Insolvency 2019 Second Edition

Last Updated November 20, 2019

India

Law and Practice

Authors



Cyril Amarchand Mangaldas has a highly reputed practice in the area of stressed assets, restructuring and insolvency law, and advises banks, private credit funds and leading financial institutions. The insolvency team is the largest in India, with 20 members, including seven partners. It is able to deliver robust strategies to deal with stressed debts for the benefit of financial institutions and to enhance recovery alternatives, through combining knowledge of the law with analysis of the reputational risk-management issues. The firm has been at the forefront of the emerging jurisprudence on the new insolvency laws, with the first referral to the corporate insolvency resolution (Innoventive) being facilitated by the firm.

Insolvency laws in India were revamped with the introduction of the Insolvency and Bankruptcy Code, 2016 (IBC) on 28 May 2016, which introduced a comprehensive rules-based insolvency framework, replacing several disparate, and often conflicting, legislations. The institutional framework of the IBC is founded on an independent regulator, the Insolvency and Bankruptcy Board of India (IBBI); a judicial/quasi-judicial framework comprising an adjudicating authority (National Company Law Tribunal – NCLT) and an appellate tribunal (National Company Law Appellate Tribunal – NCLAT) with a further right to appeal to the Supreme Court; a new cadre of professionals (insolvency professionals); and a database of debt and default (information utilities). The Supreme Court of India upheld the constitutional validity of the IBC in its entirety in the matter of Swiss Ribbons Pvt. Ltd. & Anr. vs. UoI & Ors.

As per the statistics provided in the Economic Survey of India (2018-19), as of February 2019, ie, within 27 months of the operationalisation of the corporate insolvency-related provisions of the IBC, as many as 14,000 applications had been filed for the initiation of the corporate insolvency resolution process (CIRP). Further, as per the recent statistics released by the IBBI, by September 2019, the CIRP has been initiated in relation to 2542 corporate debtors. Out of these, 186 have been closed by appeal or reviewed or settled, 587 have ended in liquidation and 156 have ended in approval of a resolution plan. It is also relevant to note that 72.86% of the CIRPs ending in liquidation (427 out of 587) were either defunct or were subject to the erstwhile regime under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).

The cases mentioned above have been filed across various sectors and, largely, were on account of the relevant sector having already been under stress due to internal and external issues. 41% of cases filed are from the manufacturing sector, covering industries like steel, fast-moving consumer goods, chemical products, electrical machinery, basic metals, etc; 19.7% in real estate; 10% in engineering, procurement, and construction sector and 10.8% in trading companies. Other sectors under stress are textiles, power and utilities, and hospitality.

As per the data released by the Reserve Bank of India (RBI) for the financial year ending March 2019, gross non-performing loans (NPLs) of government-owned banks have declined from the peak of INR895,601 crore (approximately USD123 billion) in March 2018 to INR806,412 crore (approximately USD113 billion) in March 2019. It was also announced that these banks have recovered INR3,59,496 crore (approximately USD50 billion) over the last four financial years, including record recovery of INR1,23,156 crore (approximately USD17 billion) during the financial year 2018-19.

The steel and coal sectors in India have a high percentage of Non-Performing Loans (NPLs), despite the government and regulatory authorities formulating helpful policies. Declining demand and increasing imports has made the steel sector vulnerable to rising debts, while the coal sector in India has issues with alternative sources of power gaining currency, like solar and nuclear power. Delays in the grant of licences and environmental clearances, as well as protests by environmental groups, have also contributed to the rise of non-performing assets. Recently, with a knock-on effect from the crisis in the shadow banking sector, as well economic slowdown, the real estate sector is showing signs of serious stress.

Another major reform in India was the RBI circular dated 7 June 2019 that overhauled the framework of out-of-court restructuring in India (Stressed Assets Framework). In the event of a default by the debtor to any lender (the specific Indian financial institutions to which the Stressed Assets Framework is applicable are set out therein), all lenders are required, within a period of 30 days (Review Period) of any such default, to undertake a primafaciereview of the account and decide on the resolution strategy. If, during the Review Period, a restructuring is being contemplated, all applicable lenders are required to execute an inter-creditor agreement (ICA), broadly setting out the terms of agreeing on the resolution plan.

The RBI has also issued a circular dated 7 February 2019 amending the external commercial borrowings framework (ECB Framework) which governs foreign currency as well as rupee-denominated borrowing of Indian entities. Prior to the amendment, proceeds from external commercial borrowings (ECB) could not be utilised by Indian borrowers for repayment of domestic loans (except when the ECBs were availed from foreign equity holders). However, pursuant to the amendment, the resolution applicants have been allowed to utilise the ECB proceeds for repayment of rupee-denominated term loans of the company undergoing insolvency resolution under the IBC with the approval of the RBI.

The capital markets regulator in India (the Securities and Exchange Board of India – SEBI) has also introduced various exemptions for the resolution applicants and the corporate debtor in relation to listed companies.

The RBI has also recently issued a report submitted to it by a Task Force on Developing Secondary Market for Corporate Loans. If the recommendations of the Task Force are to be accepted, it is expected that there will be significant foreign investor interest in the secondary corporate loan market in India, which will likely have a deep impact on the restructuring market.

With the introduction of the IBC and the Stressed Assets Framework, the restructuring and insolvency market has undergone a complete overhaul and is now a strong regime for restructuring. In recent years, various investment opportunities have emerged for Indian/foreign investors looking to invest in stressed assets.

Pursuant to the amendments in 2016, sponsors are now allowed to hold up to 100% equity and exercise major control on asset reconstruction companies (ARCs), which was not previously permitted. 

Similarly, after recent amendments, foreign investors may choose to invest in alternative "investment funds" (AIFs), in which 100% investment is permitted as per the extant Foreign Direct Investment regulations. As per the SEBI (Alternative Investment Fund) Regulations, 2015, a Category II AIF, being a debt fund, can invest in debt securities (both listed and unlisted) and security receipts issued by ARCs, most commonly by way of non-convertible Debentures, though it cannot provide loans. However, it is pertinent to note that no more than 25% of the AIFs investible funds can be invested in a single investee company.

IBC

The principal legislation governing insolvency resolution in India is the IBC, which is a comprehensive code dealing with the insolvency of all types of Indian corporate entities (other than financial service-providers), partnership firms, and individuals. It provides for a time-bound and creditor-in-control insolvency resolution process. Under the IBC, the government and the IBBI have issued rules, regulations and forms to explain the procedure in detail.

The NCLT is required to admit/reject any application for initiation of the CIRP within 14 days of the application being filed before it or record reasons for the delay. Upon admission, a moratorium is imposed by the NCLT (which is in force during the entire CIRP), prohibiting the following:

  • the institution or continuation of suits or proceedings against the corporate debtor;
  • transferring, encumbering, or disposing of by the corporate debtor any of its assets or any interest therein;
  • any action to foreclose, recover or enforce any security created by the corporate debtor in respect of its property;
  • the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

During the CIRP, the rights of the management are suspended and are exercised by an insolvency professional (appointed as an interim resolution professional or resolution professional).

The timeline for the completion of the process is 180 days from the date of admission of the application. This period may be extended by the NCLT once, by a maximum of 90 days, upon the approval of the committee of creditors (Creditors Committee). By a recent amendment, the CIRP is required to be mandatorily completed within a period of 330 days from the insolvency commencement date (ICD), including any extension of the period of the CIRP granted and the time taken in legal proceedings in relation to the CIRP.

The IBC also envisages a fast-track CIRP, which shall be completed within a period of 90 days from the ICD, and can be extended by the NCLT once, by a period not exceeding 45 days.

Companies Act, 2013

Any form of corporate reorganisation is governed by the provisions of the Companies Act, 2013 (Companies Act), Chapter XV of which provides for the statutory framework that applies to reorganisation (ie, compromise, arrangements and amalgamations). Such schemes are required to be approved by the NCLT.

Circulars of the Reserve Bank of India

As mentioned earlier, the RBI has also laid down guidelines and mechanisms from time to time with respect to the restructuring and resolution of stressed assets. Currently, the Stressed Assets Framework governs the out-of-court resolution of stressed assets.

Laws Governing Liquidation

If the CIRP fails for the reasons specified in section 33 of the IBC, the corporate debtor will undergo liquidation.

In relation to companies, winding-up proceedings can also be initiated under Chapter XX of the Companies Act.

For reasons other than payment default, winding-up proceedings are governed by specific statutes governing companies, limited liability partnerships and partnership firms.

Recovery Actions

Creditors may also opt for recovery measures and for the enforcement of security under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI aCT), the Recovery of Debt due to Banks and Financial Institutions Act 1993 (RDDBFI), or the Code of Civil Procedure, 1908 (CPC).

See 2.1 Overview of Laws and Statutory Regimes.

