The restructuring market in India relies on statutory, non-statutory and voluntary restructuring frameworks and processes.
Statutory Resolution Framework
In 2016, Indian insolvency laws were overhauled by a new comprehensive code, the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC). This provides a creditor-in-possession resolution process for stressed corporates. Although the IBC is a recent legislation, its effects on the resolution of corporates have been significant.
Statistics released by the Insolvency and Bankruptcy Board of India (IBBI), at the end of June 2021, show that the corporate insolvency resolution process (CIRP) under the IBC was initiated for 4541 corporate debtors (CDs). Of these, 396 cases ended with successful resolution (with the debtor continuing as a going concern) and 1349 ended in liquidation, 653 have been closed on appeal or review or settled and 461 have been withdrawn. Many of the cases that went into liquidation were hangover cases involving companies that were already in irreversible distress well before the IBC came into force and were finding it difficult to achieve liquidation in a timely manner. This should be kept in mind when considering the disparity between resolved versus liquidated cases.
The majority of the cases referred to the IBC were corporates engaged in the manufacturing, real estate, construction and wholesale and retail trade sectors.
The IBC was, largely, credited for the rise in India’s ranking in the World Bank’s Ease of Doing Business report to the 63rd place in 2020.
To address the impact of the COVID-19 pandemic on businesses, the IBC and the related regulations were amended to provide temporary relief to corporates by prescribing a year-long suspension of initiation of the CIRP (for defaults that arose between 25 March 2020 and 25 March 2021). No application may ever be filed for initiation of a CIRP of a corporate for a default occurring during that period (Suspension of IBC). The period of lockdown imposed by the Indian government in the wake of COVID-19 shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to that lockdown, in relation to the CIRP or the liquidation process.
Consensual Non-statutory Restructuring
Apart from the process under the IBC, voluntary debt restructuring (with a debtor-in-possession model) is also fairly common. Since a majority of the corporate debt is held by domestic lending institutions, the debt restructuring usually follows the processes and frameworks prescribed by the Reserve Bank of India (RBI), the primary regulator for domestic banks and financial institutions.
The RBI formulated a scheme for resolution of stressed assets by its circular of 7 June 2019 (RBI Resolution Framework) which consolidated and replaced several of the erstwhile schemes.
The RBI had also introduced specific measures to offer reliefs to borrowers facing financial stress on account of COVID-19, including relaxation from some requirements in the RBI Resolution Framework, a special scheme for the restructuring of Micro, Small and Medium Enterprises (MSMEs) (later extended as Resolution Framework 2.0 until 30 September 2021) and a special regulatory package which has permitted several lending institutions to provide a moratorium on payments in respect of loans from 1 March 2020.
These regulatory (but non-statutory) schemes often face hurdles, because there needs to be consensus amongst the creditors to enter into an inter-creditor arrangement to govern the restructuring and determine the decision-making majority. Moreover, many minor creditors (including foreign creditors or bond-holders) may not sign up for fear of having their interests overlooked.
Schemes of Arrangement
Another avenue available for restructuring is under the (Indian) Companies Act, 2013 (CA-13), which enables companies to introduce and implement schemes of arrangement or compromise (Scheme). This route is less common, as such Schemes require approval from each class of creditors, which may be difficult, and also need to be assessed and approved by the National Company Law Tribunal (NCLT), by a longer process than resolution through a CIRP.
Special Scheme for Micro, Small and Medium Enterprises
One of the key developments under the IBC in the recent past is the introduction of a special mode of resolution for micro, small and medium enterprises (MSMEs) in the form of a Pre-Packaged Insolvency Resolution Process (PIRP), which follows a debtor-in-possession model.
The PIRP aims to offer an alternative mode of resolution, with minimum disruption to business, wherein the creditors and the CDs have the opportunity to agree on a resolution strategy before admission and to present that before the tribunal at the time of admission so that resolution can be achieved in a much shorter time and more consensual manner (vis-à-vis the owner-managers) than under the CIRP.
In a recent measure to bolster the judicial infrastructure under the IBC, around 18 judicial and technical members have been added to the national company law tribunals. It is hoped this will ease some of the pressure on these tribunals and expedite the resolution process.
Looking into the Future
The PRIP mechanism for resolution of MSMEs is a welcome measure, since the IBC process, while effective, is relatively time-consuming and public, and a quicker, more private process like a PIRP could help in retaining more value in certain types of companies – especially those in the services sector.
A parliamentary committee has recently released a report on the implementation of the IBC and offered recommendations around various issues.
Some of the areas on which the report offers recommendations include burning issues under the IBC – including regulating the conduct of the committee of creditors (CoCs), strengthening the rights of some creditors such as home-buyers, adopting a cross-border insolvency framework, extending the pre-pack framework to all corporates (with necessary changes), tackling procedural delays, offering more flexibility in designing resolution plans (such as by allowing multiple bidders to pick up business units of the stressed company), specialised benches of adjudicating authorities with domain expertise, etc.
India's restructuring and insolvency laws are contained in the following key legislations.
The (Indian) Insolvency and Bankruptcy Code, 2016 (IBC)
The IBC prescribes a comprehensive code for resolution of stressed debt and insolvency and liquidation of CDs, such as companies and limited-liability partnerships (LLPs), and non-corporate entities (such as partnerships and individuals).
The IBC was notified in December 2016 to address the mounting cases of bad loans in the economy and to provide a framework for time-bound resolution and liquidation.
The provisions in relation to insolvency of partnership firms and individuals (other than personal guarantors to CDs), although contained in the IBC, have yet to be notified and, for now, continue to be governed by the Partnership Act, 1932, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, respectively.
The institutional framework for implementing the IBC consists of the following key elements:
The IBC provides for a process of resolution through the CIRP for CDs, which precedes liquidation, and during which a committee of the financial creditors (FCs) of the CD attempts to resolve stress without liquidating the CD.
Classification of creditors
The IBC classifies creditors as FCs (who disburse debt against the consideration for the time-value of money) and operational creditors (OCs) (whose claims relate to the provision of goods and services, including government dues).
Under the IBC, the FC, the OC or the CD itself may file an application with the NCLT to commence the CIRP on a payment default of at least INR10 million (approximately USD135,700). An FC may file an application if the payment default by the CD has been made against itself or to another FC (ie, a cross-default). An OC may only file an application if the payment default has been made against itself (however, the process for filing such applications by OCs generally requires more checks, including the requirement of a demand notice and demonstrating that the debt is undisputed).
Key steps in the CIRP and involuntary liquidation.
Insolvency and liquidation of financial service-providers (FSPs)
The insolvency of financial service-providers (FSPs) was not originally meant to be governed by the IBC. In November 2019, the rules governing the insolvency of FSPs were notified which, inter alia, provide for the initiation of the CIRP of such FSPs with the oversight of the appropriate financial sector regulator, and in particular, for now, these apply only to non-banking financial companies (NBFCs) with an asset size of INR5000,000,000 or more as per last audited balance sheet.
The IBC also provides a mechanism for commencing the insolvency process of a personal guarantor to a CD on the occurrence of a payment default.
Pre-packaged insolvency resolution process for MSMEs
A pre-packaged insolvency resolution framework for MSMEs under the IBC was notified on 4 April 2021. The PIRP envisages a debtor-in-possession model. An application for a PIRP may be filed by a corporate applicant in the case of default of more than INR1,000,000 (approximately USD13,570).
The key steps in a PIRP are as follows.
Companies Act 2013 (CA-13)
The CA-13 includes provisions which enable companies to introduce and implement Schemes as mentioned in 1.1 Market Trends and Changes.
