The restructuring market in India comprises various processes under different legislations and frameworks:
(i) The insolvency landscape in India witnessed a complete change in 2016 with the enactment of the Insolvency and Bankruptcy Code, 2016 (“Code”). The Code is a comprehensive legislation that provides for the corporate insolvency resolution process (“CIRP”) for all companies excluding financial service providers (“FSPs”). The Code also governs the insolvency of individuals and partnership firms. However, provisions relating to partnership firms have not yet been notified and those relating to individuals have only been operationalised to include personal guarantors of the corporate debtor (“CD”). Pending enactment of a comprehensive insolvency regime for FSPs, the government has extended the application of the Code to non-banking financial institutions with asset size above INR500 crores. Statistics published by the Insolvency and Bankruptcy Board of India (“IBBI”) (statutory regulator) reveal that by the end of June 2022, a total of 5,636 CIRPs have commenced of which 3,637 have been concluded. Of the CIRPs concluded, the CD was rescued in 1,934 cases, of which 774 cases were closed on appeal or review or settled; 643 cases were withdrawn; and 517 cases ended in approval of resolution plans; while 1,703 ended in orders for liquidation. More than 70% of the CIRPs ending in liquidation were under the erstwhile insolvency regime, and the economic value of most of the CDs had completely eroded before they were even admitted into CIRP, with the CDs valued at less than 8% of the outstanding debt amount.
Around 40% of these CIRPs admitted were against manufacturing companies, 20% against real estate companies, 11% against construction companies, 10% against retail trade companies and the remaining against hotel, electricity, transport and other sector corporates.
In view of the financial stress faced by corporates due to the outbreak of COVID-19, the Code was amended in 2021 to introduce a pre-packaged insolvency resolution process (“PPIRP”) for companies classified as micro, small and medium enterprises under the Micro, Small and Medium Enterprises Act, 2006. As per information released by IBBI, two PPIRP applications have been admitted as of 30 June 2022.
(ii) The Companies Act, 2013 (“CA-13”) allows for voluntary schemes of arrangement and compromise between a company and its creditors or members and winding up of a company on grounds other than the inability of the company to pay its debts such as, inter alia, if the company has voluntary decided to be wound up, if it is just and equitable to wind up the company, if the company has acted against the security and interests of the country, or if the affairs of the company are being conducted in a fraudulent manner.
(iii) In addition to statutory regimes, the Reserve Bank of India (“RBI”) (banking regulator) periodically issues circulars and notifications for restructuring of stressed assets outside the Code.
Expected legal developments
Since its enactment in 2016, the Code has been amended time and again to keep abreast with the evolving needs of its stakeholders. The next set of amendments are likely to bring a comprehensive framework for cross-border insolvency law largely modelled on UNCITRAL’s Model Law on Cross-Border Insolvency (1997) and introduce provisions to enhance the efficacy of the CIRP and liquidation process.
See 1.1 Market Trends and Changes.
Types of insolvency under Indian law
Under Indian law, insolvency proceedings may be initiated against a company either under the Code or under the CA-13. The grounds under which insolvency proceedings may be initiated under the two legislations vary and are described below:
CIRP, PPIRP and liquidation processes under the Code
The Code focuses on financial and organisational remodelling of the CD in distress. This new insolvency regime contains mechanisms for the resolution and revival of financially distressed companies and lays down the process of liquidation in case the resolution process fails to rescue the CD.
The Code creates four main institutions to facilitate the processes envisaged thereunder:
(i) Insolvency professionals and insolvency professional entities responsible for the conduct of the processes.
(ii) Information utilities as repositories of financial information relating to the CD.
(iii) Adjudicating authorities, which are the National Company Law Tribunal (“NCLT”), the National Company Law Appellate Tribunal (“NCLAT”) and the Supreme Court of India.
(iv) IBBI as the statutory regulator.
The PPRIP was introduced in 2021 for companies that qualify as micro, small or medium enterprises (“MSMEs”) under Indian law. An MSME that has committed a default of INR10,00,000 (approximately USD12,000) may, with the approval of 66% of its unrelated FCs in value terms and subject to certain other prerequisites, file an application for the initiation of a PPIRP. Prior to seeking approval of the FCs, the CD presents the FCs with a base resolution plan.
Upon admission of the application, the PPIRP operates for a period of 120 days during which time a limited moratorium prevails which prevents, inter alia, enforcement of security interest by creditors. After commencement of the PPIRP, the CoC may either approve the base plan proposed by the CD if the plan does not impair the claims of the OCs or approve a resolution plan invited from the market.
Liquidation upon failure of the CIRP or PPIRP
A liquidation process can be triggered if:
In case of failure of a PPIRP, liquidation may be ordered in exceptional circumstances.
Upon the passing of a liquidation order, the NCLT appoints the RP as the liquidator of the company. Secured creditors are given the right to either realise their security interest outside of liquidation proceedings or relinquish their security to the liquidation estate and partake in the distribution of proceeds from the sale of assets as per the order of priority mentioned under the Code. The CoC operating during the CIRP functions as the ‘stakeholders’ consultation committee’ (“SCC”), whose advice the liquidator may consider in connection with the sale of assets in liquidation and the appointment of professionals.
Priority of creditors
The statutory waterfall for distribution of liquidation proceeds under the Code is as follows:
(i) the insolvency resolution process costs (costs incurred during the CIRP, such as interim finance, fees of the RP, expenses incurred by the RP to keep the CD as a going concern and liquidation costs (including PPIRP costs) in full);
(ii) debts owed to a secured creditor in case of relinquishment of security interest and workmen’s dues (restricted to a period of 24 months prior to liquidation), which rank equally;
(iii) wages and any unpaid dues owed to employees other than workmen (restricted to a period of 12 months prior to liquidation);
(iv) financial debts owed to unsecured creditors;
(v) dues to the Government (restricted to a period of two years prior to liquidation), and debts owed to secured creditors for unpaid amounts following the enforcement of security interest outside liquidation (which rank equally);
(vi) any remaining debts and dues;
(vii) preference shareholders, if any; and
(viii) equity shareholders or partners, as the case may be.
The Code also provides for voluntary liquidation of solvent companies. See 7.1 Types of Voluntary/Involuntary Proceedings.
