquidation may be ordered in exceptional circumstances.

Upon the passing of a liquidation order, the NCLT appoints the RP as the liquidator of the company. Secured creditors are given the right to either realise their security interest outside the process or relinquish their security to the liquidation estate and partake in the distribution of proceeds from the sale of assets as per the order of priority.

A ‘stakeholders’ consultation committee’ (“SCC”) consisting of all creditors of the CD is constituted by the liquidator within 60 days of the commencement of the liquidation process, and until such time, the CoC acting in the CIRP of the CD acts as the SCC. Secured creditors that have not relinquished their security interest are, however, excluded from the SCC. The liquidator is required to consult with the SCC on several aspects such as sale of assets in liquidation, fee of the liquidator, manner of pursuing avoidance transactions, etc. The SCC’s advice, which is arrived at by a vote of 66% or more of the value of claims of its members, does not bind the liquidator. However, if the liquidator takes a decision that is contrary to the advice of the SCC, she is required to record reasons for the same in writing and submit records related to the said decision to the NCLT and IBBI. The SCC may also approach the NCLT requesting replacement of the liquidator with another eligible IP.

Priority of Creditors

The statutory waterfall for distribution of liquidation proceeds under the Code is as follows:

(i) the insolvency resolution process costs (costs incurred during the CIRP, such as interim finance, fees of the RP, expenses incurred by the RP to keep the CD as a going concern and liquidation costs (including PPIRP costs) in full);

(ii) debts owed to a secured creditor in case of relinquishment of security interest and workmen’s dues (restricted to a period of 24 months prior to liquidation), which rank equally;

(iii) wages and any unpaid dues owed to employees other than workmen (restricted to a period of 12 months prior to liquidation);

(iv) financial debts owed to unsecured creditors;

(v) dues to the Government (restricted to a period of two years prior to liquidation), and debts owed to secured creditors for unpaid amounts following the enforcement of security interest outside liquidation (which rank equally);

(vi) any remaining debts and dues;

(vii) preference shareholders, if any; and

(viii) equity shareholders or partners, as the case may be.

The Code also provides for voluntary liquidation of solvent companies. See 7.1 Types of Voluntary/Involuntary Proceedings.

CA-13

The CA-13 allows for restructuring through a scheme of compromise and arrangement (“Scheme”). On an application made by a creditor, member or liquidator of a company, the NCLT may order a meeting of creditors or members or classes thereof. A notice of such meeting along with details of the Scheme and other requisite documents is sent to all creditors, members (and classes thereof) and debenture holders of the company. Notice is also sent to the Central Government, income tax authorities, and other sectoral regulators and authorities that are likely to be affected by the Scheme to enable them to make adequate representations. The Scheme is required to be approved by a majority of 75% of those creditors or members in each class who are present and voting. Consequent approval of the Scheme by the NCLT binds the dissenting and abstaining creditors.

The CA-13 also provides for winding up of companies. See 1.1 Market Trends and Changes.

After the passing of the winding-up order by the court, the affairs of the company are entrusted to the liquidator. Pending the winding-up proceedings, creditors do not have any remedy against the property of the debtor in respect of the debt, nor can they commence any suit or legal proceedings in respect of the property except with the leave of the court and subject to terms imposed by the court. Pursuant to a winding-up order, the debtor’s assets are distributed amongst the creditors in the order of priority specified under the CA-13. 

A secured creditor has the option not to prove its debt before a liquidator and may instead enforce its security in settlement of its claim, but the proceeds from sale of the secured assets are subject to a pari passu charge in favour of the workmen of the company.

RBI Frameworks

The RBI introduced a Prudential Framework for Resolution of Stressed Assets in June 2019 (“RBI Framework”) which provides for a consensual restructuring process between the lenders and the debtor. 

Lenders classify accounts immediately on default and put in place board-approved policies for the resolution of the stressed asset including timelines for resolution. Further, lenders undertake a prima facie review of the borrower’s account within the first 30 days of default and decide on the resolution strategy (“Review Period”). Lenders may also opt to initiate insolvency or recovery proceedings. For the implementation of the plan, the framework requires lenders to enter into intercreditor agreements during the Review Period which shall provide that decisions of lenders representing 75% by value of outstanding credit facilities and 60% of lenders in number shall be binding on all lenders. The plan must be implemented within 180 days from the end of the Review Period. Failure to adhere to the timelines may lead to additional provisioning requirements.