RBI Resolution Framework
The RBI occasionally introduces schemes and frameworks that enable domestic banks and financial institutions (that it regulates) to restructure stressed assets while retaining some asset-classification and provisioning benefits. The RBI Resolution Framework has replaced the former schemes and frameworks and comprises a comprehensive set of guidelines for that restructuring.
The RBI Resolution Framework provides a 30-day review period (Review Period) for reviewing the account on the occurrence of a default and determining a resolution strategy and a resolution plan (not the same as a Plan presented during the IBC). During the Review Period, the lenders to whom the framework is addressed (and asset-reconstruction companies) with exposure to the borrower are required to enter into an inter-creditor agreement (ICA) to provide a framework for the finalisation of a resolution plan. The ICA must provide that decisions of lenders representing 75% of outstanding facilities and 60% by number will bind all lenders.
A resolution plan (meeting conditions set out in the RBI Resolution Framework) is required to be implemented within 180 days from the end of the Review Period. A breach of the time-lines in the RBI Resolution Framework will invite additional provisioning requirements. Conditions for the reversal of additional provisioning are also specified in the RBI Resolution Framework.
Additionally, the RBI introduced a resolution framework for a one-time settlement of COVID-19-related stress on 5 May 2021 (COVID-19 Resolution Framework – 2.0). This builds on the RBI Resolution Framework.
The COVID-19 Resolution Framework – 2.0 provides a process for addressing borrower defaults pursuant to the stress caused by COVID-19, without necessitating a change of ownership and without an asset-classification downgrade. This modifies the RBI Resolution Framework and is applicable to domestic banks, NBFCs and other notified financial institutions. Under the COVID-19 Resolution Framework – 2.0, lending institutions are permitted to offer a limited window to eligible MSMEs to implement resolution plans in respect of their credit exposures (where the aggregate exposure is not more than INR500 Million as of 31 March 2021).
Under the COVID-19 Resolution Framework, MSME loan accounts, classified as standard as of 31 March 2021, are eligible for resolution. Given that a subjective definition of COVID-19-related stress would be difficult to interpret and monitor, this more objective and stricter test has been offered to prevent longstanding defaulters from availing this scheme and simply "kicking the can down the road".
Restructuring under the COVID-19 Resolution Framework 2.0 must be invoked no later than 30 September 2021. After this, a resolution plan (meeting specified conditions) for the borrower is to be implemented within 90 days from invocation.
Statutory Winding-up Proceedings
Winding-up proceedings for companies (for reasons other than payment default – and therefore of limited commercial use) can be initiated under the CA-13 for companies and under the Limited Liability Partnership Act, 2008 for LLPs.
Creditors may also opt for recovery measures by enforcing security or taking civil proceedings for recovery.
Certain classes of domestic creditors (including commercial banks and certain NBFCs) can employ an expedited enforcement process under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act) and the Recovery of Debts and Bankruptcy Act, 1993.
The SARFAESI Act also provides for a framework to enable those domestic creditors who benefit from this legislation to transfer their exposure to asset-reconstruction companies (ARCs) (ie, specialised institutions registered with the RBI for conducting the business of asset reconstruction and securitisation). The ARCs may thus hold the exposure in their books or securitise that debt by the issuance of security receipts to eligible investors (which include foreign portfolio investors registered with the Securities and Exchange Board of India).
Creditors may take civil proceedings in Indian courts for the enforcement of security and recovery of debt, and in those proceedings may seek receivership, attachment of assets and various other interim remedies, depending on their contractual rights.
See 2.1 Overview of Laws and Statutory Regimes.
The current legal framework does not mandate companies to commence formal insolvency proceedings.
On a related note, the RBI had issued directions to certain banks directing them to make applications to admit certain specified companies into the IBC if they failed to restructure within a certain time, but this was not an obligation on the companies themselves.
See 2.1 Overview of Laws and Statutory Regimes.
The initiation of proceedings under the IBC requires a payment default of at least INR10,000,000 (approximately USD135700) to occur. This may not necessarily mean that the company is insolvent and in cases where the company against which the application is made is very clearly solvent and the applicant has used the application to exert pressure on the company to pay up, courts are sometimes keen to push the parties towards a settlement rather than impose the harsh regime of the IBC on a fully solvent and healthy company.
See also 2.1 Overview of Laws and Statutory Regimes.
The insolvency and resolution process of Indian incorporated private-sector banks is governed by the Banking Regulation Act, 1949 and is undertaken under the regulatory oversight and on the directions of the RBI.
Dissolution of branches of foreign banks in India would follow a process that is supplemental to the insolvency process of the bank in the jurisdiction of its incorporation and dissolution of Indian branches would be subject to Indian courts’ and the RBI’s oversight.
Government banks are formed by special statutes and insolvency and the winding up of such institutions is governed by special statutes under which they are incorporated.
NBFCs are non-bank institutions primarily engaged in financial activities and are also regulated by the RBI. Certain classes of NBFCs may be subject to proceedings under the IBC. See 2.1 Overview of Laws and Statutory Regimes.
Insurance Companies or Undertakings
Insurance companies in India include statutory bodies, the insolvency process of which is subject to the incorporating statute and directions of the government and privately held insurance companies, the resolution of which will be conducted under the regulatory oversight of the Insurance Regulatory and Development Authority of India.
Other Entities Operating in Financial Markets
FSPs are excluded from the provisions of the IBC unless otherwise specifically notified – and, so far, only specific NBFCs have been notified – see 2.1 Overview of Laws and Statutory Regimes for more details.
Any Other Particular Sectors
MSMEs – A framework for the pre-packaged insolvency resolution process of MSMEs has recently been introduced under the IBC – see 2.1 Overview of Laws and Statutory Regimes for more details.
In relation to corporates in any other sector, subject to the foregoing, the IBC and other relevant laws will apply unless the entity has been incorporated under a specific statute that has a specified procedure for insolvency-related matters.
Historically, consensual and informal processes for restructuring have been chosen by creditors out of necessity as the then-prevalent restructuring statutes and winding-up laws tended to take an inordinate amount of time and depleted value in the process. However, with the introduction of the IBC, its process has gained preference because it is more timely, can bind all creditors and offers a statutory whitewash. The important strategic benefit of restructuring under the IBC is that a Plan sanctioned through the IBC process is binding on all stakeholders (including foreign), irrespective of participation, whereas a consensual informal process may not bind creditors who did not participate in the process, whether out of indifference or as a strategy.
However, creditors may still consider exploring consensual informal restructuring outside the IBC before resorting to the IBC to enable the existing management to offer best value while retaining control of the company.
Creditors may opt for remedies under the IBC without exploring an informal resolution process. There is therefore no necessary or required interface between informal/consensual out-of-court restructuring and the IBC process, other than where the RBI has issued circulars which, in certain cases, require banks and financial institutions to implement consensual out-of-court restructuring within a specified time-line, failing which admitting the corporate entity into the IBC is either mandated or encouraged.
It is uncommon for lenders to agree to a standstill while negotiations on a consensual out-of-court restructuring are ongoing. However, enforcement by lenders may be subject to restriction and majority approval requirements under ICAs.
Once the parties have agreed to a consensual restructuring package, the lenders may enter into agreements to document a standstill for the period of implementation of the package, subject to exceptions such as new defaults/breaches. During this time, lenders may conduct a viability study of the company and determine restructuring terms.