The CA-13 allows for restructuring by way of a scheme of compromise and arrangement (“Scheme”). On an application made by a creditor, member or liquidator of a company, the NCLT may order a meeting of creditors (or class of creditors) or of members (or class of members). A notice of such meeting is sent to all creditors, members (and classes thereof) and debenture holders of the company which is accompanied by details of the Scheme, a copy of the valuation report (if any), explaining its effect on creditors, key managerial personnel, promoters and non-promoter members and the debenture holders, and the effect on any material interests of the directors of the company or the debenture trustees. Notice of the meeting is also sent to the Central Government, income tax authorities, the Securities and Exchange Board of India, the Registrar of Companies, the RBI and other sectoral regulators which are likely to be affected by the Scheme to enable them to make adequate representations. The Scheme is required to be approved by a majority of 75% of creditors or members in each class. Consequent approval of the Scheme by the NCLT binds the dissenting creditors and persons who did not vote.
The CA-13 also provides for winding up of companies by an order of the NCLT on various other grounds than inability of the company to pay its debts. See 1.1 Market Trends and Changes.
After the passing of the winding-up order by the court, the affairs of the company are entrusted to the liquidator. Creditors do not have any remedy against the property of the debtor in respect of the debt, nor can a creditor commence any suit or legal proceedings in respect of the property except with the leave of the court and subject to such terms as the court may impose, while winding-up proceedings are pending. Pursuant to a winding-up order, the assets of the insolvent are distributed among the creditors in the order of priority specified under the CA-13.
A secured creditor has the option not to prove its debt before a liquidator and may instead enforce its security in settlement of its claim, but the proceeds from sale of the secured assets are subject to a pari passu charge in favour of the workmen of the company.
The RBI introduced a Prudential Framework for Resolution of Stressed Assets in June 2019 (“RBI Framework”) which provides for a consensual restructuring process between the lenders and the debtor.
Lenders recognise and classify accounts immediately on default and are required to put in place board-approved policies for the resolution of the stressed asset including timelines for resolution. Further, the lenders undertake a prima facie review of the borrower’s account within the first 30 days of default and decide on the resolution strategy (“Review Period”). The lenders may also opt to initiate insolvency or recovery proceedings. For the implementation of the plan, the framework requires lenders to enter into intercreditor agreements during the Review Period which shall provide that decisions of lenders representing 75% by value of outstanding credit facilities and 60% of lenders in number shall be binding on all lenders. A resolution plan must be implemented within a time-frame of 180 days from the end of the Review Period. Failure to adhere to the timelines may lead to additional provisioning requirements.
The RBI also introduced a framework for resolution of COVID-19-related stress for MSMEs and a COVID-19 Regulatory Package which permitted banks to grant a moratorium on payment of loans between 1 March 2020 and 31 August 2020.
There is no formal obligation on companies to commence formal insolvency proceedings. However, there may be implications if directors of a company continue business operations despite knowing that insolvency of the company cannot be avoided. See 10.1 Duties of Directors.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership. Other than creditors, the Code also allows the CD itself to file an application for commencement of a CIRP, in the event of default.
Under the Code, ‘insolvency’ is determined by existence of debt and default of a minimum of INR1,00,00,000 (approximately USD120,000) by the CD. To establish such debt and default:
The procedure to wind up banking companies is contained in the Banking Regulation Act, 1949 and is regulated by the RBI. A banking company may be wound up if it is unable to pay its debts or the RBI applies for the winding up of such company.
The insolvency regime applicable to insurance companies in India is governed by the Insurance Act, 1938. A financial plan is submitted to the statutory regulator, the Insurance Regulatory and Development Authority, when an insurance company fails to meet its capital and solvency margins. If the plan fails to solve the deficiencies within three months, the insurance company can be wound up in accordance with the winding-up provisions under the CA-13.
Other Financial Entities
FSPs have been excluded from the applicability of the Code; however, the insolvency resolution and liquidation proceedings of non-banking financial companies with asset size of INR500 crores or more (as per last audited balance sheet) can be undertaken under the Code.
A company that qualifies as an MSME under Indian law can file an application for initiation of a PPRIP on a default of INR10,00,000. The PPIRP follows a debtor-in-possession model whereby the CD is allowed to negotiate a base resolution plan with its creditors.
The Code covers insolvency resolution and liquidation of corporates in all other sectors, including but not limited to hospitality, real sector, power and energy.
Although proceedings under the Code are time-bound, delays often on account of pending litigations and low capacity of the NCLTs cause value destruction of the CD during the proceedings. Therefore, creditors, though not obligated or mandated to do so by the law, prefer to engage in informal negotiations with the debtor prior to commencing formal CIRP proceedings under the Code with an aim to reach a settlement or a restructuring agreement. This entails the possibility of securing timely payments and better financial outcomes for the individual creditor than a resolution plan or payouts in a liquidation scenario. This is particularly true for OCs, as the payouts they receive in a CIRP (under a resolution plan) or under liquidation proceedings are often nominal or nil and they therefore prefer to settle their claims by a consensual process without judicial intervention.
For FCs, certain other considerations come into play while deciding the next course of action after initial bilateral attempts to settle default by the borrower. In India, since most FCs are strictly regulated by the RBI, they prefer to adopt formal and statutory forms of debt recovery rather than informal out-of-court workout strategies. There is also an inherent lack of organisational flexibility, particularly in the case of public sector banks, and such creditors may prefer to obtain formal orders from a court of law rather than engaging in informal workouts.
Lenders usually do not agree to standstills while negotiating an informal and consensual process of restructuring and reorganising. However, pursuant to finalisation of restructuring terms, creditors may agree on standstills for the smooth implementation of the terms.
The restructuring terms may include provisions regarding non-alienation of assets by the borrower, restrictions on new borrowing, capital restructuring, and monitoring of financial parameters and cash flow.
In most cases, lenders adopt a core-committee model, whereby a lead bank (usually the bank with the highest exposure of debt) or the lenders with the largest debt exposure are appointed to co-ordinate and undertake negotiations during the restructuring process. Lenders are usually not entitled to payment of any kind of fees by the debtor and incur their own expenses.
During a consensual restructuring process, the lenders usually insist on conducting forensic audits or transaction audits of the borrower to detect improper diversion of funds or fraudulent conduct by the borrower. In addition, information relating to financial parameters of the borrower is also provided to creditors.
Terms of contractual priority, security/lien priority and relative position of competing creditor classes may be altered by entering into intercreditor agreements. Generally, inter-company and related party loans are subordinated, and priority funding or last-mile funding is accorded super priority.
New money can be injected by existing creditors, promoters or even external financial or strategic investors and is usually granted super priority lien.
Under the RBI Framework, creditors are mandated to recognise incipient stress in loan accounts immediately on defaults and put in place board-approved policies for the resolution of debt. Moreover, if lenders attempt to conceal the actual status of accounts or evergreen the stressed accounts, they may be subjected to stringent enforcement actions including but not limited to higher provisioning of such accounts and monetary penalties.