In June 2023, the RBI released the Framework for Compromise Settlements and Technical Write-offs (“Comprehensive Framework”) to provide further impetus to the RBI Framework and to harmonise the instructions provided to all entities regulated by the RBI. The Comprehensive Framework (which applies to a larger set of entities as compared to the RBI Framework) allows all such regulated entities (“REs”), in accordance with board-approved policies, to undertake compromise settlements and technical write-offs in respect of borrowers classified as fraud or wilful defaulters without prejudice to any other provisions of any other statute in force.

There is no formal obligation on companies to commence formal insolvency proceedings. See 10.1 Duties of Directors.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Under the Code, ‘insolvency’ is determined by existence of debt and default of a minimum of INR1,00,00,000 (approximately USD120,000) by the CD. To establish this:

• FCs are required to submit a record of default recorded with an information utility, or such other document evidencing default as may be specified.
• OCs are required to furnish certain documents, including documents demanding payments from the CD, an affidavit stating that no pre-existing dispute has been raised by the CD in relation to the operational debt, and a certificate from financial institutions maintaining accounts of the CD confirming non-payment of operational debt.
• The CD is required to furnish several documents, including copies of relevant books of accounts of the CD evidencing default of debt, record of default recorded with the information utility (if any), and a copy of the invoice or demand notice served by an OC on the CD (if any). The CD is also required to submit a copy of the special resolution passed by its shareholders, or the resolution passed by at least three-quarters of the total number of its partners, approving filing of the application.

Banks

The procedure to wind up banking companies is contained in the Banking Regulation Act, 1949 and is regulated by the RBI. A banking company may be wound up if it is unable to pay its debts or the RBI applies for the winding up of such company.

Insurance Companies

The insolvency regime applicable to insurance companies in India is governed by the Insurance Act, 1938. A financial plan is submitted to the statutory regulator, the Insurance Regulatory and Development Authority, when an insurance company fails to meet its capital and solvency margins. If the plan fails to solve the deficiencies within three months, the insurance company can be wound up in accordance with the winding-up provisions under the CA-13.

Other Sectors Including Financial Entities, MSME Sectors

See 1.1 Market Trends and Changes.

Creditors, though not obligated or mandated to do so, prefer to engage in informal negotiations with the debtor prior to commencing formal CIRP proceedings with the aim of reaching a settlement or a restructuring agreement. This entails the possibility of securing timely payments and better financial outcomes for an individual creditor than a resolution plan or payouts in a liquidation scenario. This is particularly true for OCs, as payouts received by them in CIRP and liquidation proceedings are often nominal and they therefore prefer to settle their claims by a consensual process without judicial intervention.

For FCs, since most of them are regulated by the RBI and lack organisational flexibility, they prefer to adopt formal and statutory recourses rather than informal out-of-court workouts.

Lenders usually do not agree to standstills while negotiating an informal process of restructuring. However, they may agree on standstills for the smooth implementation of the finalised restructuring terms.

Restructuring terms may include provisions regarding non-alienation of assets by the borrower, restrictions on new borrowing, capital restructuring, and monitoring of financial parameters and cash flow. In most cases, a core-committee is formed, whereby a lead bank or the lenders with the largest debt exposure co-ordinate and undertake negotiations. Lenders are usually not entitled to payment of any fees by the debtor and incur their own expenses.

Further, lenders usually insist on conducting forensic or transaction audits of the borrower to detect improper diversion of funds or fraudulent conduct by the borrower. Information relating to financial parameters of the borrower is also provided to lenders.

Terms of contractual priority, security/lien priority and relative position of competing creditor classes may be altered by intercreditor agreements. Generally, inter-company and related party loans are subordinated and last-mile funding is accorded super priority.

New money can be injected by existing creditors, promoters or even external financial or strategic investors and is usually granted super priority lien.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Under the RBI Framework, if lenders attempt to conceal the actual status of accounts or evergreen stressed accounts, they may be subjected to stringent enforcement actions including higher provisioning of such accounts and monetary penalties.

There are no applicable laws or legal doctrines that provide for duties of creditors in a non-statutory restructuring process. Their duties are primarily governed by the terms of the intercreditor agreement.

Intercreditor agreements often contain cram-down provisions to bind dissenting creditors. For example, the RBI Framework mandates intercreditor agreements to provide for a cram-down on dissenting lenders if the plan has been approved by 75% of lenders by value and 60% of lenders by number. However, often, not all creditors give their approval to be bound by the process, and therefore, a formal statutory process is required to bind dissenting creditors.