The consensual restructuring process may include various commercial terms, including terms for cash-flow monitoring/control, information covenants on financial and non-financial parameters, negative covenants on the disposal of assets, new borrowings, change of capital structure, ownership and management and related-party transactions, business-management covenants, reversals of previous related-party transactions, infusions by promoters/owners/managers, personal guarantees, etc.
The terms of the consensual restructuring process (and determination of priority therein) would be in accordance with the restructuring documents that are executed by the participating lenders.
Steering/ad hoc committees are not mandatory; however, it is common for domestic creditors to appoint a lead lender to drive the negotiations and monitor the implementation of the restructuring. In terms of information provided to creditors, this depends on the leverage the creditors have in individual situations.
Existing lenders or a new investor may infuse new funds during a consensual non-statutory restructuring. Super-priority liens, while not mandatory, are common in the case of new funding raised during the finalisation of a restructuring package, but can be difficult to achieve, given that they need the consent of all the existing creditors. There is a statutory provision which permits a specific identified lender in specified situations to gain super priority if the borrower eventually enters a CIRP, but this benefit is not otherwise generally available.
Under the RBI Resolution Framework, the lenders are required, inter alia, to recognise incipient stress in loan accounts immediately upon default by classifying such assets appropriately, to put in place a board-approved policy for resolution of stressed assets including a time-line for resolution, to report credit information, and to make relevant disclosures to the RBI in the manner prescribed therein. The terms of the restructuring and modification of rights and priorities of lenders is subject to the contractual agreement forming the basis of the restructuring.
However, there have been instances of creditors litigating against a restructuring proposal on the grounds of having been treated unfairly or having their interests crammed down. The extent to which such challenges can be defended on the basis of contractual inter-creditor terms depends on the nature of the allegations raised. There are no bright-line tests under any well-developed legal doctrines that impose distinct duties on creditors (for inter se creditor behaviour) in a non-statutory restructuring, other than that which may be contractually specified.
ICAs that are entered into to enable a restructuring will often be based on regulatory directions, which typically contain terms permitting a majority or super-majority of lenders to bind dissenting lenders to changed credit-agreement terms. Any informal consensual process will be perceived as unworkable without a credible “cram-down” feature to deal with dissident creditors. While the RBI does direct its constituents to enter into ICAs which will provide cram-down mechanisms to augment or otherwise enable an otherwise consensual financial restructuring to be effectuated, often not all creditors agree to be bound by this, so a formal statutory process is then needed to bind dissenters.
Security over immovable property is created by way of a mortgage, the most common forms of which are (i) an English mortgage (entailing conveyance of the property upon creation of the mortgage and a re-conveyance upon redemption and which offers the mortgagee superior rights as to the sale of the property and the appointment of receivers) and (ii) equitable mortgages (created by depositing title deeds with the mortgagee and which have the benefit of attracting lower stamp taxes in certain states).
Security over movable/intangible assets (including contractual rights, receivables, bank accounts, etc) are created in the form of hypothecation (which does not entail a transfer of possession). Upon enforcement, the creditor may take possession, custody and control of, and monetise, the hypothecated assets.
Security over securities issued by a company (such as shares/debentures) is generally created by way of a pledge. The key elements of creating this security are the execution of pledge documents and, in the case of (i) certificated securities, the handing over of securities certificates and transfer forms to the pledgee, and (ii) dematerialised securities, marking that pledge with the depository with which the securities are held.
Secured creditors may enforce their security interests upon the occurrence of agreed contractual triggers. In most forms of security other than a pledge, court intervention may be required, unless the creditor has the benefit of the SARFAESI Act (note that exercise of enforcement rights under the SARFAESI Act is subject to the consent of secured creditors who have (i) the benefit of the SARFAESI Act and (ii) represent not less than 60% in value of the amount outstanding to those creditors).
A moratorium on security enforcement is applicable only if the security-provider is undergoing a CIRP. A secured creditor is not barred from enforcing security, even where other creditors are in the process of negotiating an informal restructuring. However, secured creditors cannot disrupt or block a formal voluntary or involuntary in-court restructuring process under the IBC.
See 5.1 Differing Rights and Priorities.
The IBC does not differentiate between creditors on the basis of security, except in the case of distributions under a CIRP in the IBC or liquidation (see 2.1 Overview of Laws and Statutory Regimes on the Liquidation Waterfall).
All FCs, whether secured or unsecured (except FCs who are related parties) may vote and participate in the meetings of the CoC. The distribution of proceeds under a Plan (in a CIRP) may follow the Liquidation Waterfall and take into consideration the ranking and value of the security held.
In a Scheme under the CA-13 (in relation to a Scheme process), secured and unsecured creditors form different classes, each of which needs to approve the Scheme. Within a class of creditors there would be no differentiation unless the proposed Scheme treats members of the same class of creditors differently, in which case a separate class of creditors could be created, which would then also need to approve the Scheme. A class is established on the basis of various factors, including commonality of interest.
The rights and priorities of creditors in a restructuring outside the IBC or the CA-13 framework are prescribed under the contractual terms of the restructuring.
Restructuring outside the IBC
Debt restructuring conducted outside the IBC does not typically involve restructuring or the cramming down of debts of unsecured trade creditors. In such a restructuring, the terms would bind only the creditors participating in the process, which tend not to include unsecured trade creditors.
Under the IBC, unsecured trade creditors are classified as OCs and are assured a minimum pay-out (in priority to FCs) under a Plan, up to the extent of the higher of (i) the amount to be paid to those creditors in the event of a liquidation of the CD under the IBC, or (ii) the amount that would have been paid to them if the amount to be distributed under the Plan had been distributed in accordance with the Liquidation Waterfall. This can often lead to a pay-out which ranges from nothing to nominal, until the secured creditors are paid out; this is because most assets of the company under the IBC will be secured. However, there are cases where, if secured creditors make a high recovery, they permit some of the Plan proceeds to be distributed to OCs, especially those with small dues, but this is discretionary.
See 5.1 Differing Rights and Priorities.
The CoC can (by a majority of 66% by value) vote on and approve a Plan. An unsecured creditor may raise objections on the grounds of legal non-compliance; however, the remedies sought are not likely to include a stay on the process. Unsecured creditors may also be able to influence the outcome of a CIRP if they have a sufficiently large voting share in the CoC (which comprises both secured and unsecured FCs).
Under the CA-13, approval by a 75% majority of each class would be required for approval of the Scheme and unsecured creditors may delay or disrupt the approval or implementation of the Scheme by withholding their consent.
Pre-judgment attachments may be allowed if the creditor can demonstrate a risk to its interests by disposal or alienation of property, but this is not common, especially under the IBC.
In proceedings under the IBC, the CIRP costs (which include the amount of any interim finance, the fees of the RP and costs incurred in running the business of the CD as a going concern) and liquidation costs (in the case of liquidation) (which include costs incurred by the liquidator, subject to applicable regulations) must be paid in priority to all other payments.
A financial restructuring/re-organisation may be structured and implemented under the IBC or the CA-13.
The CIRP of a CD is driven by the IRP/RP under the supervision of the CoC and the NCLT. See 2.1 Overview of Laws and Statutory Regimes.
Under the IBC, once a Plan is approved by the NCLT it becomes binding on all the stakeholders (including the dissenting creditors, creditors who are not entitled to vote and government creditors). The IBC and the related regulations include protective provisions that assure a minimum payout to dissenting FCs and OCs (which is linked to the value that any such creditor would have received in the event of liquidation). Subject to these minimum pay-outs being assured, the cramming-down of the remaining debts would be binding on all stakeholders.