There are no applicable laws or legal doctrines that spell out the duties of creditors in a non-statutory restructuring process, which are primarily governed by the terms of the intercreditor agreement.
Intercreditor agreements often contain cram-down provisions to bind dissenting creditors, as otherwise the consensual financial restructuring process may be perceived as unworkable.
For example, the RBI Framework mandates intercreditor agreements to provide for a cram-down on dissenting lenders if the plan has been approved by lenders representing 75% by value of total outstanding credit facilities (fund-based as well as non-fund-based) and 60% of lenders by number. However, often, not all creditors give their approval to be bound by the process, and therefore, a formal statutory process is required to bind the dissenting creditors.
Security can be created over movable properties, immovable properties and intangible assets.
Security over movable assets is generally created in the form of:
Usually, security is created over all present and future movable assets and is of a continuing nature.
Security over immovable properties is generally created by way of a mortgage. The Transfer of Property Act, 1882 contemplates six different types of mortgage. The two most common forms of mortgage used in financing transactions are an English mortgage (or a legal mortgage) and mortgage by way of deposit of title deeds (or an equitable mortgage).
An English mortgage contemplates absolute transfer of the property to the creditor with a right of redemption available to the debtor on repayment of dues on a certain date. An English or legal mortgage is recorded in an indenture of mortgage.
A mortgage by deposit of title deeds involves delivery of title documents to the creditor with an intention to create security on the property. Typically, the act of deposit of title deeds is recorded in a memorandum of entry and is accompanied by a declaration of an authorised officer of the company creating the mortgage.
With respect to intangible assets and intellectual property rights, assignment is the principal form of security.
The enforcement of security primarily depends on the terms of the security.
Certain types of security can be enforced without court intervention. For example, in the case of a pledge, the pledgee may exercise its right to sell the assets by giving the pledgor reasonable notice without any prior court intervention. In the case of an English mortgage, the mortgagee may appoint a receiver in respect of the property and also exercise the right to sell the mortgaged property without court intervention subject to certain conditions. A deed of hypothecation usually contains provisions entitling the creditor to sell the hypothecated assets without requiring court intervention.
On the other hand, an equitable mortgage does not provide the mortgagee with a right to sell without court intervention except for the rights available to certain financial institutions and banks under specialised legislations such as the SARFAESI Act, which is discussed below.
Recovery Under SARFAESI Act
The SARFAESI Act provides for enforcement of a security interest (including hypothecation) in favour of a secured creditor, without intervention of the court or tribunal, by such creditor itself, provided that the consent of secured creditors representing not less than 60% in value outstanding, having pari passu charge, is obtained. The remedies available under the SARFAESI Act are available only to institutional secured creditors and can be availed upon fulfilment of certain conditions.
Under the Code, the moratorium imposed on the insolvency commencement date prohibits the enforcement of security provided by the CD till the completion of the CIRP. Secured creditors cannot disrupt or block a formal voluntary or involuntary process under the Code unless they hold a significant voting share in the CoC, in which case their vote may be critical in approving a resolution plan.
The scheme of the Code categorises creditors as either FCs or OCs irrespective of the security held by them. The CIRP is primarily driven by the CoC comprising all unrelated FCs of the CD. The voting share of the creditors is determined in accordance with the aggregate debt due to them.
However, secured and unsecured creditors have differing rights and priorities during distribution of proceeds under a resolution plan and under liquidation proceedings. Under a resolution plan, the value and priority of security held by the creditor may be taken into consideration while deciding the payout to such creditor. Regarding liquidation proceedings, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
See 4.3 Special Procedural Protections and Rights.
Under the Code, unsecured trade creditors are categorised as OCs. A resolution plan approved for the CD must provide for priority payments to OCs (before FCs) which shall not be less than the amount that would be received by the OC in the event of a liquidation or the amount that would be received by the OC under a resolution plan if the proceeds were distributed in accordance with the liquidation waterfall, whichever is higher. In practice, however, OCs often receive negligible payouts and at times even nil on their liquidation value.
Under a PPIRP, if a CD proposes a base resolution plan which impairs the claims of the OCs, the CoC may require the promoters of the CD to dilute their shareholding or voting or control rights in the CD.
See 5.2 Unsecured Trade Creditors.
The CoC comprises both secured and unsecured FCs of the CD. The voting share of each CoC member is determined in accordance with the debt due to them. Therefore, if an unsecured FC has a significant debt exposure and a consequent proportionate voting share, then the vote of such FC may play a crucial role in approving a resolution plan for the CD or liquidating the CD (which requires a 66% voting share of the CoC). Other than this, unsecured creditors do not have the power to stay or defer the process.
Approval by a 75% majority of each class is required for approval of a Scheme under the CA-13. The implication of this requirement is that if unsecured creditors form a class, then such creditors can disrupt or delay the process by not providing requisite approvals.
Pre-judgment attachments may be granted in recovery actions initiated under civil law and other specialised legislations such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, to safeguard the interests of the creditor in situations where the court believes that the debtor may frustrate, delay or obstruct the execution of a decree for recovery of debt by the creditor. However, this remedy is used sparingly by courts. Under the Code, there is no formal process to grant interim or final reliefs prior to admission of the CIRP application, and therefore, pre-judgment attachments are not common.
The insolvency resolution process costs must be paid in priority to all other payments, including claims of secured creditors. Such costs include the amount of interim finance or new money and the costs of raising such money, fees payable to the insolvency professional, costs incurred to run the business of the CD during the CIRP period, costs incurred by the government to facilitate the CIRP or any other costs notified by the insolvency regulator. The next priority is accorded to workmen’s dues (restricted to a period of 24 months prior to liquidation), which rank equally with claims of secured creditors, in the event that such creditors have relinquished their security interest. Wages and unpaid dues owed to employees (restricted to a period of 12 months preceding liquidation) rank below claims of secured creditors. Government dues (including tax claims) have been deliberately kept at a priority below the unsecured FCs and rank equally with any remainder claims of secured FCs after realising their security interest.
Financial restructuring/reorganisation of companies may be undertaken under the Code or the CA-13.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
A resolution plan approved for the CD must conform to the mandatory requirements prescribed under the Code and related regulations (“Mandatory Requirements”), namely:
(i) Payment of insolvency resolution costs in priority to all other debts of the CD.
(ii) Payment of debts to OCs and dissenting FCs to the extent of the liquidation value of their claims.