The current legal framework of India does not specify circumstances whereby companies are obliged to commence formal insolvency proceedings.

See 2.3 Obligation to Commence Formal Insolvency Proceedings.

An application for initiating the CIRP under the provisions of the IBC can be filed by any of the following in the case of payment default exceeding INR100,000:

  • financial creditor: under section 5(7) of the IBC, a financial creditor is any person to whom a financial debt is owed and Section 5(8) provides an inclusive definition of financial debt as a debt with interest, if any, which is disbursed against the consideration for the time value of money and includes any transaction having the commercial effect of a borrowing.

A financial creditor can make an application to the NCLT, either by itself or jointly with other financial creditors:

  • operational creditor:under section 5(20) of the IBC, an operational creditor is any person to whom an operational debt is owed and Section 5(21) of the IBC defines operational debt as a claim in respect of the provision of goods or services, including employment, or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Government. However, an operational creditor is required to make a pre-demand before making an application;
  • corporate applicant: a corporate applicant (ie, the corporate debtor itself or an authorised member of the corporate debtor) can also file an application for initiating the CIRP. An application by the corporate debtor is required to be accompanied by a resolution passed by at least three quarters of the total number of shareholders or partners of the corporate debtor.

The term “insolvency” has not been defined in the IBC. The IBC provides for initiation of a CIRP upon a payment default.

See also 2.5 Commencing Involuntary Proceedings.

Banks in India may be classified as banking companies, government banks or sector-specific banks.

Banking Companies

The following are classified as banking companies:

  • banks incorporated as companies under the provisions of the Companies Act, 1956/2013 (or any previous law governing companies) and not being government banks;
  • Indian branches of foreign banks; and
  • co-operative banks.

The Banking Regulation Act, 1949 (Banking Act) governs all such banks. Part III of the Banking Act specifies the procedure to be followed for the winding up of banking companies which would be subject to the regulatory oversight of the RBI. In this regard, the jurisdictional High Court for a banking company can order a winding up only if the banking company is unable to pay its debts, as certified by the RBI, or if an application is made by the RBI on the directions of the Central Government.

Government Banks

The following are classified as government banks:

  • banks nationalised and constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (Nationalisation Acts); and
  • the State Bank of India (SBI), constituted under the State Bank of India Act, 1955 (SBI Act). Notably, all subsidiary banks of SBI have now merged into the SBI itself.

The SBI Act provides that no provision of law relating to the winding up of companies shall apply to the SBI. Furthermore, the SBI cannot be placed in liquidation, save by an order of the central government and in any such manner as it may direct. Similar provisions also exist in the Nationalisation Acts. Accordingly, substantial discretionary powers have been vested in Central Government with respect to the winding up of government banks.

Sector-specific Banks

The National Housing Bank; the National Bank for Agriculture and Rural Development; Exim Bank; Industrial Reconstruction Bank of India; Regional Rural Banks; and Small Industries Bank are statutorily incorporated sector-specific banks. In the context of the winding up and liquidation of these banks, the respective statutes applicable to such banks specifically provide that no provision of law relating to the winding up of companies shall apply to such banks.

Non-banking Finance Companies (NBFC)

An NBFC is a company registered under the provisions of the Companies Act, with the principal business of receiving deposits and lending. NBFCs are also governed by the RBI.

Pursuant to the Reserve Bank of India Act, 1934, the RBI has been empowered to file an application for the winding up of an NBFC (section 45MC) subject to compliance with certain criteria. However, the provisions of the Companies Act would be applicable with respect to the winding up of an NBFC.

Insurance Companies or Undertakings

Insurance companies in India may be classified as follows:

  • The Life Insurance Corporation of India (LIC), constituted under the Life Insurance Corporation of India Act, 1956 (LIC Act).

The LIC Act provides that no provision of law relating to the winding up of companies or corporations shall apply to the LIC, and that the LIC shall not be placed in liquidation unless by the order of the central government and in such a manner that the government may direct.

  • Other insurance companies:
    1. the National Insurance Company Limited, the New India Assurance Company Limited, the Oriental Insurance Company Limited and the United India Insurance Company Limited (Nationalised Insurance Companies), as nationalised under the General Insurance Business (Nationalisation) Act, 1972 (GIC Act). The provisions of the Insurance Act, 1938 (Insurance Act) govern these Nationalised Insurance Companies.

The GIC Act provides that no provision of law relating to the winding up of a company should apply to Nationalised Insurance Companies, and that those Nationalised Insurance Companies shall not be placed into liquidation, save by an order of the central government and in such a manner that the Government may direct. In light of this, it may be ascertained that substantial discretionary powers have been conferred on the Central Government with respect to the winding up of the LIC or Nationalised Insurance Companies.

    1. Insurance companies (other than those specified above) constituted under the Companies Act (or any previous law governing companies) (Private Insurance Companies). The provisions of the Insurance Act govern these insurance companies.

The Insurance Act provides that the court may order the winding up of a Private Insurance Company in accordance with the Companies Act, and the provisions of the Companies Act shall apply to the Private Insurance Companies subject to the Insurance Act.

There are virtually no sector-specific rules for the restructuring of stressed entities.

Pursuant to the Stressed Assets Framework, the lenders have complete discretion with regard to resolution plans.

The Stressed Assets Framework covers within its purview scheduled commercial banks, all India financial institutions, small finance bank, systemically important non-deposit-taking financial companies and deposit-taking non-banking financial companies.

There is no requirement to initiate restructuring negotiations before the commencement of a formal statutory process. However, the RBI has the power to issue directions to the banks for initiation of insolvency proceedings under the IBC against borrowers for specific defaults. If lenders and the stressed borrowers are unable to implement the plan within 180 days of the reference date, the lenders will have to make an additional 20% provisioning, and a further 15%, if the plan is not implemented within 365 days from the reference date. However, 50% of the additional provisioning may be reversed on the filing of the insolvency application under the IBC and the remaining amount may be reversed upon the admission of the borrower into the CIRP.

The lenders are further incentivised to undertake out-of-court restructuring, since conversion of debt into equity shares done in accordance with the Stressed Assets Framework is exempt from the applicability of SEBI regulations in relation to preferential issue, as long as the issue of shares complies with the pricing guidelines under the Stressed Assets Framework.

While the Stressed Assets Framework does provide plenty of tools to the lenders to undertake informal restructuring processes, its effect on the Indian market remains to be assessed.

See Section2 Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations.

The report of the working group to review the existing prudential guidelines on the restructuring of advances by banks/financial institutions dated 18 July 2012 noted that INSOL Principles regarding "standstill clause" and "priority in repayment of additional finance" were adopted in the RBI’s guidelines Corporate Debt Restructuring mechanism; however, the CDR mechanism has now been withdrawn pursuant to the Stressed Asset Framework.

Though it is not at all standard for lenders to agree to include "standstill" clauses, the Indian Banks’ Association has recommended inclusion of a standstill clause in the Model ICA to be signed pursuant to the Stressed Assets Framework. Under the Model ICA, the lenders may agree to a standstill period of 180 days, during which no lender can initiate or pursue any civil action against a borrower/third-party security-provider. Also, during this time, the lenders cannot sell their debts to any person (except to another bank or NBFC).

The resolution plan may provide for the manner and mode for the infusion of additional funds during the CIRP.

It is generally banks that infuse new funds during restructuring, but the infusion of funds is also possible by a new investor. The creation of super-priority has been a common phenomenon under the erstwhile regime for rescue-financing for stressed companies and is expected to continue in the context of the Stressed Assets Framework.

The lenders have a duty of early identification and reporting of the incipient stress in the loan accounts immediately upon default, by classifying such assets as per the categories mentioned in the Stressed Assets Framework. The lenders are required to report credit information to the Central Repository of Information on Large Creditors on all borrowers that have aggregate exposure of INR5 crore and above. Additionally, the lenders have to submit a weekly report of instances of default by all borrowers, with aggregate exposure of INR5 crore and above.

Once the default is reported, the lenders have to take a prima facie review of the borrower account within 30 days, during which the lenders can decide on the resolution strategy, including the nature of the resolution plan and the approach for implementation of the resolution plan.

Tortious or liability under breach of good-faith obligations is not very evolved in India.

The Stressed Asset Framework provides that any decision agreed by the 75% lenders by value and 60% lenders by number shall be binding upon all the lenders who have signed up to the ICA.

Credit agreements do not always include a “majority lenders” clause to bind the dissenting creditors.

Creditors in India can choose from a wide variety of security options, depending on the assets available and industry-specific practices.

Security is usually created over real estate and immovable property by way of a mortgage. While several types of mortgage can be created under the legal framework, the most widely used for securing immovable property are the "English" and "equitable" (by way of deposit of title deeds) variants. The English mortgage is the preferred form of security of the two, since it necessitates an actual transfer of possession of the property from borrower to creditor, subject to the right of redemption. An equitable mortgage, on the other hand, does not require actual transfer of possession of the property, with the deposit of the title deeds pertaining to the property sufficing instead.