The Plan may include other provisions, such as the release of security, write-off of claims and withdrawal of pending cases. Proofs of contingent claims may also be filed with the RP during the CIRP. Where the amount claimed by a creditor is not precise, due to any contingency or otherwise, the IRP/RP is required to make the best estimate of the amount of the claim based on the information available. Once the claim is admitted, the treatment of any such claims will be as provided in the approved Plan. There are no limitations on the types of agreements, compromises or reorganisations that can be achieved under a Plan, but the Plan must provide for the resolution of the CD as a going concern and should not involve, say, merely a strip-down of assets (although a limited sale of assets is permitted).
While the Plan approved by the CoC is placed before the NCLT for approval (the process is not court-driven, but the Plan needs to be approved by the court), jurisprudence discourages courts from interfering with the commercial wisdom of the CoC as long as the mandatory payments under the IBC are complied with. In terms of value distribution to creditors, this has to be approved by the CoC, while keeping in mind the ranking and value of security that creditors benefit from and also the Liquidation Waterfall. Courts tend not to interfere in this if the distribution agreed inter se the members of the CoC is not challenged.
The CIRP must be completed within 330 days of commencement of the process (including all extensions owing to litigations, etc). Once a Plan has been approved and passed by the NCLT, a challenge against that approval must be mounted on the basis of breach of legal requirements.
Scheme under the CA-13
Restructuring under the CA-13 is a court-driven process. The proposed Scheme is first submitted to the NCLT. Thereafter, the NCLT orders a meeting of the creditors (or classes thereof), members (or classes thereof) and/or debenture-holders to be called, unless the application is dismissed. Various authorities, including the income tax authorities, the Registrar of Companies and the relevant stock exchanges, are also notified and those authorities may raise objections. If the proposed Scheme is approved by statutorily prescribed thresholds in each meeting, it is presented before the NCLT for its approval.
Subject to certain stipulations in the CA-13, schemes may propose to alter the rights and liabilities of the creditors and members (including by way of reprioritisation of claims).
Approval by 75% of the creditors or members (or any of their classes) is required and therefore dissenting creditors/members (or classes thereof) may be crammed down. However, the NCLT may, by an order, provide for the protection of a creditor class or make an exit offer to dissenting shareholders, if it finds it necessary for the effective implementation of the terms of the Scheme. Shareholders holding at least 10% of shares or creditors to whom at least 5% of the outstanding debt is owed, as per the latest audited financial statements of the company, may raise objections to the scheme.
There are no prescribed time-lines in relation to restructuring under the CA-13. For companies whose turnover and capital does not exceed certain specified limits, or between a holding and subsidiary companies (or any such classes of companies as may be prescribed) an expedited process of restructuring may be undertaken, which generally takes 90-100 days for completion.
For Schemes, creditors' claims may be relevant for determining their voting share or for calculating their eligibility to raise objections, since the value of debt owed to relevant creditors against the total outstanding debt (owed to that class) (calculated as per the latest audited/provisional financial statement) is relevant for this purpose. Only those contingent claims that are mentioned in the financial statements of the company are recognised.
A Scheme, once approved by the NCLT, is binding on all creditors, even if they 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 CA-13 does not specifically allow an aggrieved person to challenge a Scheme approved by the NCLT. However, a general right to appeal is available (which must be filed within 45 days of the NCLT order).
See 2.1 Overview of Laws and Statutory Regimes and 9.3 Selection of Officers.
Interim finance can be raised by the CD during the CIRP, provided that any security created to secure that finance over encumbered property of the CD is created with the prior consent of the creditors whose debt is secured by the encumbered property. Prior consent of the creditor, however, shall not be required where the value of that property is not less than twice the amount of the debt. See the previous notes on the moratorium that comes into force on the ICD. The RP is expected to continue the business of the CD as a going concern.
The CA-13 does not provide for the appointment of an officer for managing and controlling the company during restructuring under a Scheme. Additionally, there are no statutory prohibitions on borrowings during the implementation of a restructuring Scheme.
See 2.1 Overview of Laws and Statutory Regimes for details pertaining to the formation of the CoC and their rights.
The CoC, which consists of FCs, does not distinguish between secured and unsecured creditors for the purpose of representation and voting. OCs, if of a certain size, are also permitted to attend but not to participate/vote. Each member of the CoC is provided with an information memorandum prepared by the RP containing details of the assets and liabilities of the CD on the ICD, financial statements, details of all material litigations, guarantees and liabilities owed to the workers and employees, etc, (subject to each of those members providing the requisite confidentiality undertaking) which assists the CoC in its decision-making functions. As the IRP/RP is in control of the CD, any reasonable information the creditors require may be produced by the IRP/RP for their consideration.
The IBBI has also released a discussion paper prescribing a code of conduct for the COC, pursuant to the 32nd report of the Parliamentary Standing Committee on finance (See 1.1 Market Trends and Changes). Therefore, the role and responsibilities of the COC may be expected to be more well-defined in the future.
Creditors and members are to be classified into classes established on the basis of certain factors, including commonality of interest, if the Scheme contemplates differential treatment on the basis of class. Secured and unsecured creditors typically form different classes. There is no express provision in the CA-13 regarding the treatment of expenses during the restructuring process.
Upon the presentation of a Scheme before the NCLT and the ordering of the meeting, a notice (along with a copy of the proposed Scheme, details of the company, a statement disclosing the details of the compromise or arrangement, disclosure on effect of the Scheme on:
See 3.4 Duties on Creditors and 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
There are no restrictions on the trading/assignment of debt under the IBC and the CA-13. In the event that a creditor assigns or transfers their debt during the CIRP, both parties shall provide the IRP/RP (as applicable) with the terms of the assignment/transfer and the identity of the assignee/transferee. The transfer of claims is recognised as a matter of applicable law and not of the IBC or the CA-13 and so depends on the type of claim traded.
The IBC does not codify the law on group insolvencies. A Working Group Report was also released in September 2019 which laid down the broad principles that may be considered for group insolvency. Consolidation of the CIRP of group companies has been allowed in some cases (such as for Lavasa Group entities, Videocon entities, etc), taking into account factors such as interdependence/joint control of entities, intermingling of finances, furtherance of interest of stakeholders, etc.
There is no express provision enabling the consolidation of restructuring of members of a corporate group under the CA-13.
During the CIRP, the IRP/RP is required to protect and preserve the CD’s assets and also to continue to run the business of the CD as a going concern. Separately, the RP may sell unencumbered asset(s) (provided that the book value of assets sold does not exceed 10% of the total admitted claims) of the CD, other than in the ordinary course of business if, in the RP’s opinion, such a sale is necessary for a better realisation of value, and if the CoC approves the sale by 66% of voting shares.
The CA-13 does not specify any restrictions on the sale of a company’s assets during the Scheme implementation period. Until the winding-up is actually ordered against a company, the debtor remains in possession and continues the business of the company. Limited exceptions to this general situation arise when the tribunal deems it fit to appoint a receiver in advance of the winding-up being ordered.
A sale of limited unencumbered assets during the CIRP may be executed by the RP on behalf of the CD. Such a sale may be by way of a pre-negotiated deal or auction and there is no bar on creditors bidding for those assets or acting as a stalking horse for this purpose. A bona fide purchaser of any such limited unencumbered assets sold under the IBC acquires free and marketable title to those assets. However, the CIRP does not permit the sale of assets as an effective resolution; the Plan must provide for the business of the CD to continue as a going concern. Credit bids are permitted under the IBC but jurisprudence relating to this is nascent. It is not possible to effectuate during the IBC an arrangement that has been pre-negotiated prior to the CIRP, because the IBC requires a public process with bids to be brought in and if a higher or better bid comes through, the CoC will find it difficult to opt for the previous arrangement as the law requires value-maximisation.