Security can be created over movable properties, immovable properties and intangible assets.

Movable Property

Security over movable assets is generally created in the form of:

• pledge (where possession of the movable property is transferred to the creditor with the intention of creating security over such movable property);
• hypothecation (where possession of the movable property is retained by the borrower but the creditor has the right to take possession and ownership of the property in case of default); or
• lien (where possession of the movable property is handed over to the lender until the discharge of certain obligations without the right to appropriate or sell the goods).

Immovable Property

Security over immovable property is generally created by way of a mortgage. The Transfer of Property Act, 1882 contemplates six different types of mortgage. The two most common forms of mortgage used in financing transactions are an English mortgage (or a legal mortgage) and mortgage by way of deposit of title deeds (or an equitable mortgage).

Intangible Assets

With respect to intangible assets and intellectual property rights, assignment is the principal form of security.

The enforcement of security primarily depends on the terms of the security.

Certain types of security can be enforced without court intervention. In case of a pledge, the pledgee may exercise its right to sell the assets by giving the pledgor reasonable notice without any prior court intervention. In case of an English mortgage, the mortgagee may appoint a receiver for the property and sell it without court intervention subject to certain conditions. A deed of hypothecation usually contains provisions entitling the creditor to sell the hypothecated assets without court intervention.

An equitable mortgage does not provide the mortgagee with a right to sell without court intervention except for the rights available to certain financial institutions and banks under specialised legislations such as the SARFAESI Act.

Recovery Under SARFAESI Act

The SARFAESI Act provides for enforcement of security interest (including hypothecation) in favour of a secured creditor, without intervention of the court or tribunal, provided that consent of secured creditors representing at least 60% in value, having pari passu charge, is obtained. The remedies therein are available only to institutional secured creditors and can be availed upon fulfilment of certain conditions.

Under the Code, the moratorium imposed on the insolvency commencement date prohibits the enforcement of security interest provided by the CD until the completion of the CIRP. Secured creditors cannot disrupt the process under the Code unless they hold a significant voting share in the CoC, in which case their vote may be critical in approving a resolution plan.

The CIRP is primarily driven by the CoC comprising all unrelated FCs of the CD. The voting share of the creditors is determined based on the aggregate debt due to them.

Secured and unsecured creditors have differing rights and priorities under a resolution plan and under liquidation proceedings. Under a resolution plan, the value and priority of security held by the creditor may be taken into consideration while deciding the payout to such creditor. Regarding liquidation proceedings, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

See 4.3 Special Procedural Protections and Rights.

Under the Code, unsecured trade creditors are categorised as OCs. A resolution plan approved for the CD must provide for priority payments to OCs which shall not be less than the amount they would have received in the event of a liquidation or under a resolution plan if the proceeds were distributed in accordance with the liquidation waterfall, whichever is higher. In practice, however, OCs often receive negligible payouts.

Under a PPIRP, if a CD proposes a base resolution plan which impairs the claims of the OCs, the CoC may require the promoters of the CD to dilute their shareholding or voting or control rights in the CD.

Code

See 5.2 Unsecured Trade Creditors.

The CoC comprises both secured and unsecured FCs of the CD. The voting share of each CoC member is based on the debt due to them. Therefore, the vote of an unsecured FC that has a significant debt exposure and a proportionate voting share may play a crucial role in approving a resolution plan for the CD or liquidating the CD.

Scheme

Approval by a 75% majority of each class is required for approval of a Scheme. This implies that if unsecured creditors form a class, they can disrupt or delay the process by not providing requisite approvals.

Although sparingly, pre-judgment attachments may be granted in recovery actions initiated under civil law and other specialised legislations such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to safeguard the interests of a creditor in situations where the court believes that the debtor may frustrate, delay or obstruct the execution of a decree for recovery of debt by a creditor. Under the Code, there is no formal process to grant interim or final reliefs before admission of the CIRP application, thus, pre-judgment attachments are not common.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Financial restructuring/reorganisation of companies may be undertaken under the Code or the CA-13.

Code

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

A resolution plan approved for the CD must conform to the mandatory requirements prescribed under the Code and related regulations (“Mandatory Requirements”), namely:

(i) Payment of insolvency resolution costs in priority to all other debts.

(ii) Payment of debts to OCs and dissenting FCs to the extent of the liquidation value of their claims.

(iii) Provision for management of affairs of the CD after approval of the resolution plan.