The most common type of security created over movable property is by way of hypothecation or lien. A hypothecation is a form of charge created over current or future property, without requiring the actual delivery of possession at the time of its creation, and entitling the creditor to take possession and sell such assets upon the commitment of a default by the borrower. Movable property can also be charged by way of "stapling" such assets along with immovable property under an English mortgage. Liens are usually exercised by unpaid sellers over goods/property that has not yet been supplied or delivered to the borrower.

Equity shares and financial shares are usually secured by way of a "pledge", which constitutes a type of "bailment" and requires either actual or constructive delivery of possession of the assets in question. Physical shares are pledged by way of actual handover of the share/security certificates, and electronically recorded shares are pledged by way of "marking" in the records of the appointed depository.

Intangible property/assets such as intellectual property, contractual rights and receivables are usually secured by way of hypothecation, mortgage (if stapled with land) or assignment clauses. Security created over intellectual property is required to be notified to the relevant registration authorities.

Subject to restrictions under the contract (for instance, under an ICA), secured creditors are entitled to enforce their security interests upon the occurrence of the requisite contractual trigger event for enforcement.

Mortgagees are accorded the right to make an application before courts for the foreclosure of – or to effect the sale of – the mortgaged property upon default by the borrower in its repayment obligations. Enforcement of English mortgages is typically less onerous, as creditors are afforded private remedies under law (for instance, the appointment of a receiver). Similarly, a pledge can also be enforced outside the court process (in accordance with the terms of the underlying contract) by effecting a sale of the goods pledged, and using the proceeds of such a sale for the discharge of the debtor’s obligations. Such a sale may only be carried out after giving due notice to the pledgor, however. Charges created over movable assets, however, usually require court intervention, unless otherwise provided for under the underlying contract.

Furthermore, under the framework of the SARFAESI Act, creditors are accorded private enforcement rights in respect of any security interest (other than with respect to pledges created over movable assets and liens). In situations where a creditor holds a substantial part of the business of the corporate debtor, the SARFAESI Act provides for a mechanism for the takeover of the management of that corporate debtor by the creditor.

ICAs usually include turnover provisions, by which subordinated creditors are required to turn over any recoveries made out of turn, as well as provisions that mandate that such out-of-turn recoveries will be held in trust for the senior creditors. Usage of an ICA is a standard practice, and such agreements are well-recognised by courts and lending institutions, although the validity and binding effect of subordination provisions contained in such an ICA on liquidators appointed under the IBC have yet to be tested.

In the case of the CIRP proceedings, the above-mentioned rights and remedies are subject to the moratorium. However, such a stay is not applicable for purposes of the commencement of restructurings undertaken under the Companies Act framework (schemes of arrangement/ amalgamation). This opens up such restructurings to the possibility of disruption and the initiation of parallel proceedings by secured creditors.

The private enforcement process can take between two to four years, whereas the formal judicial process can take between eight to ten years.

Foreign creditors are required to obtain no-objection certificates prior to the creation of any security over Indian assets or the repatriation of any proceeds from the relevant authorised dealer banks (banks that are authorised to deal in foreign exchange by the RBI). Any enforcement action by a foreign creditor would also need to abide by the extant foreign exchange regulations.

While foreclosure of mortgages is an option for domestic creditors, such rights are not extended to foreign creditors under the framework governing the transfer of property. Further, the benefits under the SARFAESI Act do not accrue to foreign creditors. In addition, foreign creditors do not have the right to initiate recovery actions before the Debt Recovery Tribunals (DRT) under the RDDBFI. Instead, any such creditors would be required to approach the relevant civil court (having competent jurisdiction under the underlying contract) to enforce security interests created in their favour or for the recovery of their debts.

Other than the relative priority accorded to secured creditors under the liquidation waterfall mechanism, there are no special procedural protections and rights accorded to secured creditors under statutory insolvency and restructuring proceedings.

Under the IBC, there is no differentiation/sub-classification of creditors’ rights (whether secured and unsecured), unless in a case of liquidation. All financial creditors, whether secured or unsecured, and all sub-classes of such creditors are entitled to vote and participate in the Creditors Committee. However, a resolution plan may provide for distribution of proceeds proposed in the resolution plan, which may take into account the order of priority amongst creditors as laid down in the liquidation waterfall under the IBC.

Similarly, to effect a restructuring scheme under the Companies Act, there is no differentiation amongst creditors, unless the scheme being proposed contemplates differential treatment on the basis of class (established on the basis of “commonality of interest” and certain other factors), in which event separate meetings would have to be called for each such class of creditors for the approval of the scheme.

Under the IBC, there is no requirement for unsecured creditors to be kept whole. However, all costs that are incurred by the insolvency professionals to keep the insolvent company as a "going concern" will be treated as insolvency resolution process costs (CIRP Cost).

As mentioned, the Creditors Committee is comprised of both secured and unsecured financial creditors. Unsecured financial creditors, thus, have the right to reject any resolution plan submitted in respect of the corporate debtor if they can muster an adequate majority during the voting process, which would result in the corporate debtor being pushed into liquidation.

As operational creditors, the unsecured trade creditors may disrupt the smooth functioning of the resolution process by threatening to terminate their contract, since the moratorium does not apply to the termination of contracts, thereby stopping the supply of critical goods or services. These vendors may also include clauses in the vendor contracts that effect the retention of title over the goods.

As also mentioned previously, in schemes being undertaken under the Companies Act, unsecured creditors have the right to disrupt such a process if the scheme document accords differential rights to those creditors (vis-à-vis secured creditors or any other class of creditors), as those unsecured creditors would constitute a separate class, which would have to vote on such a scheme by way of a three-quarters majority for the scheme to be approved.

Pre-judgment attachments are available to creditors who have initiated recovery actions, if they can prove that the corporate debtor is likely to dispose of or remove the whole or any part of its property from the local limits of the court's jurisdiction, or is likely to cause damage or mischief or create third-party interests over its property.

Unsecured claims are usually enforced by way of traditional recovery actions (before specially designated DRTs or regular civil courts). These recovery measures could take eight to ten years.

Landlords are not afforded any bespoke rights for purposes of insolvency and may only seek recovery of their rent/lease amounts by way of filing money suits outside the IBC. As per extant jurisprudence, claims towards arrears of rent may not be “operational debt”. Thus, in respect of such dues, landlords are classified as “other creditors”. Where the landlords are not able to recover their property, those rents may be considered CIRP Costs.

For winding-up proceedings, section 327(5) of the Companies Act confers on landlords a first charge, shared along with preferential payments to workers/employees, over proceeds that arise out of goods distrained by landlords during a three-month period prior to a winding-up order.

See 4.4 Foreign Secured Creditors.

The liquidation waterfall mechanism provided under the IBC and Companies Act is set out below.

Under the IBC

First, full payment of all CIRP Cost and liquidation costs is to be made, followed by payment of workers' dues for the 24 months preceding the liquidation commencement date, and payment of dues of secured creditors that have chosen to relinquish their security interests to the liquidation estate. It may be noted that any interim finance provided during CIRP period would form part of the CIRP Cost and will be paid in priority to any other payments.

Next would be payment of wages and dues of employees for the 12 months preceding the commencement of liquidation, followed by payment of any financial debts owed to unsecured creditors.

Next, the proceeds are to be distributed equally towards amounts due to the Central Government and State Government (including any amount payable to the Consolidated Fund of India and the Consolidated Fund of a State for the two years preceding the commencement of liquidation), and any balance amounts unpaid to secured creditors that chose to enforce their security interests outside the liquidation estate. This is to be followed by any remaining debts and dues, including payments to be made to operational/trade creditors, followed by payments towards preference shareholders and, lastly, payments towards equity shareholders or partners.

Under the Companies Act

First, payments are to be made towards workers' dues pertaining to the 24-month period preceding the commencement of liquidation, and towards any balance amounts unpaid to a secured creditor that has realised its security interest outside of the liquidation estate, or to the extent of the amount of the workers' portion pertaining to its security interest (if payable under law) payable in the 24-month period preceding the commencement of liquidation, whichever is less.

Further, payments are to be made against:

  • tax claims for the 12 months preceding the commencement of liquidation;
  • the wages and salaries of employees for a period not exceeding four months during the 12-month period preceding the commencement of liquidation;
  • accrued holiday remuneration payable to any employee;
  • all amounts due in respect of beneficial labour legislation such as the Employees State Insurance Act, 1948;
  • sums due to welfare funds such as the provident fund and the gratuity fund (other than in voluntary winding up for reconstruction/amalgamation);
  • amounts due as compensation for the death or disablement of any employee (unless covered by insurance); and
  • expenses on account of investigations/inquiries into the affairs of the company (if any).