(iii) Provision for the management of affairs of the CD after approval of the resolution plan.
(iv) Provision for implementation and supervision of the resolution plan.
(v) The plan does not contravene any provisions of the law for the time being in force.
(vi) The plan conforms to other requirements as specified by IBBI.
Subject to these Mandatory Requirements, a resolution plan may be crammed down on the dissenting minorities and other stakeholders.
There are no limitations on the types of agreements, compromises or reorganisations that can be achieved under a resolution plan except that the plan should be feasible and viable and should address the cause of default by the CD. See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
Calculation of claims and treatment of contingent claims
The IRP invites all categories of creditors to submit their claims during a CIRP, including creditors with contingent claims. The existence of a claim by a creditor may be proved based on records available in an information utility or by way of other documents such as bank statements of the creditor or a court order that has adjudicated on the non-satisfaction of claims, if any. The IRP may also call for such evidence as may be deemed necessary by her for substantiating the whole or part of the claim. When the amount of the claim is not precise due to any contingency or other reason, the IRP/RP can make the best estimate of the claim on the basis of the information available and further make appropriate revisions whenever warranted. The IRP/RP, however, cannot adjudicate on the claim. Once the claims are admitted by the IRP, the resolution plan provides for the treatment of such claims. However, the jurisprudence regarding treatment of contingent claims is not yet settled, and a resolution plan often does not provide for payments in lieu of contingent claims.
The process of approving a resolution plan is largely driven by the CoC under the contours of the Code, but the plan must gain final approval of the NCLT to bind all stakeholders of the CD including contingent claimants. The scope of judicial review is limited to ensuring that the resolution plan conforms to the Mandatory Requirements under the Code. The manner of distribution of proceeds under a plan may consider the order of priority of creditors in a liquidation waterfall including the priority and value of the security interests of secured creditors.
A resolution plan approved by the NCLT can be challenged on grounds of non-compliance with the Mandatory Requirements, and material irregularity in the exercise of powers by the RP during the CIRP.
A CIRP must be completed within 330 days from the date of admission of the CIRP application. This time period includes the time taken to conclude all pending litigations. In practice, however, at times it takes longer than the prescribed timelines for the completion of the CIRP.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
The CA-13 also allows for an expedited process known as a fast-track merger between two or more small companies, between a holding company and its wholly-owned subsidiaries, or between other companies or classes of companies as may be prescribed. The approximate time for the completion of a fast-track merger is around 90 to 100 days.
Any person aggrieved by the approval of a Scheme may prefer an appeal to the NCLAT (appellate body) within 45 days of the NCLT order.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 6.10 Priority New Money.
CIRP and PPRIP under the Code
A CoC, comprising all unrelated FCs (secured or unsecured) of the CD, is formed in all CIRPs under the Code. OCs are granted a right to attend (without voting rights) the CoC meetings if the debt owed to OCs constitutes a minimum of 10% of the total debt of the CD.
The CoC is the supreme decision-making body and takes all important decisions pertaining to the functioning of the CD. The CoC is empowered to replace the IRP/RP during the CIRP and determines the fate of the CD by deciding to either liquidate the CD or invite and approve a resolution plan that proposes to rescue the CD as a going concern.
Other than this, the CoC’s approval is required for carrying out certain actions including but not limited to raising interim finance beyond a specified limit, undertaking any related party transactions, and recording changes in the ownership of the CD. The CoC is also empowered to decide the remuneration of the RP and the fees of the professionals appointed by the RP to assist her in the discharge of her duties.
The costs of organising the CoC meetings are included in the process costs, which are paid in priority to all other payments under a resolution plan or under liquidation proceedings. However, costs of professionals appointed by the CoC and or any other costs incurred by the CoC are privately funded and are not reimbursed out of the CD’s estate.
The responsibilities of the CoC under a PPIRP are similar. While the management retains control of the business during a CIRP, the board of directors is required to take approvals from the CoC for the same actions for which an RP requires prior CoC approval. The CoC is also responsible for approving a resolution plan.
The RP prepares an information memorandum containing key details relating to the CD such as a description of the CD’s assets and liabilities, details of creditors and guarantees, and details of material litigations, and tenders it to each member of the CoC (subject to the member furnishing an undertaking of confidentiality). A member of the CoC may request the RP to provide additional information, which the RP shall provide within a reasonable time if such information has a bearing on the resolution plan.
See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
Under the CA-13, creditors and members are categorised into different classes generally based on similar characteristics and vote on a Scheme as a class. For example, secured and unsecured creditors usually form different classes. The CA-13 is silent on the treatment of process costs during a Scheme.
For information available to creditors, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
Under the Code, a resolution plan approved for the rehabilitation of the CD must conform to the Mandatory Requirements, one of which is priority payment of the liquidation value to dissenting FCs. Subject to compliance with such Mandatory Requirements, the resolution plan can be crammed down on dissenting creditors.
Under the CA-13, if the Scheme is approved by 75% of creditors/members in value terms in each class, then the Scheme can be crammed down on the dissenting creditors/members and those who did not vote on the Scheme.
Under the Code, a creditor can assign or transfer the debt due to it to any other person during the CIRP. Both parties are required to provide the terms of the assignment or transfer and the identity of the assignee or transferee to the IRP/RP.
The Code does not have a formal framework to deal with the issues that arise in the insolvency of group companies; judicial precedents have developed to fill the gap. Most notably, in relation to Videocon Industries Limited, different CIRPs of different group companies were heard by the same bench of the NCLT to ensure procedural co-ordination and to avoid passing of conflicting orders. Subsequently, substantive consolidation of the assets of 13 out of 15 companies of the Videocon group was allowed on the basis of parameters such as common control, common directors, common assets, common liabilities, interdependence, interlacing of finance, co-existence for survival, pooling of resources, intertwined accounts, interlooping of debts, singleness of economics of units, common FCs, and common group of corporate debtors. Since then, the courts have allowed substantive consolidation of different companies undergoing a CIRP.
In many cases, a common RP is appointed in the CIRPs of different group companies to ensure co-ordination and co-operation in different cases.
In 2019, the Working Group on Group Insolvency constituted by IBBI submitted a report recommending a comprehensive framework to facilitate the insolvency resolution and liquidation of group companies (“Report”). Based on the Report, the legislature may introduce a formal mechanism for group insolvency.
The IRP/RP is responsible for protecting and preserving the assets of the CD and ensuring its operation as a going concern. For better realisation of value, the RP is also authorised to sell the unencumbered assets of the CD other than in the ordinary course of business with the prior approval of the CoC by a vote of 66% of the voting share of the members. The book value of the assets sold during the CIRP should not exceed 10% of the total claims admitted by the IRP. The RP is also required to obtain prior approval of the CoC for creating any security interest over the assets of the CD.