The CA-13 does not impose the duty to administer a Scheme on a particular person and there is no express provision in the CA-13 which restricts sales/other transactions that have been pre-negotiated to be effectuated as part of a Scheme.
Under the IBC, secured creditor liens and security arrangements (including claims of guarantors) and other claims may be released pursuant to an approved Plan.
Under the CA-13, if a Scheme envisages disposal of assets (and is approved by 75% majority by value), the Scheme would bind all creditors that hold security/charges over the assets, and all such creditors (whether or not they voted in favour of the Scheme) would be required to release their charge to give effect to the disposal.
See 6.2 Position of the Company.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
A Plan under the IBC is required to include a statement as to how it proposes to deal with the interests of all the stakeholders, and provide for a fair and equitable distribution. See 2.1 Overview of Laws and Statutory Regimes. The RP does not have any rights to disclaim onerous contracts during the CIRP, although many Plans attempt to seek relief from courts to terminate contracts and cram down any resultant consequences, with differing degrees of success.
Under the CA-13, courts tend to examine the process and proposed terms of the Scheme on the anvil of fairness and the just and reasonable treatment of all parties involved. There is no specific provision which would enable a company to reject/disclaim contracts pursuant to the terms of a Scheme.
A Plan approved under the IBC may provide for the release of obligations of non-debtor parties (such as guarantors) in relation to claims settled under the Plan. A Plan approved by the NCLT is binding on all stakeholders. However, it would be common for the CoC to object to such a limitation of liability (especially of related parties) unless the release of obligations of a non-debtor party is critical to the restructuring of the claims.
The CA-13 does not provide for the release of non-debtor parties from liabilities; however, such a provision could be included in the Scheme were the non-debtor parties and the beneficiaries of the liabilities owed by them to have voted on and approved the Scheme by the requisite majority.
Set-off of claims for which proofs have been filed during a CIRP may be barred. Furthermore, judicial precedents are evolving to prohibit the exercise of such set-off rights (to facilitate resolution of all debt in accordance with the IBC and the approved Plan).
The CA-13 is silent on the right of set-off or netting under a Scheme.
The Bilateral Netting of Qualified Financial Contracts Act, 2020 (Netting Contracts Act) recognises the right of netting under "qualified financial contracts" (including in the case of insolvency, winding up, liquidation, etc). The Reserve Bank of India and International Financial Services Centres Authority (IFSCA) have notified derivatives, repo, reverse repo, currency, cross-currency, interest-rate swap, basis swap, spot, forward or other foreign exchange transactions as qualified financial contracts under the Netting Contracts Act.
If the CD, its officers, its creditors or any person on whom the Plan is binding contravenes any terms of a Plan or abets that contravention, they will be punished with imprisonment of one to five years, or a fine of approximately USD1357 to USD135,700. Also, if the CD contravenes any of the terms of the Plan, any aggrieved person can make an application before the NCLT to liquidate the company under the IBC.
The CA-13 imposes a fine of approximately USD270 to USD4,000 on a company and its officer in default contravening the terms of an agreed Scheme. If the NCLT determines that the Scheme sanctioned by it under the CA-13 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 a Plan and their treatment is determined by the Plan. The Plan may provide for the reduction/cancellation of existing shares held by the shareholders of the CD. If the consideration proposed under the Plan is such that it flows below the creditor lines, shareholders may receive a pay-out under a Plan.
In a Scheme under the CA-13, shareholders may receive whatever property is contemplated in the Scheme.
The IBC provides for voluntary and involuntary liquidation, as provided below.
See 2.1 Overview of Laws and Statutory Regimes regarding involuntary liquidation.
Upon the passing of an involuntary liquidation order, no suits or other legal proceedings may be instituted by or against the CD (except by the CD with approval of the NCLT).
The liquidator is empowered to disclaim onerous contracts and property by applying to the NCLT (within six months of the LCD) and serving a notice to a person interested in the onerous property at least seven days prior to doing so. On the order of the NCLT approving the disclaimer, the disclaimer operates to determine, from the date of the disclaimer, the rights, interest and liabilities of the CD in or in respect of the property or contract disclaimed, but does not (except to the extent required for releasing the CD and its property from any liability) affect the rights, interest or liabilities of any other person.
If the CD has not made any payment default, it may initiate its voluntary liquidation process after obtaining a declaration from the majority of the directors confirming, inter alia, that either the CD has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the liquidation and that the CD 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 CD.
Within four weeks of the issuance of the declaration, (i) a special resolution (passed by 75% approval of the members with voting rights (present and voting)) of the members of the CD resolving to liquidate the CD voluntarily, or (ii) a resolution of the members of the CD in a general meeting requiring the CD to be liquidated voluntarily in accordance with the CD’s articles is required. In such meetings, the members must also resolve to appoint an IP to act as the liquidator and fix his or her terms of appointment and remuneration.
If the CD has any creditors, approval must also be obtained from creditors representing two thirds in value of the debt of the CD for the initiation of liquidation. The CD is required to notify the regulatory authorities of the resolution to liquidate itself.
The liquidator must endeavour to complete the voluntary liquidation process of the CD in one year. Here too, stakeholders are expected to submit their claims within 30 days of the liquidation commencement, and the liquidator is expected to verify those claims within 30 days therefrom.
Appointment of Liquidator
See 9. Trustees/Receivers/Statutory Officers.
Creditors' Right of Set-Off
In liquidation processes, creditors are expressly permitted to exercise the right of set-off in respect of any mutual dealings with the CD. There are no provisions for the temporary suspension or termination of the set-off. Regarding netting, see 6.14 Rights of Set-Off.
Information Accessible to Creditors
The liquidator is required to make all reports and minutes available to the creditors inter alia on receipt of the relevant confidentiality undertaking from those creditors.
Conclusion of the Statutory Proceedings
After the assets of the CD have been completely liquidated, the liquidator is required to make an application to the NCLT for the dissolution of the CD; the NCLT would then pass an order for the dissolution.
The liquidator is empowered to undertake the sale of assets of the CD under a liquidation process.
In order to provide a free and clear title to the purchaser, the regulations permit the sale of assets (which are subject to security interest) only after the security interest over that asset has been relinquished by the relevant creditor.
Creditors are permitted to bid in the auction for the assets. Ordinarily, the sale of assets of the CD will be through an auction. There are certain exceptions to this, where a private sale is permitted for value maximisation (such as where the asset is perishable or likely to deteriorate in value in the event of a delay, or to effect a sale at a price higher than the reserve price of a failed auction or with the approval of the court).
Under involuntary liquidation, the liquidator has to constitute a stakeholders’ consultation committee (SCC), on the basis of claims received to advise the liquidator on the matters relating to the sale. The SCC advises the liquidator, by a vote of not less than 66%. The advice of the SCC is not binding on the liquidator. However, where the liquidator takes a decision different from the advice given by the SCC, he or she is required to record in writing the reasons for that decision.
India has yet to adopt the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency (UNCITRAL Model Law). There is currently no comprehensive cross-border insolvency regime in India, although the Insolvency Law Committee has released a report on the introduction of a cross-border insolvency framework.
The IBC allows the Indian Government to enter into reciprocal treaties with other countries to extend the provisions of the IBC to those countries. However, currently no such bilateral agreements have been entered into. In the CIRP of Jet Airways India Limited, the NCLAT upheld a voluntary co-operation protocol between the RP of the CD and the trustee appointed in insolvency proceedings in the Netherlands, which sets out the terms of co-operation between the administrators.