The above-mentioned payments are to be followed by payment of amounts towards secured creditors (including balance amounts payable to secured creditors that stood outside the liquidation waterfall), followed by amounts towards unsecured creditors and trade creditors, followed by amounts towards preference shareholders and, lastly, amounts towards equity shareholders.

See 5.8 Statutory Waterfall of Claims.

The two possible mechanisms for effectuating a restructuring/reorganisation plan under the Indian legal framework are under the IBC and under the restructuring schemes provided for under the Companies Act.

Both the IBC and the Companies Act framework provide for voluntary and involuntary processes for the restructuring or reorganisation of companies.

The procedure governing the Companies Act schemes is further detailed under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Scheme Rules). Under a scheme, a company can enter into a compromise or arrangement with its creditors (or any class thereof) or its members (or any class thereof). Schemes of arrangement include within their purview schemes of amalgamation, merger and demerger or reorganisation of share capital by way of consolidation/division of shares. A proposal for a scheme may be made by the company itself, or by the creditors or members, and even by the Central Government in certain cases. Schemes may also be proposed by the liquidator if appointed for the company. A scheme becomes binding on the company and all its creditors (or class of creditors), its members (or class of members), contributories, and the liquidator (if any) upon receipt of the approval of the NCLT.

Under the IBC, resolution plans are solicited by the resolution professional from eligible resolution applicants, and are then voted on by the Creditors Committee. Those plans are then submitted to the NCLT for its approval.

Under the IBC, creditors' consent of a 66% vote share majority by value is required to approve a resolution plan.

Under the Companies Act framework, a scheme requires the vote of three quarters of the creditors (or class of creditors) or members (or class of members) in value for its approval. Dissenting creditors/members (or classes thereof) can thus be crammed down; however, the Tribunal can provide for the protection of any class of creditor in its order approving the scheme, if it finds it necessary. Insofar as shareholders are concerned, in its order the Tribunal can provide an exit offer to dissenting shareholders (if any) if it finds it necessary to do so for the effective implementation of the terms of the scheme. Objections to the proposed scheme can be made only by shareholders that hold no fewer than 10% of shares or by creditors to whom 5% or more of the outstanding debt is owed, as per the latest audited financial statements of the company.

For details ofwho can initiate proceedings, see 2.5 Commencing Involuntary Proceedings.

Under the IBC, there are no restrictions on the type of resolution that can be proposed or adopted. The IBC does, however, provide an illustrative list of measures that may be provided for resolution, which includes, inter alia, the sale/transfer of all or part of the assets of the corporate debtor, the substantial acquisition of shares of the corporate debtor, merger, demerger, or amalgamation, restructuring, a reduction in amounts payable to creditors, the satisfaction/modification of security interests, etc. However, piecemeal/individual sale of assets cannot be proposed under a resolution plan, and such a plan will be liable to be rejected by the NCLT as being in contravention of the objective of "resolution" of a corporate debtor on a going-concern basis.

A scheme under the Companies Act may be applied for the restructuring of the company in many different ways. Subject to certain stipulations, schemes can propose the alteration of the rights and liabilities of the creditors and members of the company (including inter alia by way of reprioritisation of claims).

The IBC provides for a resolution process that is largely autonomous after the admission of an application for initiation of the CIRP. The resolution professional acts as a facilitator of the resolution process, whose administrative functions are overseen by the Creditors Committee and by the NCLT. The intervention of the NCLT is also required for the purpose of according the final approval on the selected resolution plan, and for deciding any ancillary issues/disputes in relation to inter alia claims submitted by creditors and the eligibility of resolution applicants. In respect of resolution plans, the commercial wisdom of the Creditors Committee has been recognised as paramount by the Indian Supreme Court.

Restructuring under the Companies Act, however, is a court-driven process, in terms of both its initiation and its implementation.

See 2.5 Commencing Involuntary Proceedings for how such proceedings are commenced.

Under the Companies Act, the proposed scheme is first required to be submitted to the NCLT by the relevant applicant. Thereafter, the NCLT orders a meeting of the creditors (or classes thereof), members (or classes thereof) and/or debenture holders to be called, unless it thinks fit for the application to be dismissed. A notice calling the meeting by the appointed chairperson, in this regard, is required to be sent to each creditor or member or debenture holder of the company individually. In a scheme of merger/amalgamation, notices would have to be sent to the creditors and members of both companies, the income tax authorities, and the jurisdictional Registrar of Companies, SEBI and the relevant stock exchanges (as applicable), and would also have to be issued to several other regulatory authorities (seeking objections) and would also have to be published in newspapers and on the websites of the respective companies (if any). If the proposed scheme is approved by statutorily prescribed thresholds in each meeting, it is presented before the NCLT for its approval.

In relation to timelines for admission and completion of CIRP, please see 2.1 Overview of Laws and Statutory Regimes.

In respect of restructuring under the Companies Act, there are no prescribed timelines that apply to the process as a whole. An expedited process that would generally take 90-100 days for completion is available in respect of schemes proposed for companies whose turnover and capital do not exceed certain prescribed limits, or between a holding company and its subsidiary (or such classes of companies that may be prescribed by the Central Government).

Under the IBC, creditors (including creditors having unmatured and contingent claims) are required to submit their proof of claims to the IRP/resolution professional, along with the supporting documentation to establish the veracity of such claims. The IRP/resolution professional is required to vet and verify those claims, and to admit/reject them.

For schemes, there is no requirement for the calculation of creditors' claims other than to determine their vote share for the purposes of voting at meetings or calculating eligibility to raise objections. For this purpose, the value of debt owed to creditors (or any class of creditors) whose meetings have to be called (ie, impaired creditors) is that which remains outstanding as per the latest audited financial statements or provisional financial statement, as the case may be. In this respect, only those contingent claims that find mention in the financial statements of the company will be recognised.

A resolution plan, once approved by the NCLT, is binding on the corporate debtor and its employees, members, creditors, including the Central and State Government or any local authority to whom a debt is owed in respect of the payment of dues arising under any law for the time being in force, any authorities to whom statutory dues are owed, guarantors and all other stakeholders involved in the resolution plan.

A Companies Act scheme, once approved by the NCLT, is binding on the company and all of its creditors (or class of creditors) and/or members (or class of members), the contributories, and the liquidator (if any). Such an approved scheme would even bind all those creditors that did not vote upon the scheme, provided that they were informed of the convening of the meeting for the purposes of voting upon the scheme at the appropriate time.

The terms and content of resolution plans received under the IBC are kept confidential, and no disclosure can be made to any of the stakeholders other than the members of the Creditors Committee and those operational creditors that are entitled to attend meetings of the Creditors Committee, as well as the members of the suspended Board. However, the order of the NCLT approving the resolution plan would examine the material terms of the plan while ensuring that the mandatory requirements as envisaged under the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) are satisfied. The order would then be published on the NCLT website.

The procedure for the proposal and approval of a Companies Act scheme is not a confidential process, and entails the disclosure of its terms to the members, creditors and debenture holders of the company concerned.

Under the IBC, an aggrieved person can file an appeal against approval of the resolution plan before the NCLAT within 30 or latest within 45 days of the NCLT approval. A challenge can be made in the case of contravention of applicable laws, material irregularity by the resolution professional in the exercise of his or her powers, or if debts owed to operational creditors and/or costs pertaining to the CIRP have not been provided for in the resolution plan.

There is no specific provision in the Companies Act that allows an aggrieved person to challenge a restructuring scheme once it is approved. However, a general right to appeal is provided in Section 421 of the Companies Act and any such appeal is required to be filed within 45 days of the NCLT order.

See 2.1 Overview of Laws and Statutory Regimes and 9.3 Selection of Officers.

During the CIRP, a corporate debtor can borrow money as ‘interim finance’ after obtaining the approval of the Creditors Committee. The resolution professional is empowered to offer the financier security over the unencumbered assets of the company. To create security over encumbered assets, the resolution professional would have to seek the permission of the relevant secured creditors holding security over those assets. However, prior consent of the creditor is not required where the value of the asset is not less than the amount equivalent to twice the amount of the secured debt.

This interim finance will be counted towards the CIRP Costs, and the payment of such amounts in priority over any other creditors will have to be accounted for in any resolution plan.

Initiation of a restructuring process under the Companies Act does not result in a moratorium/automatic stay of claims or proceedings against the company.

The Companies Act does not contemplate appointment of an officer for controlling and managing the company during the process of restructuring.

Further, no statutory prohibitions apply to the borrowing of money during the implementation of a restructuring scheme.

For the purposes of the IBC, creditors are classified into two categories: financial creditors and operational creditors. The classification is not on the basis of the security holding of creditors (ie, into secured and unsecured creditors), other than for purposes of liquidation. See 5.1Differing Rights and Priorities.