The CA-13 does not stipulate any restrictions on the use of company’s assets during the Scheme implementation process when the debtor is in possession of the company.
See 6.7 Restrictions on a Company’s Use of Its Assets.
A bona fide purchaser of the assets sold during a CIRP shall have a free and marketable title to such assets notwithstanding the terms contained in the constitutional documents of the CD, a shareholders’ agreement, or other documents of a similar nature. The Code and the regulations thereunder do not prohibit creditors from bidding for the assets or acting as stalking horses in the sale process.
Effectuating pre-negotiated transactions during a CIRP is not possible as the Code follows a public bidding process to ensure value maximisation of the CD.
The CA-13 does not require a statutory officer to administer a Scheme and is silent on effectuating/restricting pre-negotiated transactions during the implementation of a Scheme.
Secured creditor liens and security arrangements may be released pursuant to approval of a resolution plan. A dissenting FC, however, is guaranteed the liquidation value of its claims and is entitled to receive this value either by payment or by enforcing its security interest to the extent of its liquidation value.
The IRP/RP is authorised to raise new money (known as interim finance under the Code) provided that no security interest is created over encumbered properties of the CD without the prior consent of creditors whose debt is secured over such property. The requirement of prior approval of those creditors can be dispensed with if the value of the property is not less than twice the amount of debt.
The CA-13 does not prohibit new money investments during the implementation of a Scheme.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation.
See 6.1 Statutory Process for a Financial Restructuring/Reorganisation. The RP does not have the right to reject or disclaim contracts during a CIRP.
While the law does not explicitly deal with the principles that should be followed while sanctioning a Scheme, the case law jurisprudence that has developed indicates that while considering a Scheme, courts consider whether the Scheme is fair and reasonable and whether all classes of creditors/members have been fairly represented.
An approved resolution plan does not ipso facto release non-debtor parties (such as guarantors) from their liabilities but may contain provisions allowing the same. In practice, however, creditors do not usually agree to such a release as the non-debtor parties’ liability is independent from the CD’s.
A scheme under the CA-13 between a company and its creditors or a class of its creditors may provide for restructuring of the company’s debts, whereby securities available to the creditors are structured such that a non-debtor is released from the liability given as security for and on behalf of the company.
Rights of set-off may be allowed at the stage of filing proof of claims with the IRP but have been disallowed by courts after the commencement of a CIRP in view of the moratorium imposed on the insolvency commencement date and further to facilitate collective resolution of debts of the CD.
The CA-13 is silent on the right of set-off or netting under a Scheme.
Under the Code, a resolution plan once approved by the NCLT is binding on all its stakeholders. If any person bound by the plan knowingly and wilfully contravenes the provisions of the approved resolution plan or abets such contravention, then such person shall be punished with imprisonment for one to five years or with a fine of INR1,00,000-5,00,000 (approximately USD1,200-6,000). Contravention of the terms of the resolution plan by the CD may also result in the liquidation of the CD.
Under the CA-13, the company may be wound up if the NCLT is satisfied that the sanctioned Scheme cannot be implemented satisfactorily, and the company is unable to pay its debts in accordance with the Scheme.
The treatment of equity owners is determined by the terms of the resolution plan approved by the CoC, which may contemplate cancellation or delisting of shares of the CD.
Under the CA-13, equity owners may receive or retain any ownership or other property as may be contemplated by the Scheme.
See 2.1 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.
The liquidator issues a public announcement stating that the CD is in liquidation. No suit or legal proceeding can be instituted by or against CD; however, secured creditors may enforce their security interest outside the liquidation process. The insolvency professional functioning as the RP is appointed as the liquidator and all powers of the board of directors, key managerial persons, and partners of the CD vest in the liquidator. In some cases, the RP may be replaced by another insolvency professional to act as the liquidator.
The personnel of the CD are required to cooperate with and assist the liquidator in the discharge of her functions. All creditors of the CD are required to submit their claims to the liquidator along with a supporting document which is then verified by the liquidator. The liquidator is empowered to require the creditors to submit additional documents for the purposes of verifying the claims in whole or any part thereof. Where any amount claimed is not precise due to any contingency or another other reason, the liquidator is required to make the best estimate of the amount on the basis of the information available to her. In addition, the liquidator also has the power to disclaim onerous properties or contracts (within six months from the liquidation commencement date) by applying to the NCLT for such relief.
The liquidator has various duties and powers including but not limited to taking custody and control of the assets of the CD, protecting and preserving the assets of the assets of CD, and selling the assets of the CD by way of public auction or private sale. The liquidator can sell the assets of the CD in various manners such as on a standalone basis, in a slump sale, in parcels, as a set of assets collectively or by schemes of arrangement under the CA-13. The CD or the business of the CD may also be sold as a going concern during liquidation proceedings. The liquidator is permitted to carry on the business of the CD only to the extent for its beneficial liquidation as she considers necessary. The creditors may require the liquidator to provide them with any financial information relating to the CD.
The liquidator also constitutes an SCC during involuntary liquidation proceedings comprising creditors of the CD to advise her on certain matters.
The liquidation process must be completed within a period of one year from the liquidation commencement date (the date on which the NCLT passes the order for liquidation).
A corporate person that has not committed any default in its payment obligations and has no debts or can pay all its debts in full can initiate a voluntary liquidation process under the Code pursuant to obtaining:
Such declarations have to be accompanied by (i) audited financial statements of the company along with a record of its operations for the last two years, and (ii) an asset valuation report on the company prepared by a registered valuer, if any.
Within four weeks of such declaration, (i) a resolution must be passed by a special majority (75% or more, present and voting) of members of the company requiring the company to be liquidated, or (ii) a resolution must be passed by the members of the company in a general meeting requiring the company to be liquidated as a result of expiry of the period of the company’s duration, if any, fixed by its constitutional documents or the occurrence of any other event that requires the dissolution of the company according to its constitutional documents. In both cases, the resolution passed must also appoint an insolvency professional to act as the liquidator of the company. Moreover, if the company owes debts to creditors, then approval of the resolution by creditors representing two-thirds in value of the debt is required.
The company is required to notify the Registrar of Companies and IBBI of the resolution passed to liquidate the company within seven days from the date of the resolution by the members or approval of the resolution by the creditors of the company, as the case may be. A liquidator shall attempt to complete the liquidation process within one year and, after the liquidation of the assets of the company and winding up of all its affairs, apply to the NCLT for dissolution of its corporate personality.