Judgments pronounced by a foreign court can be enforced in India, subject to certain conditions and exceptions comprised in the (Indian) Code of Civil Procedure (CPC), 1908 (which take into account various factors such as the competence of the foreign court, the matter having been considered on the merits, recognition of Indian law where applicable, principles of natural justice having been followed, allegations of fraud/ breach of Indian law, etc).
Foreign judgments (under which a sum of money is payable) passed by superior courts of notified reciprocating territories can, subject to some conditions and exceptions, be enforced as if they were issued by an Indian court. In all other cases, the foreign judgment will need to be adduced as evidence in proceedings in India.
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
The IBC does not differentiate between foreign and domestic creditors.
See 8.1 Recognition or Relief in Connection with Overseas Proceedings.
The IRP/RP (during the CIRP) and the liquidator (during liquidation), registered as an IP and appointed by the NCLT, conduct and facilitate the relevant processes.
A liquidator is appointed to conduct winding-up proceedings under the CA-13.
There is no specific authority appointed to administer a Scheme under the CA-13.
See 2.1 Overview of Laws and Statutory Regimes.
During the CIRP, the management of the CD vests in the IRP, and then the RP, from the date of his or her appointment. The officers of the CD are required to co-operate with the IRP/RP.
The IRP/RP is authorised to act on behalf of and access all records of the CD. The RP is required, inter alia, to take custody and control of all the assets of the CD, to invite and verify the claims of creditors, to invite prospective resolution applicants to submit a Plan based on the criteria prescribed by the CoC, to present Plans at the meetings of the CoC, and generally to conduct the CIRP.
Upon appointment of the liquidator, all powers of the board of directors of the CD shall vest in the liquidator. The liquidator is required, inter alia, to verify the claims of all the creditors, take into custody or control all the assets of the CD, monetise those assets and distribute the proceeds as per the Liquidation Waterfall.
In addition to the above-mentioned specific duties, IPs also need to abide by a high standard of duty of care and the code of conduct applicable to them.
Under the CA-13
A company liquidator (subject to the directions of the NCLT) is authorised inter alia to:
Under the IBC
See 2.1 Overview of Laws and Statutory Regimes.
The applicant who initiates a CIRP must (if it is an FC or the CD itself) and may (if it is an OC) make a proposal as to the IRP to be appointed; that person will be appointed as the IRP, if no disciplinary proceedings are pending against him or her. If no IRP is proposed by an OC applicant, the NCLT will seek recommendations from the IBBI as to the selection of the IRP. The IRP is confirmed as the RP or replaced with a new RP during the first meeting of the CoC.
On the commencement of liquidation, the RP continues to act as liquidator, subject to the written consent of the RP. The NCLT may by order replace the liquidator if the submitted Plan was rejected for failure to meet certain mandatory requirements under the IBC, or if the IBBI recommends his or her replacement or if the consent of the RP is not received.
During voluntary liquidation, the company is required to appoint a liquidator by passing a special resolution containing details of the liquidator, the terms and conditions of his or her appointment and remuneration.
In a PIRP, the unrelated financial creditors of the CD to whom at least 66% of the value of the total financial debt is owed may approve the RP. If the application for initiation of PIRP is complete and no disciplinary action is pending against the proposed RP, the NCLT shall appoint him or her as the RP.
A Liquidator under the CA-13
A provisional liquidator may be appointed till the winding-up order is passed and, at the time of the passing of the winding-up order, the NCLT is required to appoint an official liquidator or a liquidator from the IPs registered and empanelled with the IBBI.
Liabilities under the CA-13
The CA-13 sets out the general duties of directors, which include the duty to act with due and reasonable skill and diligence, to act in good faith to promote the objects of the company for the benefit of its members, and in the best interests of the company, its employees, the shareholders, etc, to act in accordance with the articles, to avoid conflicts of interests, to exercise independent judgement, and not to achieve or attempt to achieve any undue gain or advantage while in office. The CA-13 also provides penalties for the contravention of such duties.
A creditor or contributor or the liquidator appointed in respect of the company under the CA-13 (in the case of a winding-up under the CA-13) may apply to the NCLT to declare that any directors of a company whose business was carried on with the intent to defraud the creditors of the company shall be personally responsible (without any limitation of liability) for all or any of the debts or other liabilities of the company.
Liabilities under the IBC
Upon the initiation of the CIRP, the powers of the board of directors vest with the IRP/RP. The personnel of the CD, including its erstwhile management, must extend all assistance and co-operation to the IRP/RP as may be required in managing the affairs of the CD.
If the directors or partners of the CD knew or ought to have known before the ICD that there was no reasonable prospect of avoiding the commencement of the CIRP in respect of the CD and did not exercise due diligence in minimising the potential loss to the creditors, they may become liable to contribute to the assets of the CD (as may be directed by the NCLT). However, it should be noted that suspension of the IBC (see 1.1 Market Trends and Changes) also applies to this provision.
Further, persons who were in charge of or were responsible for the conduct of the CD’s business shall continue to be liable for offences committed by the CD prior to the CIRP (notwithstanding the cessation of the CD’s liability for that offence under the IBC) if the Plan results in the change in the management and control of the CD.
Liabilities under Other Statutes
Directors may face liability (in their official capacity) for non-compliances by the company (such as a breach of income tax laws), or owing to malfeasance, gross negligence or breach of duty under certain statutes.
See 6.13 Non-debtor Parties.
See 11.3 Claims to Set Aside or Annul Transactions.
Under the IBC
The following transactions can be challenged under the framework of the IBC:
The look-back period for such transactions is two years in the case of transactions with related parties and one year in all other cases.
The look-back period for Extortionate Transactions is two years.
If it is found that the business of the CD was carried on with intent to defraud creditors or for any fraudulent purpose, any persons who were knowingly parties to the carrying-on of the business in such a manner may be made personally liable by the NCLT. See also 10.1 Duties of Directors for liabilities under the IBC.
Under the CA-13
The following transactions can be challenged under the framework of the CA-13:
See 11.1 Historical Transactions.
The RP or the liquidator may assert claims to annul or set aside avoidance transactions under the IBC. Creditors, members or partners of the CD are also entitled to make applications for Undervalued Transactions if the RP or the liquidator fails to do so.
Applications for the Disclaimer of Onerous Property under the CA-13 are required to be made by the liquidator.
Trends and Developments – Corporate Debt Restructuring and Insolvency Laws
In the last two decades, Indian law has taken great strides in the evolution of debt restructuring and insolvency laws. The developments since mid-2019 represent an important milestone in this ongoing evolution. The (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) was a crucial milestone in this regard, and was a catalyst that brought about a change in approach – from recovery-oriented solutions to promoting revival as a sustainable solution to financial stress, and changing the culture of corporate credit in India.
The IBC has overhauled the former Indian insolvency regime, in which the most notable change was the introduction of the “corporate insolvency resolution process” – a time-bound process that precedes liquidation and involves financial creditors working together to explore options to resolve the debts of the stressed company in order to enable the company to continue as a going concern. Needless to say, it has inspired other regulatory changes to align financial legislations towards this common objective.
As the IBC evolves, the Indian market continues to explore more innovative means and structures, to support the new endgame of revival of stressed companies, with liquidation being seen as the final resort.
The Former Regime
While India has had sick companies’ revival legislation and a special law on recoveries by domestic banks since the 1980s and 1990s, the early 2000s saw the introduction of special legislations and regulations to enhance recoveries by domestic lending institutions.