Operational creditors can initiate insolvency proceedings under the IBC, and have the right to be paid, in priority to a financial creditor, an amount which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor or if the distribution of amounts under a resolution plan was on the basis of the liquidation waterfall, whichever is higher.

As regards creditors' participation, only the financial creditors participate in the Creditors Committee (unless there are none). However, a financial creditor that is a related party of the corporate debtor has no right of representation or participation in the Creditors Committee. Operational creditors who have aggregate dues of 10% or above of the total debt of the corporate debtor can participate in the Creditors Committee without voting rights. Further, “classes” of creditors exceeding ten in number are empowered to appoint a separate insolvency professional to act on their behalf and represent their interests in meetings of the committee.

The Creditors Committee approval is required for various actions during the CIRP, including for purposes of inter alia approval of the resolution plans, the appointment/change of the resolution professional, changing the capital structure of the company, raising interim finance, making a decision to liquidate the company, and making a decision to approve the sale of unencumbered assets of the company outside the ordinary course of business. The IBC prescribes different voting thresholds depending on the nature of the subject matter.

Within two weeks of his or her appointment and no later than the 54th day from the ICD, the resolution professional is required to submit an information memorandum to each member of the Creditors Committee, containing the details of inter alia the assets and liabilities of the corporate debtor on the ICD, financial statements, a list of creditors, details of all material litigation, details of guarantees given in respect of the debts, liabilities owed to the workers and employees.

Under the Companies Act, creditors/members of the company are categorised into classes based on their “commonality of interests”. Identification of a class and the basis for its classification have to be specifically provided in the scheme. A scheme proposing the restructuring of debt obligations of a company is required to set out the treatment of unsecured creditors (if any) and dissenting creditors.

While the statutory framework does not provide for the formation of committees, creditors/members are placed in different classes for voting on the scheme. There is no express provision in the Companies Act regarding the treatment of expenses during the restructuring process.

Upon the presentation of a scheme before the NCLT, a notice (along with a copy of the proposed scheme and any related details in respect of the scheme in the prescribed format) is required to be sent to all creditors, members and debenture holders of the company, at their registered address available to the company.

The claims of the dissenting creditors, together with security interest and rights over assets, can be modified under a resolution plan. Thus, there is no protection over the assets that are secured; however, the dissenting creditors would be entitled to receive their relative liquidation value.

Under the Companies Act, it is required that the scheme is voted on and approved at each separate meeting of creditors and members (or sub-classes thereof) by a 75% majority (by value), and an intra-class “cram-down” is applicable on all such stakeholders that voted against the plan.

Claims against a company undergoing CIRP may be assigned/traded. If a creditor assigns/transfers its debt to any other person during the CIRP period, both parties (ie, both the assignor and the assignee) are to provide the details of the terms and mechanics of the assignment to the resolution professional.

There is no bar on the trading/assignment of debt under the Companies Act during the scheme process.

There are no specific statutory provisions barring the consolidation of CIRP of group companies. However, recently the NCLT has allowed "substantive consolidation" of 14 group companies of Videocon Industries Limited. Similarly, the NCLAT has ordered consolidated insolvency proceedings for another corporate group. A Working Group Report was recently released, on 14 October 2019, laying down the broad principles that may be considered for group insolvency.

There is no express statutory provision providing for consolidation of ongoing restructuring of members of a corporate group under the Companies Act.

Under Regulation 29 of the CIRP Regulations, the resolution professional is permitted to sell unencumbered assets after obtaining the approval of the Creditors Committee. The overall book value of the assets sold under this process cannot exceed 10% of the total claims admitted. While contractual rights accruing in favour of creditors pose no hindrance to such a sale process, consent must be specifically obtained from any third parties whose rights may be affected in this regard. If such assets are encumbered prior to the sale, specific releases must be obtained from all the creditors that hold security over the assets.

The Companies Act does not stipulate restrictions/conditions on the power to sell the company’s assets in the period during which the scheme is being implemented.

Only the resolution professional is empowered to execute/effect a sale of unencumbered assets under Regulation 29 of the CIRP Regulations, as specified in 6.7 Restrictions on a Company’s Use of or Sale of its Assets.

A bona fide purchaser of unencumbered assets sold under this provision acquires free and marketable title to such assets.

There is no bar on creditors bidding for assets sold under a Regulation 29 sale. A creditor may also act as a stalking horse for the purposes of such a sale process.

Under the IBC framework, pre-negotiated sales or similar transactions may not be effectuated unless the proposal is submitted as a resolution plan in accordance with the requirements stipulated in the IBC and the regulations thereunder. Effectuating pre-negotiated transactions in respect of a Regulation 29 sale is also permissible.

The Companies Act does not impose the duty to administer the scheme on a particular person.

There is also no express provision in the Companies Act that restricts sales/other transactions that have been pre-negotiated prior to the restructuring to be effectuated as part of the scheme proposed for the company.

Upon approval of a resolution plan pursuant to the CIRP, security interests of the creditors may be released in terms of the resolution plan. Claims of the guarantors, such as subrogation claims, may also be released pursuant to the resolution plan.

Under the Companies Act framework, any asset disposition provided for under an approved scheme would bind all creditors that hold security/charges over the assets, and those secured creditors (whether or not they voted in favour of the scheme) would be statutorily obliged to release their security/liens over such assets.

See 6.2 Position of the Company.

See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.

A resolution plan is mandatorily required to include a statement as to how it proposes to deal with the interests of all the stakeholders of the company.

Further, while the resolution applicant can propose for payment to operational creditors and dissenting financial creditors in terms of the liquidation waterfall (see 6.3 Roles of Creditors and 6.4 Claims of Dissenting Creditors), any distributions in relation thereto is required to be “fair and equitable”.

In relation to the Companies Act scheme, although there is no express provision, courts have traditionally examined whether the process and proposed terms of the scheme, on the whole, are fair, just, and reasonable for all parties involved.

No statutory empowerment is given to the resolution professional or any other person to disclaim onerous contracts during the resolution process envisaged under the IBC. Similarly, there are no provisions that enable the company to reject/disclaim contracts pursuant to the terms of a scheme.

Resolution plans approved pursuant to the various provisions of the IBC are binding on various stakeholders referred to therein, and can release non-debtor parties such as guarantors from specific obligations in relation to the debt of the insolvent company.

The Companies Act does not provide for the release of non-debtor parties from liabilities pursuant to the terms of a restructuring scheme, unless those parties have voted on and approved such a scheme (shareholders, for example).

The format of the "proof of claims" to be submitted by the various creditors includes a specific entry for the disclosure of “details of any mutual credits, mutual debts, or mutual dealings between the corporate debtor and the creditor which may be set off against the claim.” The statute does not provide any clarity about whether or not these rights can be temporarily suspended or terminated, and this issue has not been tested before courts thus far.

At present, the Companies Act regime does not contemplate the right of set-off, off-set or netting in a restructuring that is carried out pursuant to a scheme of compromise/arrangement.

As per section 74(3) of the IBC, any contravention of the terms of a resolution plan by the corporate debtor, its officers, or any creditor of the company attracts imprisonment of one to five years, or a fine of between INR1 lakh and INR1 crore.

Further, if the corporate debtor contravenes any of the terms of the resolution plan, any aggrieved person can make an application before the NCLT to liquidate the company.

For contravention/failure to observe the terms of an agreed scheme in respect of a merger/amalgamation, section 232(8) of the Companies Act imposes a penalty by way of a fine (of no less than INR1 lakh, and which may extend to INR25 lakh) on such a company. Furthermore, every officer of that company who is in default is also liable to be punished with imprisonment of up to one year or with a fine of INR1 lakh to INR3 lakh, or both.

As per section 231 of the Companies Act, if the NCLT is of the view that the scheme sanctioned by it under the statutory framework cannot be implemented satisfactorily, and that the company is unable to pay its debts as per the scheme, it may make an order for the winding up of the company.

Under the IBC, the shareholders do not have a right to vote on the approval of the resolution plan and their treatment is determined by the resolution plan.

Under the Companies Act, owners of equity may receive property only if such a receipt is envisaged in terms of the proposed scheme.

As the relevant framework for insolvency proceedings has been dealt with extensively in the sections above, this section will be restricted to liquidation proceedings under the IBC.

The IBC provides for both a voluntary and an involuntary regime for the liquidation of the company, as set out below:

Involuntary Liquidation

Rejection of the resolution plan by the NCLT, non-receipt of a resolution plan, by way of resolution of the Creditors Committee, and contravention of the terms of the resolution plan by the corporate debtor can lead to liquidation under the IBC. The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Process Regulations) also permit the restructuring of the corporate debtor pursuant to a Companies Act scheme. The process of approval of the scheme is required to be completed within 90 days of the liquidation commencement date, which period is not included in the overall timeline for liquidation.