(iv) Provision for implementation and supervision of the resolution plan.

(v) The plan does not contravene any provisions of law and conforms to requirements specified by IBBI.

Subject to these Mandatory Requirements, a resolution plan may be crammed down on the dissenting minorities and other stakeholders.

There are no limitations on the types of agreements, compromises or reorganisations that can be achieved under a resolution plan except that the plan should be feasible and viable and should address the cause of default by the CD. See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Calculation of claims and treatment of contingent claims

The IRP invites all creditors to submit their claims during a CIRP, including creditors with contingent claims. The existence of a claim by a creditor may be proved based on records available with an information utility or other documents such as bank statements of the creditor or a court order that has adjudicated on the non-satisfaction of claims, if any. The IRP may also call for such evidence as may be necessary for substantiating the whole or part of the claim. When the amount of the claim is not precise due to any contingency or other reason, the IRP/RP can make the best estimate of the claim based on the information available and make appropriate revisions whenever warranted. The IRP/RP, however, cannot adjudicate on the claim. Once the claims are admitted by the IRP, the resolution plan provides for the treatment of such claims. However, jurisprudence regarding treatment of contingent claims is not yet settled, and a resolution plan often does not provide for payments in lieu of contingent claims.

The process of approving a resolution plan is largely driven by the CoC but the plan must gain final approval of the NCLT to bind all stakeholders of the CD including contingent claimants. The scope of judicial review is limited to ensuring that the resolution plan conforms to the Mandatory Requirements. The manner of distribution of proceeds under a plan may consider the order of priority of creditors in a liquidation waterfall including the priority and value of the security interests of secured creditors.

A resolution plan approved by the NCLT can be challenged on grounds of non-compliance with the Mandatory Requirements, and material irregularity in the exercise of powers by the RP during the CIRP.

For conclusion of procedure, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

CA-13

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

The CA-13 also allows for an expedited process known as a fast-track merger between two or more small companies, between a holding company and its wholly-owned subsidiaries, or between other companies or classes of companies as may be prescribed. The approximate time for its completion is 90 to 100 days.

Any person aggrieved by the approval of a Scheme may prefer an appeal to the NCLAT within 45 days of the NCLT order.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 6.10 Priority New Money.

CIRP and PPRIP under the Code

A CoC, comprising all unrelated FCs (secured or unsecured) of the CD, is formed in a CIRP. OCs are granted a right to attend (without voting rights) the CoC meetings if the debt owed to OCs constitutes a minimum of 10% of the total debt of the CD.

The CoC is the supreme decision-making body and takes all important decisions pertaining to the functioning of the CD. It can replace the IRP/RP and determines the fate of the CD by deciding to either liquidate the CD or approve a resolution plan for the CD.

The CoC’s approval is also required for carrying out certain actions including raising interim finance beyond a specified limit, undertaking any related party transactions, and deciding the remuneration of the RP and the fees of the professionals appointed by her.

The costs of organising CoC meetings are included in the process costs, which are paid in priority under a resolution plan or under liquidation proceedings. However, costs of professionals appointed by the CoC and any other costs incurred by the CoC are privately funded.

The RP prepares an information memorandum containing key details of the CD and tenders it to each member of the CoC (subject to the member furnishing an undertaking of confidentiality). CoC members may request the RP to provide additional information, which the RP shall provide within a reasonable time if such information has a bearing on the resolution plan.

The responsibilities of the CoC under a PPIRP are similar. While the management retains control of the business during a PPIRP, the board of directors is required to take approvals from the CoC for the same actions for which an RP requires prior CoC approval in a CIRP. The CoC is also responsible for approving a resolution plan.

Scheme

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Creditors and members are categorised into different classes generally based on similar characteristics and common interests and vote on a Scheme as a class. For example, secured and unsecured creditors usually form different classes. The CA-13 is silent on the treatment of process costs.

For information available to creditors, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

For the Code, see 6.1 Statutory Process for a Financial Restructuring/Reorganisation. Subject to compliance with the Mandatory Requirements, the resolution plan can be crammed down on dissenting creditors.

For the CA-13, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

A creditor can assign or transfer the debt due to it to any other person during the CIRP. Both parties are required to provide the terms of the assignment or transfer and the identity of the assignee or transferee to the IRP/RP.