During liquidation proceedings, the liquidator is empowered to sell the assets and the actionable claims of the CD through a public auction or private sale. See 7.1 Types of Voluntary/Involuntary Proceedings.
During involuntary liquidation proceedings, the liquidator ordinarily sells the assets through a public auction but may conduct a private sale in case the asset of the CD is perishable, likely to deteriorate in value or being sold at a price higher than the reserve price of a failed auction, or with the prior approval of the NCLT. During voluntary liquidation proceedings, the liquidator may value and sell the assets of the corporate person in the manner and mode approved by the corporate person.
Creditors of the CD can participate in the public auction. Auction purchasers acquire a free and clear title to the assets purchased, as the Code and related regulations thereunder permit of the sale of assets only upon relinquishment of security interest by the FC, if any.
In the case of involuntary liquidation, the CoC formed during the CIRP functions as the SCC. The SCC is reconstituted after 60 days on the basis of the claims admitted by the liquidator and comprises all creditors of the CD. Secured FCs that have not relinquished their security interest are excluded from the SCC.
The SCC has the power to replace the liquidator and decide the remuneration of the liquidator. Other than this, the SCC also advises the liquidator (by a vote of not less than 66%) on various matters including but not limited to remuneration of professionals appointed to assist the liquidator, manner of sale of assets of the CD, marketing strategies and auction processes. The advice of the SCC is not binding on the liquidator; however, in case the liquidator makes a different decision, she shall record the reasons for the same in writing.
The costs of organising the SCC meetings form part of liquidation costs and are paid in priority over all other payments. However, any other expenses incurred by the SCC (such as legal and consultancy services) are not reimbursed to the SCC from the estate of the CD and are usually divided in proportion to the financial debts owed to such FCs.
The Code does not contain a comprehensive framework to deal with cross-border insolvency, although certain provisions of the Code allow for the Indian Government to enter into bilateral treaties with foreign countries prescribing the manner in which cross-border issues related to each country will be dealt with. However, India is on the brink of adopting the UNCITRAL Model Law on Cross-Border Insolvency.
In addition, the Civil Procedure Code, 1908 also allows for enforcement of judgments passed by superior courts of reciprocating countries.
In the absence of a formal codified framework, the courts have allowed co-ordination and co-operation with foreign courts through protocols. For example, in the CIRP of Jet Airways (India) Limited, insolvency proceedings were initiated against the CD in India and in the Netherlands. In this case, the RP of Jet Airways in India and the Dutch administrator in the Netherlands entered into a cross-border insolvency protocol approved by the NCLT for the harmonisation of the parallel proceedings. The protocol provided for identification of India as Jet Airways’ centre of main interests (as Jet Airways was incorporated in India), information sharing and communication, right to appear and attend proceedings, etc.
See 8.1 Recognition or Relief in Connection With Overseas Proceedings and 8.2 Co-ordination in Cross-Border Cases.
The Code does not distinguish between domestic creditors and foreign creditors.
The Civil Procedure Code, 1908 (“CPC”) provides for the enforcement of foreign judgments passed by superior courts of notified reciprocating countries.
The court can refuse recognition and enforcement of the judgment:
Process of Enforcement
A certified copy of the decree along with a statement of the foreign court stating the extent to which the decree has been satisfied is filed before the Indian district court. Subject to the disqualifications mentioned above, the foreign judgment of the reciprocating country can be directly enforced as a domestic decree by filing an execution petition under the provisions of the CPC. For non-reciprocating countries, an ordinary civil suit may be filed with a copy of the foreign decree as proof of debt.
Under the Code, an insolvency professional known as the IRP/RP during a CIRP and the liquidator during liquidation proceedings is appointed to conduct the processes. Under the CA-13, a provisional/company liquidator is appointed to conduct the winding-up proceedings.
During the CIRP period, the powers of the board of directors of the debtor company is suspended and is exercised by the IRP/RP. The general role of the IRP/RP has two limbs. Firstly, the IRP/RP is responsible to protect and preserve the value of the property of the CD and to manage the affairs of the CD as a going concern and secondly the facilitate the CIRP.
For the said purposes, the IRP/RP is authorised to act on behalf of the CD. The IRP is endowed with various responsibilities including but not limited to collection of all financial information relating to the CD, receipt and collation of claims, constitution of the CoC, taking control and custody of and monitoring the assets of the CD. In addition to the duties of the IRP, the RP has the duty to, inter alia, invite market participants to submit resolution plans for the CD, present such plans before the CoC and file applications for avoidance of certain transactions. The RP is also empowered to raise interim finance or new money with the prior approval of the CoC.
If the CIRP fails to rescue the CD, liquidation proceedings are initiated against such CD. See 7.1 Types of Voluntary/Involuntary Proceedings.
On appointment of the liquidator, powers of the board of directors, key managerial personnel and partners of the CD cease to have effect and are vested in the liquidator. Key responsibilities of the liquidator include verifying claims of creditors, taking custody and control over the assets of the CD, forming a liquidation estate comprising assets of the CD, selling assets of the CD by way of public auction or private contract and distributing the proceeds from the sale amongst various stakeholders of the CD in the order of priority as given under the Code.
Under the CA-13, the role of the liquidator includes but is not limited to:
Insolvency professionals registered with the insolvency regulator IBBI can serve as the statutory officers under the Code as well as under the CA-13.
The insolvency professional is known as the IRP/RP during a CIRP and the liquidator during a liquidation.
If the CIRP is initiated by an FC or the CD itself, then such applicant is required to propose the name of an insolvency professional who will act as the IRP. If there are no disciplinary proceedings pending against such professional, the NCLT appoints the insolvency professional as the IRP. If the CIRP is initiated by an OC, then the NCLT can make a reference to IBBI for recommendations (if no name is proposed by the OC) or appoint the insolvency professional proposed by the OC provided that there are no disciplinary proceedings pending against the professional.
The CoC in its first meeting by a majority vote of 66% in value terms either confirms the IRP as the RP or replaces the IRP with a new RP. In the event that the CoC resolves to appoint a new RP, an application is filed before the NCLT, and the name of the RP is forwarded to IBBI for confirmation, after which the appointment is confirmed. The CoC is empowered to replace the RP at any time during the CIRP by a majority vote of 66%.