In liquidation under the IBC, the liquidation dividends are to be distributed amongst various stakeholders as per the waterfall mechanism (discussed in more detail in 5 Unsecured Creditor Rights, Remedies and Priorities). Secured creditors  are afforded the right to enforce their security outside of the liquidation process. Relinquishment of security is presumed if the secured creditor does not inform the liquidator of its decision to realise the security within 30 days of the liquidation commencement date.

The liquidation process is required to be completed within one year of its initiation (which may be extended by the NCLT upon an application being made by the liquidator). Stakeholders are expected to submit their claims to the liquidator within 30 days of the liquidation commencement, and the liquidator is required to verify those claims within a period of 30 days therefrom. Further, the Liquidation Process Regulations prescribe an event-wise model timeline for the conduct of the process.

Voluntary Liquidation

The corporate debtor itself may initiate a voluntary liquidation process after obtaining a shareholders' resolution and a declaration from the majority of the directors in relation to the solvency of the company and that the company is not being liquidated to defraud any person. The declaration should be accompanied by the audited financial statements and valuation report of the assets of the company.

Within four weeks of the issuance of the declaration, a resolution of the members of the company resolving to liquidate the company voluntarily is required. In such meetings, the members must also resolve to appoint an insolvency professional to act as the liquidator.

If the company has any creditors, approval must also be obtained from creditors representing two thirds in value of the debt of the company for the initiation of liquidation. The company is required to notify the Registrar of Companies and the IBBI of the resolution to liquidate the company, within seven days of the passing of the members’ resolution (or of the date of approval of the creditors, where applicable), and the voluntary liquidation of the company is deemed to have commenced from the date of the passing of that resolution.

The timeline for completion of the voluntary liquidation process is one year. Here too, stakeholders are expected to submit their claims within 30 days of the liquidation commencement date, and the liquidator is expected to verify those claims within 30 days therefrom.

Trading/Assignment of Claims

There is no statutory bar on trading/assignment after the commencement of the liquidation of the company.

Moratorium

Upon the passing of a liquidation order under the IBC, a prohibition on the initiation of suits or legal proceedings (by or against the corporate debtor) comes into effect.

Appointment of Liquidator

For liquidation, a liquidator (who must be an insolvency professional, including the resolution professional appointed during the CIRP) is appointed, inter alia, to take over control of the assets, property and management of the corporate debtor. For further information in relation to the powers of the liquidator, see 9.2 Statutory Roles, Rights and Responsibilities of Officers.

Disclaimer of Onerous Contracts

In liquidation, the liquidator is empowered to disclaim onerous contracts and property. For the purposes of effecting such a disclaimer, the liquidator is required to apply to the NCLT (within six months of the liquidation commencement date) and to serve a notice to persons interested in the onerous property at least seven days prior to doing so. Upon the NCLT approving such an application, the disclaimer operates to determine – from the date of such disclaimer – the rights, interests and liabilities of the corporate debtor in or in respect of the property or contracts disclaimed, but shall not have the purpose of affecting the rights, interests or liabilities of any other person. Any person affected by such a disclaimer is deemed to be a creditor of the corporate debtor in respect of the amount of compensation or damages payable in respect of the property/amounts disclaimed.

Creditors' Right of Set-off

For the purposes of liquidation under the IBC, creditors are expressly permitted to exercise the right of set-off in respect of any mutual dealings between the corporate debtor and themselves. There is no provision for the temporary suspension or termination of the set-off.

Information Accessible to Creditors

Various documents are made available to the creditors, such as the information memorandum, the liquidation value report and the fair-value report in respect of the insolvent company.

Conclusion of the Statutory Proceedings

After the assets of the corporate debtor have been completely liquidated, the liquidator is required to make an application to the NCLT for the dissolution of the corporate debtor and the NCLT passes an order for the dissolution of the corporate debtor.

The liquidator is empowered to undertake the sale of movable and immovable property and actionable claims. The Liquidation Process Regulations permit the sale of any asset which is subject to security interest only if the interest therein has been relinquished to the liquidation estate. Creditors are permitted to credit-bid in the auction for the assets.

Pre-negotiated sales are not barred under liquidation proceedings; however, a public auction is first required to be undertaken.

A liquidator (after taking reasonable efforts to obtain information) may make an application to the NCLT for seeking directions that a non-co-operative officer, auditor or employee, promoter or partner of the corporate debtor shall co-operate with him or her for the collection of necessary information for the conduct of the liquidation proceedings.

There are no provisions under the IBC for raising interim finance during liquidation proceedings.

There are no specific statutory provisions for liquidating a corporate group on a combined basis.

As previously mentioned, the liquidator invites claims from financial creditors, operational creditors, workers, employees and other stakeholders.

For dealing with the assets of the corporate debtor, the liquidator has to constitute a stakeholders’ consultation committee, on the basis of claims received. While reasons for divergence from its advice are required to be recorded by the liquidator, in writing, the advice of this committee is not binding. Further, only with respect to “going-concern” sales, the creditors’ committee, constituted in the CIRP, may record its recommendations for the liquidator.

During liquidation, the sale may be effected through an auction or a private sale, and the assets may be sold on a standalone basis, or in a slump sale, or collectively, or in parcels. The corporate debtor (or a business thereof) can even be sold on a going-concern basis. Prior permission of the NCLT is required for private sale in general, as well as for a private sale to a related party of the corporate debtor, a related party of the liquidator, or any professional appointed by the liquidator.

India currently lacks a comprehensive and dedicated cross-border regime. India has not yet adopted the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency (UNCITRAL Model Law). The Insolvency Law Committee has submitted a Report on Cross-Border Insolvency dated 16 October 2018 (ILC Report). Further, the Ministry of Corporate Affairs has also proposed a draft Chapter on Cross-Border Insolvency (MCA Draft Chapter) to be included in the IBC. The proposed framework under the ILC Report and MCA Draft Chapter are based upon the UNCITRAL Model Law, with certain modifications.

Currently, section 234 makes provision for the Indian government to enter into reciprocal treaties with other countries to extend the provisions of the IBC to such countries. Further, Section 235 provides for an application to be made by the insolvency professional before the NCLT in case some action or evidence is required to be undertaken in relation to assets of the corporate debtor located outside India. NCLT can issue a letter of request to the relevant authority of the country with which a reciprocal arrangement under section 234 has been entered into. To date, no such bilateral agreements have been entered into.

The only available recourse for enforcement of recognition of a foreign judgment is by resorting to section 44A of the CPC, which allows Indian courts to enforce decrees passed by foreign courts located in certain specified "reciprocating territories" (as notified by the government of India). The powers in section 44A are limited by the qualifications in section 13 of the CPC. The recognition and enforcement of judgments from non-reciprocating territories would necessitate a retrial before Indian courts (with the judgment obtained in the foreign jurisdiction being accorded only evidentiary value).

There is no statutory framework enabling the signing of co-ordination agreements. However, the NCLAT in its discretion in Jet Airways (India)Limitedv State Bank of Indiaallowed a Joint Corporate Insolvency Processof Jet Airways (India) Limited (which is subject to parallel insolvency proceedings in India and in the Netherlands) by approving a Cross-Border Insolvency Protocol between the Indian Resolution Professional and the Dutch Bankruptcy Trustee appointed to administer the Dutch insolvency proceedings.

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

Under the IBC, foreign creditors have been placed at par with domestic creditors and are accorded all rights available to domestic creditors under the statutory framework.

In relation to insolvency proceedings under the IBC, the insolvency professional (as IRP or resolution professional) acts as the facilitator for the entire CIRP.

In the case of liquidation, the NCLT would appoint a liquidator (registered as an insolvency professional) for liquidating the corporate debtor.

IRP

Simultaneously with the admission of the application to commence CIRP,  an IRP would be appointed. The management of the corporate debtor shall vest in the IRP from the date of her or his appointment and the powers of the board of directors of the corporate debtor shall remain suspended and be exercised by the IRP. The officers and managers of the corporate debtor are mandatorily required to report to the IRP and co-operate with her or him. Similarly, financial institutions maintaining the accounts of the corporate debtor are also required to act on the instructions of the IRP.

The IRP is authorised to act and execute in the name and on behalf of the corporate debtor all the documents and access the records of the corporate debtor.

As a part of his or her duties, the IRP is required, inter alia,to collect all information relating to the assets, finances and operations of the corporate debtor, to receive and collate all the claims submitted by creditors, constitute a Creditors' Committee, take control and monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the Creditors' Committee.

Resolution Professional

As mentioned, the IRP is required to constitute a Creditors' Committee, which, in its first meeting appoints a resolution professional to conduct the entire CIRP and manage the affairs of the corporate debtor during the CIRP period. See also 9.3 Selection of Officers below.