The Code does not have a formal framework to deal with the issues that arise in the insolvency of group companies; judicial precedents have developed to fill the gap. Most notably, different CIRPs of different group companies of Videocon Industries Limited were heard by the same bench of the NCLT to ensure procedural co-ordination and to avoid passing of conflicting orders. Subsequently, substantive consolidation of the assets of 13 out of 15 companies of the Videocon group was allowed based on parameters such as common control, common directors, interdependence, etc. Since then, courts have allowed substantive consolidation of group companies undergoing a CIRP.

For effective co-ordination, a common RP is often appointed in the CIRPs of different group companies.

The IRP/RP is responsible for protecting and preserving the assets of the CD and running its operation as a going concern. The RP is authorised to sell the unencumbered assets of the CD outside of the ordinary course of business with prior approval of 66% of the CoC in value. The book value of the assets sold during the CIRP should not exceed 10% of the total claims admitted. The RP is also required to obtain prior approval of the CoC for creating any security interest over the assets of the CD.

The CA-13 does not stipulate any restrictions on the use of a company’s assets during the Scheme implementation process when the debtor is in possession of the company.

See 6.7 Restrictions on a Company’s Use of Its Assets.

A bona fide purchaser of the assets sold during a CIRP shall have a free and marketable title to such assets notwithstanding the terms contained in the constitutional documents of the CD, a shareholders’ agreement, or other documents of a similar nature. Creditors are not prohibited from bidding for the assets or acting as stalking horses in the sale process. Effectuating pre-negotiated transactions during a CIRP is not possible as the Code follows a public bidding process.

The CA-13 does not require a statutory officer to administer a Scheme and is silent on pre-negotiated transactions during the implementation of a Scheme.

Secured creditor liens and security arrangements may be released pursuant to approval of a resolution plan.

The IRP/RP is authorised to raise new money (interim finance) provided that no security interest is created over encumbered properties of the CD without prior consent of creditors whose debt is secured over such property. Such consent requirement can be dispensed with if the value of the property is not less than twice the amount of debt.

The CA-13 does not prohibit new money investments during the implementation of a Scheme.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

Code

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation. The RP does not have the right to reject or disclaim contracts during a CIRP.

CA-13

While the law does not explicitly deal with the principles that should be followed while sanctioning a Scheme, case law jurisprudence indicates that courts consider whether the Scheme is fair and reasonable and whether all classes of creditors/members have been fairly represented.

An approved resolution plan does not ipso facto release non-debtor parties (such as guarantors) from their liabilities but may contain provisions allowing the same. In practice, creditors do not usually agree to such a release as the non-debtor parties’ liability is independent from the CD’s.

A Scheme between a company and its creditors or a class of its creditors may provide for restructuring of the company’s debts, whereby securities available to the creditors are structured such that a non-debtor is released from the liability given as security for and on behalf of the company.

Rights of set-off may be allowed at the stage of filing proof of claims with the IRP but have been disallowed by courts after the commencement of a CIRP in view of the moratorium imposed and further to facilitate collective resolution of debts of the CD.

The CA-13 is silent on the right of set-off or netting under a Scheme.

Under the Code, a resolution plan once approved by the NCLT is binding on all its stakeholders. If any person bound by the plan knowingly and wilfully contravenes its provisions or abets such contravention, she shall be punished with imprisonment for one to five years or with a fine of INR1,00,000-5,00,000 (approximately USD1,200-6,000). Contravention of the terms of the resolution plan by the CD may result in liquidation of the CD.

Under the CA-13, the company may be wound up if the NCLT is satisfied that the sanctioned Scheme cannot be implemented satisfactorily, and the company is unable to pay its debts in accordance with the Scheme.

In a CIRP, the treatment of equity owners is determined by the terms of the approved resolution plan, which may contemplate cancellation or delisting of shares of the CD.

In a Scheme, equity owners may receive or retain any ownership or other property as may be contemplated.

Involuntary Liquidation

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

The liquidator issues a public announcement stating that the CD is in liquidation. No suit or legal proceeding can be instituted by or against the CD; however, secured creditors may enforce their security interest outside the liquidation process. The IP functioning as the RP is appointed as the liquidator and all powers of the management of the CD vest in the liquidator. In some cases, the RP may be replaced by another IP to act as the liquidator.

The personnel of the CD are required to co-operate with and assist the liquidator in the discharge of her functions. All creditors of the CD are required to submit their claims to the liquidator, which are verified by the liquidator. The liquidator is empowered to require the creditors to submit additional documents for verification of the claims. Where any amount claimed is not precise due to any contingency or another reason, the liquidator is required to make the best estimate of the amount based on the information available to her. The liquidator also has the power to apply to the NCLT to disclaim onerous properties or contracts (within six months from the liquidation commencement date).