If liquidation proceedings are commenced against the CD, the insolvency professional acting as the RP during the CIRP continues to act as the liquidator subject to the written consent of the professional. The NCLT may replace the liquidator if the resolution plan submitted was rejected for failure to adherence to mandatory requirements under the Code, if IBBI recommends replacement of the RP or if the RP fails to give his written consent for appointment as liquidator. The SCC is empowered to replace the liquidator by a majority vote of 66% subject to the written consent of the new liquidator.
On receipt of a petition for winding up, a provisional liquidator may be appointed pending final orders on the winding-up petition. At the time of passing of the winding-up order, the NCLT may appoint the provisional liquidator as the company liquidator or appoint a new company liquidator. The provisional and company liquidators are appointed from the insolvency professionals empanelled with IBBI.
The company liquidator or provisional liquidator may be replaced on grounds of, inter alia, misconduct, fraud or misfeasance, professional incompetence, failure to exercise due care and diligence in performance of her functions, conflict of interest or lack of independence.
Duties and Liabilities Under the Code
The directors of the CD are duty-bound to exercise due diligence to minimise potential losses to creditors during the twilight period or the period before the insolvency commencement date when the directors or partners knew or ought to have known there was no reasonable prospect of avoiding the commencement of a CIRP against the CD. Failure to exercise such diligence may result in passing of contribution orders by the NCLT (on an application by the RP), requiring the director or partner of the CD to make appropriate contributions to the assets of the CD.
The NCLT may also require such persons to contribute to the assets of the CD who knowingly carried the business of the CD, during a CIRP or liquidation, with an intent to defraud creditors or for any fraudulent purpose.
During the CIRP, the primary duty of the management of the company is to extend all assistance and co-operation to the IRP/RP as required by her to manage the affairs of the CD. In case of non-cooperation by the management of the CD, the NCLT may pass orders (on an application by the IRP or RP) directing such personnel to comply with the instructions of the RP and to co-operate with her in collection of information and management of the CD.
Under the PPIRP, the CD generally remains under the control and supervision of the directors or partners of the CD. The management of the CD is responsible for protecting and preserving the value of the CD and managing the affairs of the CD as a going concern. In the event that the affairs of the CD are conducted in a fraudulent manner or grossly mismanaged, the NCLT may pass orders vesting the management of the CD with the RP.
Further, the persons who were in charge or responsible for the conduct of the CD’s business or associated with the CD in any manner whatsoever and were involved in the commission of offences by the CD prior to the commencement of the CIRP shall continue to be liable to be prosecuted and punished for such offences even after a new management takes over the CD pursuant to approval of a resolution plan.
Duties and Liabilities Under CA-13
The general duties of the directors under the CA-13 are:
Contravention of the duties prescribed under the CA-13 can lead to the imposition of a fine of INR1,00,000-5,00,000 (approximately USD1,200-6,000). Moreover, in cases of undue gain, the director will be liable to pay an amount equal to the gain.
When a winding-up petition has been filed before the NCLT, in addition to the above-mentioned duties, the directors of the company must extend full co-operation to the company liquidator in the discharge of her functions and duties. Moreover, if during winding up:
See 11.3 Claims to Set Aside or Annul Transactions.
The Code provides for avoidance and setting aside of four categories of specified pre-insolvency transactions during the CIRP/PPIRP or liquidation period:
“Preferential transactions” and “undervalued transactions” are vulnerable to being set aside if they are entered into within the two years preceding the insolvency commencement date with related parties; and within one year preceding the insolvency commencement date when entered into with persons other than related parties.
The Code does not prescribe any suspect period for transactions defrauding creditors. “Extortionate credit transactions” entered into by a company within the two years preceding the insolvency commencement date are liable to be set aside (irrespective of whether they are or they are not entered into with a related party).
Under the CA-13, the liquidator has the authority to examine all transactions since the commencement of winding up and has the right to initiate appropriate proceedings to declare such transactions as void or invalid by the court:
See 11.1 Historical Transactions.
The RP or the liquidator may apply to the NCLT to set aside or annul avoidance transactions (during the CIRP, PPRIP or liquidation). Creditors, members or partners of the CD may also seek remedies of declaration of undervalued transactions as void and reversing their effect in case the RP or liquidator has failed to so.
Under the CA-13, the liquidator has the right to initiate appropriate proceedings in order for the court to declare such transactions as void or invalid.
Rights of Secured Creditors Under the Insolvency and Bankruptcy Code, 2016
The status and rights of secured creditors have become a subject matter of serious debate in the developing jurisprudence under the provisions of the recently enacted Insolvency and Bankruptcy Code, 2016 (the “Code”). The Code has been one of the path-breaking pieces of legislation in the insolvency and restructuring space and has put in place a holistic framework for resolution and revival of enterprises through a process known as the corporate insolvency resolution process (“CIR Process”) before liquidation.
The Code has, however, created a lot of debate and a cloud of doubt over well-settled principles of law with respect to the treatment of secured creditors. The root of the controversy lies in the Code’s scheme, which involves a new manner of classification of creditors during insolvency – based on the nature of the underlying transaction between the debtor and the creditor rather than the traditional classification based on availability of security.
The Code classifies creditors into two broad categories: as financial and operational creditors. Financial creditors are creditors who disburse debt against the consideration of the time value of money, and the definition of financial debt is designed to cover all types of commercial lending and borrowing transactions. Operational creditors are defined to include (i) creditors who provide goods or services to the corporate debtor, (ii) creditors who are workmen or employees of the corporate debtor, and (iii) any government authority which is owed money under any law for the time being in force. While the Code defines secured creditors, however, in the scheme of the drafting, references to secured creditors are primarily found in the context of liquidation of the corporate debtor.
To add to the confusion, the Code provides for the creation of a committee of creditors comprising all unrelated financial creditors (whether secured or unsecured) to oversee the entire insolvency resolution process facilitated by a qualified insolvency professional. The committee of creditors is responsible for taking all crucial commercial decisions relating to the corporate debtor during the CIR Process, including confirmation or replacement of insolvency professionals, deciding on parameters for the invitation and evaluation of resolution plans, and approving a resolution plan for the rehabilitation or rescue of the corporate debtor or commencing liquidation proceedings against the corporate debtor. For the said purposes, the voting share of each financial creditor comprising the committee of creditors is determined in proportion to their outstanding debt without reference to their security interest or its value or inter-se priority amongst secured creditors.