The resolution professional has the same power and responsibilities as the IRP. The resolution professional is required to preserve and protect the company’s assets, including its continued business operations. In this regard, the resolution professional shall, inter alia:

  • take immediate custody and control of all the assets of the corporate debtor;
  • represent and act on behalf of the corporate debtor;
  • raise interim finances; 
  • convene and attend all meetings of the Creditors' Committee; prepare the information memorandum;
  • invite prospective resolution applicants to submit a resolution plan or plans as per the criteria laid down by the Creditors' Committee; and
  • present all resolution plans at the meetings of the Creditors' Committee and file applications for avoidance of transactions, if any.

Liquidator under the IBC

Upon the appointment of a liquidator under the provisions of the IBC, all the powers of the board of directors of the corporate debtor shall cease to have effect and shall be vested in the liquidator. Pursuant to section 35 of the IBC, the liquidator is, inter alia, required to: 

  • verify the claims of all the creditors;
  • take into custody or control all the assets, property, effects and actionable claims of the corporate debtor;
  • evaluate the assets and property of the corporate debtor;
  • protect and preserve the assets and properties of the corporate debtor;
  • sell the immovable and movable property and actionable claims of the corporate debtor; and
  • invite and settle claims of creditors and claimants, and distribute proceeds.

Furthermore, the liquidator is required to form a liquidation estate constituting all the assets owned by the corporate debtor, and to hold the liquidation estate for the benefit of all the creditors.

General Duties of the Insolvency Professionals

In addition to these specific duties, the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IP Regulations) provide for a high standard of duty and care for all insolvency professionals. Section 208 of the IBC states that every professional shall take reasonable care and diligence while abiding by his or her duties, follow the bylaws of the insolvency professional agency of which he or she is a member, allow it to inspect his or her records, and submit a copy of every proceeding before the NCLT to it and to the IBBI.

Regulation 7 of the IP Regulations states that the registration of the professional will be subject to them abiding by the code of conduct specified therein. An insolvency professional is required to maintain integrity by being honest, straightforward and forthright in all professional relationships. He or she must act with objectivity and maintain impartiality,  and avoid conflicts of interest.

Liquidator under the Companies Act

A company liquidator (subject to the directions of the NCLT) is inter aliaauthorised to:

  • carry on the business of the company so far as may be necessary for the beneficial winding-up of the company;
  • sell the immovable and movable property and actionable claims of the company;
  • sell the whole of the undertaking of the company as a going concern;
  • raise any money required on the security of the assets of the company;
  • represent the company;
  • invite and settle the claims of creditors, employees or any other claimants, and distribute sale proceeds in accordance with the priorities established under this Act;
  • prove rank and claim in the insolvency of any contributory for any balance against his or her estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and rateably with the other separate creditors;
  • take all such actions and steps as may be necessary for the winding-up of the company, distribution of assets or in discharge of his duties and obligations and functions as company liquidator.

IRP

Once an application to commence the CIRP under the provisions of the IBC is filed before the NCLT, the applicant may propose the name of an insolvency professional to be appointed as the IRP. The insolvency professional (as may be suggested under the application and in relation to whom no disciplinary proceedings are pending) or a insolvency professional recommended by the IBBI on reference of the NCLT (if no suggestions have been made) will be appointed as the IRP by the NCLT, by an order, within 14 days of admission of the application. The term of the IRP extends to 30 days from the date of his or her appointment and in the case of replacement of the IRP, the term would be up until the resolution professional assumes the office.

The IRP is required to constitute a Creditors' Committee on or before the completion of the 30-day period. In its first meeting (ie, within seven days of its constitution), the Creditors' Committee must resolve either to appoint the IRP as the resolution professional or to replace the IRP with another resolution professional to conduct the CIRP, by a majority vote of no less than 66% of the voting share of the financial creditors. In both cases, the creditors need written consent from the professional in the specified form. The Creditors' Committee is also required to update the NCLT regarding the appointment of the resolution professional.

The Creditors' Committee can replace the resolution professional at any time during the CIRP by a vote of 66% of the voting share, subject to obtaining written consent from the proposed resolution professional, and forwarding it to the NCLT, which shall forward it to the IBBI for confirmation.

Liquidator under the IBC

Where the NCLT passes an order of liquidation, the resolution professional appointed for the insolvency process shall act as liquidator, subject to written consent in specified form. As per section 34(4), the NCLT shall by order replace the liquidator if the resolution plan submitted under section 30 is rejected for failure to meet the requirements of section 30(2), or if the IBBI recommends his or her replacement for reasons recorded in writing, or if the written consent is not received.

If a company makes an application for voluntary liquidation, it is required to appoint a liquidator by passing a special resolution to that effect containing details of the liquidator to be appointed and the terms and conditions of his or her appointment, including remuneration.

Liquidator under the Companies Act

Upon the receipt of a petition for winding-up, the NCLT may pass an order appointing a provisional liquidator of the company until the making of a winding-up order. At the time of the passing of the order of winding-up, the NCLT shall appoint an official liquidator or a liquidator from the panel of insolvency professionals registered with the IBBI.

Restrictions on Serving as a Statutory Officer

An insolvency professional is required to be registered with the IBBI in compliance with the eligibility criteria laid down in the IP Regulations. A non-registered insolvency professional cannot act as an IRP, resolution professional or the liquidator.

In the case of resolution under the IBC, insolvency professionals (similar to an administrator) are the facilitators entrusted with the task of conducting the CIRP of the corporate debtor.

As a part of their duties, the resolution professional is also entitled to appoint accountants, legal or other professionals in the manner specified by the IBBI. The resolution professional is also mandatorily required to appoint two "registered valuers" for the purposes of determining the fair value and the liquidation value of the corporate debtor. The appointment of such professionals shall be confirmed by the Creditors' Committee, and their expenses will form part of the CIRP Cost.

The other participants in the CIRP (ie, the Creditors' Committee and the resolution applicants) may also engage professionals such as lawyers, evaluation agents or other advisers to assist them in performing their respective roles.

In terms of restructuring under the Stressed Asset Framework, the lenders may engage professionals such as accountants, legal professionals, credit rating agencies, etc. The appointment of restructuring advisers is not very common.

Under the IBC

As mentioned above, the insolvency professionals may engage other professionals to provide support services in running/managing the business of the corporate debtor as a going concern, and for the facilitation of the CIRP.

The costs incurred by the interim resolution professional, including his or her fees and the fee to be paid to the professionals, are fixed by the applicant creditor. The expense borne by the applicant is reimbursed by the Creditors' Committee.

The fees of the resolution professional are fixed by the Creditors' Committee and the fee to be paid to him or her and to his or her advisers form part of the CIRP Cost.

Restructuring under Stressed Asset Framework

Restructuring under the Stressed Asset Framework is an out-of-court mechanism that is led by the lenders, and the appointment of any professionals and payment of compensation would be determined by the lenders.

See 10.1 Typical Advisers Employed.

In relation to insolvency proceedings under the IBC, insolvency professionals are accountable to the IBBI and the NCLT. Furthermore, the insolvency professionals are required to report to the Creditors Committee as well as the NCLT at various stages as envisaged under the IBC and related regulations from time to time. Failure to do so may result in the initiation of disciplinary proceedings against those insolvency professionals by the IBBI. No specific duty towards creditors has been imposed on the resolution professionals.

In the case of registered valuers and other professionals such as lawyers, evaluation agents, etc, the professionals are bound by the terms of engagement and the norms laid down by their respective governing institutions.

Insolvency cases and schemes of arrangement fall within the jurisdiction of NCLTs in India and the appellate jurisdiction of the NCLAT and the Supreme Court. Arbitration and mediation is not utilised for insolvency and liquidation matters.

See 11.1 Utilisation of Mediation/Arbitration.

While admitting the application for initiating CIRP, the NCLT would also, by an order, impose a moratorium under section 14 of the IBC, inter alia, prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor. However, there is no restriction on initiation of the arbitration proceedings by the corporate debtor against third parties during the CIRP period.

In Alchemist Asset Reconstruction Company Limited v M/s. Hotel Gaudavan Private Limited &others(AIR 2017 SC 5124),the Supreme Court observed that the effect of section 14(1)(a) is that an arbitration that has been instituted after the order of moratorium is non est in law. In Power Grid Corporation of India Ltd v Jyoti Structures Ltd, the Delhi High Court held that a moratorium would not apply to the proceedings which are to the benefit of the corporate debtor and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor.

Enforceability of an arbitral award obtained during the CIRP period after cessation of the corporate insolvency resolution period would also be subject to the terms of the resolution plan.

Arbitration in India is governed by the Arbitration and Conciliation Act, 1996.

Under the Arbitration Act, either the parties or the appointed court appoints the arbitrators.

There are no specific qualifications regarding who can serve as an arbitrator/mediator. However, individuals with relevant technical expertise or retired judges are typically appointed as arbitrators.