The liquidator has various duties and powers including taking custody and control of the assets of the CD, and protecting, preserving and selling the assets of the CD by way of public auction or private sale. The liquidator can sell the assets in various ways such as on a standalone basis, in a slump sale, in parcels, as a set of assets collectively or by schemes of arrangement under the CA-13. The CD or the business of the CD may also be sold as a going concern during liquidation proceedings. The liquidator is permitted to carry on the business of the CD only to the extent that she considers necessary for its beneficial liquidation. The creditors may require the liquidator to provide them with any financial information relating to the CD.

The liquidation process must be completed within a period of one year of its commencement.

Voluntary Liquidation

A corporate person that has not committed any default in its payment obligations can initiate a voluntary liquidation process under the Code pursuant to obtaining a declaration by the majority of its directors or partners or governing body that:

• the corporate person has no debts or can pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
• the corporate person is not being liquidated to defraud any person.

Such declarations have to be accompanied by (i) audited financial statements and records of business operations of the corporate person for the last two years, and (ii) an asset valuation report of the corporate person prepared by a registered valuer, if any.

Within four weeks of such declaration, (i) a resolution must be passed by a special majority (75% or more, present and voting) of members, partners or contributories of the corporate person requiring it to be liquidated, or (ii) a resolution must be passed by the members, partners or contributories in a general meeting requiring the corporate person to be liquidated as a result of expiry of the period of the corporate person’s duration, if any, fixed by its constitutional documents or the occurrence of any other event that requires its dissolution according to its constitutional documents. In both cases, the resolution passed must also appoint an IP to act as the liquidator. Moreover, if the corporate person owes any debts, then approval of the resolution by creditors representing two-thirds in value of the debt is required.

The corporate person is required to notify the Registrar of Companies and IBBI of the resolution passed to liquidate it within seven days from the date of the resolution by the members, partners or contributories or the approval of the resolution by the creditors of the company. A liquidator shall attempt to complete the liquidation process within one year and, after the liquidation of the assets of the company and winding up of all its affairs, apply to the NCLT for dissolution of its corporate personality.

During liquidation proceedings, the liquidator is empowered to sell the assets and the actionable claims of the CD through a public auction or private sale. See 7.1 Types of Voluntary/Involuntary Proceedings.

During involuntary liquidation proceedings, the liquidator ordinarily sells the assets through a public auction but may conduct a private sale if the asset of the CD is perishable, likely to deteriorate in value or being sold at a price higher than the reserve price of a failed auction, or with the prior approval of the NCLT. During voluntary liquidation proceedings, the liquidator may value and sell the assets of the corporate person in the manner and mode approved by the corporate person.

Creditors can participate in the public auction. Auction purchasers acquire a free and clear title to the assets purchased, as the Code and related regulations thereunder permit of the sale of assets only upon relinquishment of security interest by the FC, if any.

In the case of involuntary liquidation, the liquidator constitutes an SCC. See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

The costs of organising the SCC meetings form part of liquidation costs and are paid in priority over all other payments. However, any other expenses incurred by the SCC (such as legal and consultancy services) are privately funded.

The Code does not contain a comprehensive framework to deal with cross-border insolvency, although it allows the Indian Government to enter into bilateral treaties with foreign countries prescribing the manner in which cross-border issues related to each country will be dealt with. The government of India has expressed its intention to adopt the UNCITRAL Model Law on Cross-Border Insolvency.

The Civil Procedure Code, 1908 (“CPC”) allows for enforcement of judgments passed by superior courts of reciprocating countries.

In the absence of a codified framework, courts have allowed co-ordination and co-operation with foreign courts through protocols. In the CIRP of Jet Airways (India) Limited, insolvency proceedings were initiated against the CD in India and in the Netherlands. The Indian RP of Jet Airways and the Dutch administrator entered into a protocol approved by the NCLAT for the harmonisation of the parallel proceedings. The protocol provided for identification of India as Jet Airways’ centre of main interests, information sharing and communication, right to appear and attend proceedings, etc.

See 8.1 Recognition or Relief in Connection With Overseas Proceedings and 8.2 Co-ordination in Cross-Border Cases.

The Code does not distinguish between domestic and foreign creditors.