The two key pieces of legislation that set the ball rolling in this regard were the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) and the corporate debt-restructuring scheme (CDR Scheme) introduced by India’s central bank, the Reserve Bank of India (RBI). The SARFAESI Act essentially provided an avenue to domestic banks to expedite their recovery through a speedier security-enforcement process or by transferring their stressed exposure to asset-reconstruction companies (specialised institutions which would in turn take over the mantle of realising the stressed financial assets). The CDR Scheme provided a framework for the voluntary restructuring of delinquent assets by (again) domestic banks and lending institutions, without the intervention of courts and through a process which was overseen by committees and cells of bank representatives.
While several cases of distressed companies were referred to the CDR Scheme, the efficiency and success rate of resolution of such cases was not as expected (for instance, based on public records, by 2016, of all the cases referred to the CDR Scheme, less than 50% had seen a restructuring package implemented). The SARFAESI Act also did not entirely deliver on the hope of a speedier recovery process, since proceedings under the SARFEASI Act were also mired in delays and litigations.
In the meanwhile, starting in 2014, the RBI started introducing specific schemes for restructuring, which essentially involved banks and lending institutions following certain restructuring rules to restructure stressed assets without taking a substantial hit on provisioning. These schemes provided various options, ranging from a general framework for collaboration amongst domestic lenders (towards recovery or restructuring) to special schemes which provided for the manner in which restructuring could be effected (such as a change in control, carving out unsustainable debt, schemes catering to project delays, etc). However, the effectiveness of these schemes faced some challenges – the most crucial of which was that they were limited to a certain class of lenders of the debtor (ie, domestic banks and non-banking financial companies), without a moratorium, intra-class and cross-class cram-down or whitewash of past liabilities.
In addition to the foregoing, the creditors continued to have the frameworks prescribed under Indian company law and the law relating to sick companies, both of which provided a “debtor-in-possession” regime to effect a restructuring of debt. Consequently, both frameworks relied heavily on co-operation and good-faith actions from the borrower and its promoters, which was not forthcoming.
In summary, domestic lenders holding delinquent assets were, in 2016, left with the option of enforcing security and initiating court proceedings, which had the practical pitfalls of court delays and hostile borrowers or restructuring the debt under the RBI schemes. These options, however, came with their own risks, since they did not insulate the lenders from challenges by the borrower or other stakeholders of the borrower. Further, neither of these options presented a time-bound approach to resolve the stress. For foreign lenders, the options were even more limited and the Indian court process, notorious for its delays, arguably served as a deterrent for foreign creditors seeking to enter the market. It was against this background that the IBC was enacted by the Indian legislature.
The Insolvency and Bankruptcy Code, 2016 and Resolution and Insolvency of Corporate Persons
The IBC was introduced to replace the erstwhile legal regime on insolvency laws, which was comprised in the (Indian) Companies Act, 2013 (for Indian companies) and the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. While this new insolvency legislation incorporated several concepts from the erstwhile regime, it also leveraged the experiences from the implementation of its predecessors.
The IBC aimed at creating a consolidated legislation for dealing with stress across various types of borrowers and creditors. Some notable features of the IBC, with regard to the resolution and liquidation of corporate entities, are as follows.
Scope of application
The IBC provided a resolution and insolvency framework for corporate persons, partnership firms and individuals, except for financial service-providers, with a “creditor-in-possession” model. In so doing, the IBC serves as a comprehensive code for the insolvency process across various types of entities. This was, and remains, a key benefit, because while corporate entities are more likely to owe a significant amount of the stressed debt in the market, this debt is often guaranteed or supported by individual promoters or non-corporate group entities.
The IBC was introduced in a phased manner, with the provisions on resolution and liquidation of corporate persons being brought into effect first. In 2019, the provisions on personal insolvency were brought into effect, to the extent of their application to personal guarantors of corporate debtors. Also in 2019, the IBC’s application (with some changes) was extended to a specified category of non-banking finance companies (NBFCs). In June 2021, the financial distresses of Dewan Housing Finance Corporation Limited, one of India’s largest NBFCs, were resolved through a process under the IBC in the first-ever instance of a financial sector company undergoing such a resolution process.
Resolution before insolvency
The process under the IBC precedes the liquidation process with a time-bound corporate insolvency resolution process (CIRP). The CIRP allows for an attempt to resolve the stress in the corporate debtor by inviting third parties to provide a “resolution plan” for the debtor. Upon the occurrence of a default over a certain threshold (currently INR10 million, or approximately USD135,700), a creditor or the debtor itself may refer the debtor to the CIRP.
The CIRP entails the formation of a committee of creditors (CoC) which is comprised of “financial creditors” (discussed in detail below) of the corporate debtor. This CoC appoints a resolution professional who takes over the management and assets of the debtor during the CIRP. Major decisions relating to the debtor are taken by the CoC through the resolution professional, including the evaluation and passing of a resolution plan. If a resolution plan is not approved within the period provided for the CIRP, or the CoC opts to liquidate the debtor during the CIRP period, the liquidation process is initiated. If a resolution plan is approved and passed, it is binding on all stakeholders and creditors of the debtor (thereby offering the comfort of certainty to the bidders and creditors).
Categories of creditors and their rights
The IBC recognises different categories of creditors and prescribes the rights and powers of each of those categories.
Under the IBC, creditors may be “financial creditors” (ie, creditors who hold debt which is disbursed against the consideration for the time value of money), “operational creditors” (whose claims have arisen in respect of the provision of goods or services, including employment or statutory claims), or an “other creditor” (ie, a creditor which is neither a financial creditor nor an operational creditor).
The rights of financial creditors are superior to the rights of operational creditors or other creditors and include the right to vote on significant matters relating to the running of the debtor as a going concern during the CIRP and also to vote on the resolution plan. Distributions under the resolution plan to financial creditors are also likely to be higher than distributions to other creditors.
Operational creditors’ rights are limited in comparison. While they may attend meetings of the CoC if they are owed debt of a certain size, they are not entitled to vote in those meetings. There are limited exceptions to this rule. Operational creditors are protected in terms of distributions under a resolution plan to the extent of the value that each of those creditors would have received had the debtor been liquidated (assuming the higher of the value of the debtor estate at the commencement of the CIRP and the resolution plan value). However, in most cases, such assured pay-outs are significantly lower than the pay-outs to financial creditors.
The IBC provides for a fixed time-line (of a maximum of 330 days) to close the CIRP. The liquidation process is also subject to guidelines on the time-line for concluding the process within one year from the date of commencement of liquidation. Based on experience, these time-lines have been extended in exigencies such as litigations and force majeure events (including the current COVID-19 pandemic). However, the time-lines provide a stronger structure in which to conduct these proceedings – which under the erstwhile regime could drag on for years. Recent judicial precedents have stressed the importance of adhering to the CIRP time-lines.
One of the key roadblocks in the erstwhile regime was the lack of infrastructure to support efficient resolution processes. The IBC sought to address this by introducing a framework involving certain key participants.
Evolution of the IBC and the Restructuring Norms
Regulatory and legislative support
Very quickly after the introduction of the IBC in December 2016, the market saw a marked shift towards the IBC as a means of resolution and, as a side-effect, recovery. This was also encouraged by the central government and the central bank. The Banking Regulation Act, 1949 was amended in May 2017 to empower the RBI to direct banks to refer matters to the IBC for resolution. This was followed closely by the RBI releasing lists of stressed companies (based on the value of debt) in respect of which the domestic banks were either to attempt resolution in a time-bound manner or refer the case to resolution under the IBC. While the initial directions issued by the RBI for stressed accounts generally contemplated a more decisive push towards the IBC (for accounts which could not be resolved within the prescribed deadline), the more generic of these directions could not withstand a constitutional challenge.