Duties of Officers and Directors of a Financially Distressed or Insolvent Company

Section 166 of the Companies Act sets out the general duties of directors of Indian companies, which include the duty to act in accordance with the articles of the company, to act with due and reasonable skill and diligence, to exercise independent judgment and avoid conflicts of interests, and not to achieve or attempt to achieve any undue gain or advantage while in office.

Under section 166(2), directors are required to act in “good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and the protection of environment.” These provisions should be read along with section 166(7) of the Companies Act, which provides the penalty for the contravention of any such duties, being punishment with a fine of INR1 lakh to INR5 lakh.

Creditors are conspicuous in their absence.

Directors' Duties to a Company's Creditors

Indian law provides for no shift of duties towards creditors as the company approaches the “twilight” of insolvency or actual insolvency itself.

Under section 66(2) of the IBC, if the directors of the corporate debtor, knew or ought to have known before the ICD that “there was no reasonable prospect” of avoiding the commencement of a CIRP in respect of the corporate debtor, “did not exercise due diligence in minimising the potential loss to the creditors” during the twilight period, they may become liable to make contribution to the assets of the corporate debtor, as may be directed by the NCLT. The provision comes into play where a director or partner.

Sanctions on Directors

Under the IBC

Chapter VII of the IBC stipulates various offences and penalties to which officers of the corporate debtor are subjected to. In the case of

  • wilful concealment of the corporate debtor’s property (in the manner specified in section 68 of the IBC) within the 12 months immediately preceding the ICD or thereafter;
  • transactions defrauding creditors (as specified in section 69 of the IBC);
  • misconduct in course of CIRP (as specified in section 70 of the IBC);
  • destruction/mutilation/alteration or falsification of any books, papers or securities;
  • wilful and material omissions from statements relating to affairs of corporate debtor; and
  • making any false representation or committing fraud to induce creditors to an agreement, the officer of the corporate debtor shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years and with a fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both.

Under the Companies Act

Under the Companies Act regime, in the case of:

  • concealment, destruction or fraudulent removal of property, books or papers of the company within 12 months of the commencement of the winding-up procedure;
  • the making of any material omission in a statement relating to the affairs of the company;
  • the commission of fraudulent actions with the intent to defraud creditors;
  • not keeping proper books of accounts during the two years before the commencement of the winding-up; the director would be punishable with imprisonment of between three and five years and with a fine of between INR1 lakh and INR3 lakh.

Apart from the above, any creditor or contributor or the liquidator appointed in respect of the company may apply to the NCLT to declare that any directors who were knowingly parties to the carrying on of the business with the intent to defraud the creditors of the company are liable for all or any of the debts or other liabilities of the company.

Liabilities under Other Statutes

Directors also face liability for acts committed in their official capacity under certain statutes, including liability under the Income Tax Act, 1961, for failure of the company to pay income tax owing to gross negligence, misfeasance or breach of duty on part of the directors in relation to the affairs of the company.

Claims in respect of duties and obligations owed to creditors under sections 66(1) and 66(2) of the IBC cannot be asserted by the creditors directly, but have to be made by the resolution professional. Under section 49 (dealing with transactions "defrauding creditors"), such a claim can be made by either the resolution professional or the liquidator, as the case may be.

There is currently no concept/market practice of chief restructuring officers or other restructuring professionals being appointed by companies for the purposes of restructuring in India. There has been only a handful of instances in complex cases where such officers have been engaged.

De facto or shadow directors are mentioned under the definitions of "officer" and "officer who is in default" under sections 2(59) and 2(60) of the Companies Act, in that these definitions include “any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.” However, there is a specific carve-out created for such persons who are advising the board in a purely professional capacity. Owing to the broad scope of the definition of an "officer in default", creditors can be categorised as de facto/shadow directors.

There are no specific provisions making shareholders or owners directly liable to creditors.

Under the IBC

The following transactions can be challenged under the framework of the IBC:

  • preferential transactions – transactions which involve the transfer of property by the corporate debtor to a creditor, surety or guarantor in relation to an antecedent debt, which puts the counterparty in a more beneficial position than it would have been in the eventuality of liquidation, may be challenged as being preferential. Transfers made in the ordinary course of business of the corporate debtor, or involving security for new money are exceptions to such challenges;
  • undervalued transactions – transactions involving transfer of assets by the corporate debtor for a consideration that is significantly less than the value of the consideration provided by the corporate debtor including gifts can be challenged under this provision;
  • transactions defrauding creditors – undervalued transactions that have been deliberately entered into in order to keep such assets beyond the reach of the company’s creditors can be challenged;
  • extortionate credit transactions – credit transactions where the corporate debtor is required to pay exorbitant and unconscionable payments can also be challenged.

Under the Companies Act

  • fraudulent preference – transactions entered into by the company with a creditor, surety or guarantor that have the effect of putting such counterparty in a better position in a liquidation scenario than it would have been if no preference had been given;
  • transfers not in good faith – transactions involving transfer of property or a delivery of goods by the corporate debtor that was not in good faith and/or for valuable consideration, and that this transaction was not carried out in the ordinary course of business;
  • creation of a floating charge– under the Companies Act, the creation of a floating charge by the corporate debtor on its undertaking or property in favour of any person can be challenged unless it can be proved that the company was solvent immediately after having created such a charge;
  • disclaimer of onerous property – property (land or tenure) that is burdened with onerous contracts, shares, non-saleable property or unprofitable contracts can be disclaimed by the liquidator.

All periods below are calculable from the ICD under the IBC, and from the presentation of a winding-up petition under the Companies Act.

Under the IBC

  • preferential transactionstwo years in respect of transactions entered into with a related party; one year for transactions entered into with non-related parties;
  • undervalued transactions two years in respect of transactions entered into with a related party; one year for transactions entered into with a non-related party;
  • transactions defrauding creditorsno look-back period prescribed;
  • extortionate credit transactions – two years.

Under the Companies Act

  • fraudulent preference– six months;
  • transfers not in good faithone year
  • creation of a floating charge– one year;
  • disclaimer of onerous property– no look-back period prescribed.

For avoidance/antecedent transactions dealt with under the IBC, the resolution professional or the liquidator is entitled to assert claims to set aside or annul transactions. For undervalued transactions, however, creditors, members or partners of the corporate debtor are also entitled to make such applications if the resolution professional or the liquidator fails to do so.

For avoidance/antecedent transactions dealt with under the Companies Act, applications for the disclaimer of onerous property are required to be made by the liquidator.

The claims in relation to avoidance/antecedent transactions cannot be asserted during the solvent restructuring of corporate debtors.

Valuation is crucial to the resolution of stressed assets under the provisions of the IBC. See also 6.3 Roles of Creditors and 6.4 Claims of Dissenting Creditors in relation to the entitlement of the operational creditors and dissenting financial creditors. At the stage of resolution, valuation is mandatory for the computation of the following:

  • fair value – ie, the estimated realisable value of the assets of the corporate debtor, if they were to be exchanged on the ICD between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing and where the parties had acted knowledgeably, prudently and without compulsion; and
  • liquidation value – ie, the estimated realisable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the ICD.

The valuation is undertaken in accordance with internationally accepted valuation standards.

During liquidation, registered valuers are required to submit independently to the liquidator the estimates of the "realisable value" of the asset(s), which is required to be computed in accordance with internationally accepted valuation standards.

Under the Stressed Asset Framework, the resolution plans are mandatorily required to provide for a payment not less than the liquidation value to the dissenting financial creditors.

During CIRP, the resolution professional is mandatorily required to appoint two registered valuers within seven days of his or her appointment, but not later than the 47th day from the ICD, in order to determine the fair value and the liquidation value of the corporate debtor.

During liquidation, the liquidator is required to appoint at least two registered valuers to determine the realisable value of the assets and the business of the corporate debtor intended to be sold. Further, from a restructuring context, the creditors generally appoint the valuers.

See 14.1 Role of Valuations.

Cyril Amarchand Mangaldas

Peninsula Chambers,
Peninsula Corporate Park
GK Marg
Lower Parel
Mumbai – 400 013, India

+91 22 2496 4455

+91 22 2496 3666

cam.mumbai@cyrilshroff.com cam.mumbai@cyrilshroff.com
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Law and Practice

Authors



Cyril Amarchand Mangaldas has a highly reputed practice in the area of stressed assets, restructuring and insolvency law, and advises banks, private credit funds and leading financial institutions. The insolvency team is the largest in India, with 20 members, including seven partners. It is able to deliver robust strategies to deal with stressed debts for the benefit of financial institutions and to enhance recovery alternatives, through combining knowledge of the law with analysis of the reputational risk-management issues. The firm has been at the forefront of the emerging jurisprudence on the new insolvency laws, with the first referral to the corporate insolvency resolution (Innoventive) being facilitated by the firm.

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