The CPC provides for the enforcement of foreign judgments passed by superior courts of notified reciprocating countries, which can be refused by the court where:

• the judgment was passed by a foreign court of incompetent jurisdiction;
• the judgment disregarded the merits of the case;
• an incorrect view of international law was adopted or the applicable Indian law was not recognised;
• principles of natural justice were not followed;
• the judgment was obtained by fraud; or
• the judgment sustains a claim founded on a breach of any Indian law.

Process of Enforcement

A certified copy of the decree along with a statement of the foreign court stating the extent to which the decree has been satisfied is filed before the Indian district court. The foreign judgment of the reciprocating country can be directly enforced as a domestic decree by filing an execution petition under the CPC. For non-reciprocating countries, an ordinary civil suit may be filed with a copy of the foreign decree as proof of debt.

Under the Code, an IP known as the IRP/RP during a CIRP and the liquidator during the liquidation process is appointed to conduct the process. Under the CA-13, a provisional/company liquidator is appointed to conduct the winding-up proceedings.

Code

During a CIRP, the powers of the board of directors of the debtor company are suspended and are exercised by the IRP/RP. The general role of the IRP/RP has two limbs. Firstly, the IRP/RP is responsible for protecting and preserving the value of the property of the CD and for managing the affairs of the CD as a going concern and secondly, to facilitate the CIRP.

For the said purposes, the IRP/RP is authorised to act on behalf of the CD. The IRP is endowed with various responsibilities including collection of all financial information relating to the CD, receipt and collation of claims, constitution of the CoC, and taking control and custody of and monitoring the assets of the CD. In addition to the duties of the IRP, the RP has the duty to, inter alia, invite market participants to submit resolution plans for the CD, present such plans before the CoC and file applications for avoidance of certain transactions. The RP is also empowered to raise interim finance or new money with the prior approval of the CoC.

If the CIRP fails to rescue the CD, liquidation proceedings are initiated against such CD. See 7.1 Types of Voluntary/Involuntary Proceedings. Key responsibilities of the liquidator include verifying claims of creditors, taking custody and control over the assets of the CD, forming a liquidation estate comprising assets of the CD, selling assets of the CD through public auction or private contract and distributing the proceeds from the sale amongst various stakeholders of the CD in the order of priority provided under the Code.

CA-13

Under the CA-13, the role of the liquidator includes carrying on the business of the company for its beneficial winding up, selling the assets of the company by public auction or private contract, defending or instituting legal proceeding on behalf of the company, etc.

IPs registered with IBBI can serve as statutory officers under the Code and under the CA-13.

Code

The IP is known as the IRP/RP during a CIRP and the liquidator during a liquidation.

If the CIRP is initiated by an FC or the CD itself, then such applicant is required to propose the name of an IP who will act as the IRP. If the CIRP is initiated by an OC, the NCLT can make a reference to IBBI for recommendations (if no name is proposed by the OC) or appoint the IP proposed by the OC. In both cases, the IP appointed as the IRP should not have any disciplinary proceedings pending against her.

In its first meeting, 66% of the CoC in value terms either confirms the IRP as the RP or replaces her with a new RP. If the CoC resolves to appoint a new RP, an application is filed before the NCLT, and the name of the RP is forwarded to IBBI for confirmation, after which the appointment is confirmed. The CoC may replace the RP at any time during the CIRP by a majority vote of 66%.

If liquidation proceedings are commenced against the CD, the IP acting as the RP during the CIRP continues to act as the liquidator. The NCLT may replace the liquidator if the resolution plan submitted was rejected for failure to adherence to Mandatory Requirements or if IBBI recommends replacement of the RP. The SCC may also approach the NCLT requesting replacement of the liquidator if agreed to by 66% of the SCC in value terms.

CA-13

On receipt of a petition for winding up, a provisional liquidator may be appointed pending final orders on the winding-up petition. At the time of passing of the winding-up order, the NCLT may appoint the provisional liquidator as the company liquidator or appoint a new company liquidator. The provisional and company liquidators are appointed from the IPs empanelled with IBBI.

The company liquidator or provisional liquidator may be replaced on grounds such as misconduct, fraud or misfeasance, professional incompetence, etc.