During the CIR Process, the enforcement of security interest is prohibited on account of the moratorium imposed on the insolvency commencement date, which is primarily intended to provide a calm period for enabling the holistic resolution of the corporate debtor. Once, however, a company is ordered to be liquidated under the Code, the traditional right of a secured creditor to stand outside liquidation proceedings is recognised and the secured creditor can choose to enforce its security interest outside the framework of the Code or relinquish its security interest and receive proceeds from the sale of liquidation estate of the corporate debtor in an order of priority specified under the Code. Debts owed to secured creditors that have relinquished their security interest rank equally with workmen’s dues (restricted to a period of 24 months prior to liquidation proceedings) and higher than unsecured creditors. Secured creditors that have realised their security interest outside of liquidation proceedings stand in queue to receive any unrecovered amount of their claim at a rank lower than unsecured creditors.
In context of this framework, a major controversy arose when the appellate body under the Code, the National Company Law Appellate Tribunal (“NCLAT”), in one of the largest ever insolvency resolution proceedings in India – that of Essar Steel (India) Limited involving restructuring of debt in excess of INR50,000 crores (approximately USD6 billion) – held that the “security interest” during the CIR Process was entirely irrelevant, and that the committee of creditors could not distribute proceeds under a resolution plan on the basis of the value of security and inter-se priority amongst the secured creditors, and that in fact all creditors of the corporate debtor needed to be treated equally. The NCLAT also redistributed the proceeds under the resolution plan equally amongst financial and operational creditors, treating all classes of creditors and super-secured creditors as well, alike. This resulted in a major uproar in the entire banking industry, to the extent that the Government of India was forced to move urgent amendments in the Code to introduce provisions enabling the committee of creditors to consider security interest and its value and priority while deciding the distribution of resolution proceeds. The amendments also brought in provisions to guarantee minimum payments of liquidation value to dissenting financial creditors of a resolution plan, apart from the original provision requiring minimum payment of liquidation value to the operational creditors as a mandatory condition for a resolution plan to be valid under the Code. The decision of the NCLAT redistributing the resolution plan proceeds was challenged before the Supreme Court of India. Certain stakeholders, while defending the NCLAT decision, also challenged the constitutional validity of the amendments brought in by the government.
Coming to the rescue of secured creditors, the Supreme Court of India recognised age-long principles in relation to the rights and status of secured creditors and upheld the distribution mechanism amongst the secured creditors in accordance with the priority and value of their security. The Supreme Court also held that the principle of ‘equality’ could not be interpreted to mean equal recovery for all creditors under a resolution plan, irrespective of their security interest or classification as an operational or financial creditor, and that the NCLAT had erred in mandating equal distribution amongst all classes of creditors. The Supreme Court noted that treating all creditors equally would incentivise secured financial creditors to vote for liquidation (where such creditors can realise their security interest outside liquidation proceedings) rather than resolution of the corporate debtor, which would be contrary to the entire objective of the Code. Rather, the principle of equitable treatment of different classes of creditors based on whether they were financial or operational or secured or unsecured creditors and in reference to the value and priority of their inter-se security interest was upheld. In doing so, the Supreme Court also made important observations on the scope of judicial interference over the commercial wisdom of the committee of creditors and held that distribution of proceeds under a resolution plan in compliance with minimum prescriptions under the Code, such as payment of liquidation value to the dissenting financial creditors and the operational creditors, fell within the realm of the commercial domain of the committee of creditors and that the NCLAT could have not have taken it upon itself to entirely change the distribution mechanism approved by the committee on its own. The constitutional validity of the amendments making value of the security and relative inter-se priority amongst secured creditors relevant factors for determining distribution of proceeds under a resolution plan and amendments affording minimum entitlement of liquidation value to dissenting financial creditors was also upheld by the Supreme Court.
The decision of the Supreme Court of India in Essar Steel is, however, surprisingly, being interpreted in a manner so as to justify commercial decisions of committees of creditors forcing inequitable distribution of proceeds divorced from the security structure of the company in subsequent cases. Even though Essar Steel upheld equitable distribution of resolution proceeds, the Supreme Court of India in India Resurgence ARC Private Limited v M/S Amit Metaliks Limited refused to interfere with the decision of the committee of creditors denying benefit of payment to a dissenting financial creditor in accordance with the priority and value of security of the creditor on grounds that the financial proposal in the resolution plan forms the core of the business decision of the committee of creditors and, upon compliance with all the mandatory requirements under the Code, the process of judicial review cannot be stretched to the carrying out of quantitative analysis qua a particular creditor or any stakeholder, which may bear its own dissatisfaction. The Supreme Court further held that what amounts are to be paid to different classes or subclasses of creditors in accordance with provisions of the Code and the related regulations, is essentially the commercial wisdom of the committee of creditors and that a dissenting secured creditor cannot suggest a higher amount to be paid to it with reference to the value of the security interest.
This interpretation has been further skewed by another recent decision of the NCLAT in Small Industries Development Bank of India v Vivek Raheja, RP, M/s. Gupta Exim (India) Pvt. Ltd., where the NCLAT held that payment of liquidation value to a dissenting financial creditor relates to the value of the outstanding debt, which is a fixed amount determined in the CIR Process and not the value of the security of a secured creditor. The NCLAT further refused to interfere with the decision of the committee of creditors to distribute the resolution proceeds in proportion to outstanding debt divorced from inter-se priority amongst secured creditors and security structure.
To add to the confusion, there has been another decision by the NCLAT in the case of Technology Development Board v Mr. Anil Goel & Ors holding that during liquidation, the secured creditors upon relinquishment of their security interest lose their inter-se priority and, therefore, all secured creditors are to be treated as one class ranking equally for distribution of proceeds in the order of priority specified, second only to payment of process costs. Any inter-se priorities amongst the secured creditors cannot be sustained once the secured creditor has elected to forgo its right to enforce the security interest. This was followed by the case of Oriental Bank of Commerce v Anil Anchalia, Liquidator of M/s. Bala Techno Industries Ltd., wherein the NCLAT reiterated that upon relinquishment of security interest, payouts to secured creditors would be governed strictly in accordance with the order of priority specified under the liquidation provisions, without reference to inter-se priorities amongst secured creditors. Although these decisions of the NCLAT have been stayed by the Supreme Court of India, in the absence of a final judgment, the position remains unclear.
Given the aforesaid developments, despite a significant judgment in Essar Steel, there remains lack of clarity on the rights and status of secured creditors under the Code during both insolvency resolution and liquidation. As a result, a committee of creditors which includes unsecured as well as under-secured financial creditors by a majority decision can force an inequitable distribution of resolution proceeds to super-secured creditors, thereby defeating the very purpose of the creation of security interest in the first instance. The position of law in this respect urgently needs careful review and course correction by judicial interpretation and, if necessary, by yet another clarificatory amendment to the Code.