Ultimately, the RBI settled on a new and revised restructuring framework in June 2019, which replaced the former restructuring frameworks and schemes, including the CDR Scheme. This June 2019 RBI circular essentially directed domestic banks and large NBFCs (amongst others) to attempt a resolution of stressed assets within a specified period. If the asset remained unresolved, the asset would attract additional provisioning, which could be reduced by referring the matter to the IBC.
What is remarkable in this evolution is the IBC’s contribution in the shifting mind-set of the central bank itself, from a recovery-driven approach to a resolution-based approach under the IBC, which seems to acknowledge that meaningful recoveries would be likelier in a time-bound process that carried along (and was binding on) all stakeholders and also provided a moratorium and whitewash.
The other key financial-sector regulator, the Securities and Exchange Board of India (SEBI) also granted some important exemptions from the securities market regulations to facilitate resolutions under the IBC. Notably, an acquisition of a debtor pursuant to a resolution plan approved under the IBC was exempted from the requirement of an open offer to the public. Relaxation from the minimum public-shareholding requirements was also offered to companies being acquired pursuant to a resolution plan under the IBC, with a prolonged period for reinstating the public shareholding up to a minimum level. Other crucial exemptions under the delisting regulations were also provided. These relaxations (which were specific to a resolution under the IBC) were seen as concrete steps to encourage resolution under the IBC.
As is the case for any other legislation, a large part of the evolution of the IBC would be credited to the judicial precedents that lent depth to the legislation. Certain key aspects of the IBC were scrutinised and analysed by the judiciary soon after its introduction, not least because of the time-bound nature of the process (which prompted more urgency in resolving judicial cases), coupled with the extent to which this new law was relied upon by market participants. The legislature setting up a standing committee to track the developments and issues in IBC implementation only served to further this cause. Some key judicial precedents under the IBC are discussed below.
Role and rights of different kinds of creditors
One of the unique features of the IBC is the distinction between financial creditors and operational creditors. The constitutionality of this distinction was challenged in a landmark case of Swiss Ribbons Pvt Ltd v Union Of India, decided by the Supreme Court in 2019. The constitutionality of the IBC and this distinction was upheld and the highest court in India observed that the distinction, though unique to India, was justified in view of the objectives of the IBC of ensuring an efficient and sustainable revival.
The judgment in Essar Steel v Satish Kumar Gupta in November 2019 further settled the position in upholding the sanctity of the “commercial wisdom” of the CoC in selecting the plan to revive the debtor. It was made clear that decisions of the CoC could not be questioned as long as the plan selected by the COC considered the interests of all stakeholders.
Tax claims versus other claims
There has been something of a historical tussle between the priority of statutory dues (often entrenched in special statutes) and creditor claims. This controversy also bled into the implementation of the IBC in its early days, when it was found that tax authorities were not pro-actively filing proofs of claims and the question of whether tax claims could be crammed down plagued creditors and bidders alike.
The decision of the High Court of Telangana, in Leo Edibles & Fats Limited v Tax Recovery Officer, clarified that the Income Tax Authority could not claim the status of a secured creditor but at best could claim a charge on an asset under its attachment orders. This, together with the decisions of the National Company Law Appellate Tribunal, which clarified that tax dues would fall within operational debt, offered much-needed clarity on the ranking of tax dues vis-à-vis other claims. The proposition was strengthened with the Supreme Court clarifying in the case of Pr. Commissioner of Income Tax v Monnet Ispat and Energy Ltd that the provisions of the IBC would override the provisions of the Indian Income Tax Act, 1961 in the event of an inconsistency.
In September 2020, the IBBI issued a facilitation note, on the “Role of the Government and its Agencies in the Corporate Insolvency Resolution and Liquidation Processes”, encouraging government entities to act within the framework and the time-lines of the IBC to resolve their claims.
Liquidation value as a benchmark or a floor
The Supreme Court’s decision in the case of Maharashtra Seamless Limited v Padmanabhan Venkatesh & Others set the tone on the value-maximisation objective of the IBC. While thus far the liquidation value (based on the value of the debtor estate as determined with respect to the CIRP commencement date) was seen as an important benchmark, this case took into account the ground realities of resolution of distressed assets and acknowledged that the CoC would be entitled to evaluate and approve resolution plans where the total value offered to creditors was less than the liquidation value.
The pandemic that followed a couple of months later lent true meaning to the practical import of this ruling. The pandemic made it clear that unforeseen exigencies could trigger a drop in the value of the debtor’s assets (as against the liquidation value), and this should not deter resolution.
Such cases also throw up queries on whether the provisions of the IBC that guarantee liquidation value to dissenting financial creditors and operational creditors should allow for a recalibration of the pay-out to take into account such exigencies. It is to be hoped that market experience will inspire further amendments to the regulations under the IBC to enable such recalibration where it is truly merited.
The case of the CIRP of Jet Airways (India) Limited (India’s first and largest airline company in insolvency with claims of over USD2 billion), saw many firsts – not the least of which was the issue around cross-border insolvency. This was the first instance in which an Indian resolution professional entered into a co-operation protocol with the administrator appointed in the insolvency process initiated in the Netherlands. The co-operation protocol facilitated the objective of value-maximisation by supporting a smooth sale of assets in the Netherlands.
In summary, the IBC has come a long way in terms of the new law being tested by market participants and courts and the encouragement and support that it has received from other regulators. The legislature has been actively monitoring the implementation of the IBC and has been quick to make edits and amendments to address emerging issues.
Some recent examples include the introduction of the pre-packaged insolvency-resolution process (PPIRP) for the quick resolution of micro-, small- or medium-sized enterprises (MSMEs). The PPIRP adopts a debtor-in-possession (but creditors and resolution professional are in control of key issues) approach to allow stressed MSMEs to initiate a resolution process and present a (potentially pre-baked) plan to its creditors. The creditors in this process are equally involved and empowered to identify and prevent any misuse of the process. The PPIRP mechanism is expected to provide a restructuring solution which may be consensually opted for by the lenders and owner managers, as opposed to the CIRP which lenders push for, but which owner-managers are rarely keen to use.
The standing committee of the Indian parliament also released a report on the implementation of the IBC in August 2021 – where it has identified some key roadblocks to an efficient process and has made recommendations. Some of the key recommendations are on framing guidelines for the selection of a resolution professional by the CoC in a transparent manner, prescribing a code of conduct for the CoC, improving the efficiency of the NCLTs, streamlining the resolution process with a focus on meeting the timelines and persevering the integrity of the CIRP.
The insolvency and restructuring space in India is adapting to the requirements of the market and is witnessing more and more complex resolution cases, including cases pertaining to cross-border insolvency and group insolvency. The extension of the PPIRP to all companies is eagerly awaited and is expected to fill in a gap in the matrix of resolution strategies, by providing a structure that both the lenders and the owner-managers may consensually opt in for. With the legislative support of which the IBC has had the benefit, and with the evolution of law through judicial precedents, the IBC and its implementation continues to be refined to meet the requirements of resolutions and the restructuring of complex cases. Other measures by the RBI and the executive to deepen the debt market are in progress and are likely to invite more sophisticated players into this space – which in turn may bring more innovative structures and solutions into the Indian insolvency and restructuring landscape.