Duties and Liabilities Under the Code

The directors of the CD are duty-bound to exercise due diligence to minimise potential losses to creditors in the period before the insolvency commencement date when the directors or partners knew or ought to have known there was no reasonable prospect of avoiding the commencement of a CIRP against the CD. Failure to exercise such diligence may result in the NCLT requiring the director or partner of the CD to make appropriate contributions to the assets of the CD. Contribution orders may also be passed against persons who knowingly carried the business of the CD, during a CIRP or liquidation, with an intent to defraud creditors or for any fraudulent purpose.

During the CIRP, the primary duty of the management of the company is to extend all assistance and co-operation to the IRP/RP as required by her to manage the affairs of the CD. In case of non-cooperation, the NCLT may direct such personnel to comply with the instructions of the RP and to co-operate with her.

Under the PPIRP, the CD generally remains under the control and supervision of the directors or partners of the CD. The management of the CD is responsible for protecting and preserving the value of the CD and managing the affairs of the CD as a going concern. In the event that the affairs of the CD are conducted in a fraudulent manner or grossly mismanaged, the NCLT may pass orders vesting the management of the CD with the RP.

Further, the persons who were in charge or responsible for the conduct of the CD’s business or associated with the CD in any manner and were involved in the commission of offences by the CD prior to the commencement of the CIRP shall continue to be liable to be prosecuted and punished for such offences even after a new management takes over the CD pursuant to approval of a resolution plan.

Duties and Liabilities Under CA-13

The general duties of the directors under the CA-13 are to:

• act in accordance with the constitutional documents of the company;
• act in good faith to promote the objectives of the company for the benefit of its members, employees, shareholders and for the protection of environment;

• exercise her duties with due and reasonable care, skill and diligence and exercise independent judgement;
• avoid involvement in situations that may conflict with the interests of the company;
• avoid undue gain or advantage either to herself, her relatives, partners or associates; and
• not assign her office.

Contravention of the duties prescribed under the CA-13 can lead to the imposition of a fine of INR1,00,000-5,00,000 (approximately USD1,200-6,000). Moreover, in cases of undue gain, the director concerned will be liable to pay an amount equal to the gain.

When a winding-up petition has been filed before the NCLT, the directors of the company must extend full co-operation to the company liquidator in the discharge of her functions and duties. Moreover, if during winding up:

• a director knowingly carries on business with an intent to defraud creditors, then such director (without any limitation of liability) can be held personally liable for all or any of the debts or other liabilities of the company; and
• a director who has applied, retains or becomes liable or accountable for any money or property of the company has been guilty of any misfeasance or breach of trust in relation to the company, then such director can be made liable to repay or restore such money or property.

The directors may also be required to contribute such sums to the assets of the company for any misapplication, retainer, misfeasance or breach of trust.

See 11.3 Claims to Set Aside or Annul Transactions.

The Code provides for avoidance of four categories of transactions during the CIRP/PPIRP or liquidation period:

• Preferential transactions that put any person in a better position than they would have been in the distribution waterfall and which are not in the ordinary course of business;
• Undervalued transactions in which the CD has gifted or transferred property to a person for a value which is significantly less than the value of consideration provided by the CD;
• Transactions defrauding creditors in which the CD deliberately entered into undervalued transactions to keep the assets beyond the reach of any claimant or to adversely affect the interests of such person in relation to the claim; and
• Extortionate credit transactions where credit has been extended on extortionate terms.

“Preferential transactions” and “undervalued transactions” are vulnerable to being set aside if they are entered into within the two years preceding the insolvency commencement date with related parties; and within one year preceding the insolvency commencement date with persons other than related parties.

The Code does not prescribe any suspect period for transactions defrauding creditors. “Extortionate credit transactions” entered into by a company within the two years preceding the insolvency commencement date are liable to be set aside.

Under the CA-13, the liquidator has the authority to examine all transactions since the commencement of winding up and initiate appropriate proceedings to declare such transactions as void or invalid by the court:

• Fraudulent preference: Transactions between the company and a creditor in preference to other creditors within six months prior to presentation of a winding-up petition.
• Avoidance of voluntary transfer: Transfer of property not made in the ordinary course of business, in good faith or for real and valuable consideration where such transfer was made within one year prior to the presentation of a winding-up petition.
• Floating charge: A floating charge on the undertaking or property of a company created within 12 months before commencement of winding up unless the company was solvent immediately after creation of the charge.
• Disclaimer of onerous property or unprofitable contracts.

See 11.1 Historical Transactions.

See 11.1 Historical Transactions.

Under the Code, creditors, members or partners of the CD may apply to the NCLT to set aside undervalued transactions in case the RP or liquidator fails to do so.