The restructuring market in India is composed of various processes under different pieces of legislation and different frameworks.

The insolvency landscape in India witnessed a complete change in 2016 with the enactment of the Insolvency and Bankruptcy Code, 2016 (the “Code”). The Code is a comprehensive piece of legislation that provides for the corporate insolvency resolution process (CIRP) and liquidation for all companies excluding financial service providers (FSPs). The Code also governs the insolvency resolution and bankruptcy of individuals and partnership firms.

However, provisions relating to partnership firms have not yet been enacted and those relating to individuals have only been enacted in respect of 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 sizes above 500 crores.

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.

The Companies Act, 2013 (CA 2013) allows for voluntary schemes of arrangements and compromise between the company and its creditors or members and winding up of companies on grounds other than the inability of the company to pay its debts such as (inter alia):

• the company has voluntarily decided to be wound up;
• it is just and equitable to wind up the company;
• the company has acted against the security and interests of the country; or
• the affairs of the company are being conducted in a fraudulent manner.

In addition to statutory regimes, the Reserve Bank of India (RBI) (banking regulator) periodically issues circulars and notifications for the restructuring of stressed assets outside the remit of the Code.

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 2013. The grounds on which insolvency proceedings may be initiated under the two pieces of legislation vary.

CIRP, PPIRP and liquidation process under the Code

The Code enacted in 2016 focuses on financial and organisational remodelling of the CD in distress. It contains mechanisms for 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 comprises of four main institutions to facilitate the processes envisaged thereunder:

• insolvency professionals and insolvency professional agencies responsible for the conducting of the processes;
• information utilities as repositories of financial information relating to the CD;
• adjudicating authorities which are the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court of India; and
• the Insolvency and Bankruptcy Board of India (IBBI) (statutory regulator).

CIRP

An application for initiation of a CIRP may be filed by a financial creditor (FC) (who disburses debt against the consideration for the time value of money), operational creditors (OC) (who have provided goods and services to the CD in exchange for money and also includes employees and government creditors) or by the CD itself, before the NCLT on a default of a minimum amount of approximately USD121,565 by the CD.

The CIRP commences on the date the NCLT accepts the application filed by the creditor or the CD and operates for a limited period of 180 days extendable by 90 days but not more than a total of 330 days. In practice, however, CIRPs have at times continued beyond prescribed timelines.

The powers of the board of directors of the CD are suspended and the management of the CD vests in the insolvency professional appointed as the interim resolution professional (IRP) by the NCLT. The IRP is responsible for protecting and preserving the assets of the CD and managing the affairs of the CD as a going concern. The personnel of the CD are required to extend all assistance and co-operation to the IRP as may be required to manage the CD as a going concern.

At the time of acceptance of the CIRP application, the NLCT declares a moratorium whereby actions against the CD and its assets are halted and no legal proceedings can be commenced or continued. However, continued supply of essential goods and services such as electricity, water, information technology and telecommunication services to the CD is mandatory. The moratorium operates until the completion of the CIRP.

The IRP makes a public announcement of the initiation of the CIRP and calls for submission of claims by creditors of the CD. The IRP verifies all claims received and constitutes a committee of creditors (CoC) composed of all unrelated FCs of the CD. In the first meeting, the CoC resolves either to appoint another insolvency professional as the resolution professional (RP) or to permit the IRP to continue as the RP.

The RP, in consultation with the CoC, invites market participants (known as resolution applicants) to submit resolution plans for the purposes of restructuring and revival of the CD. The Code disqualifies certain persons from submitting plans, including the incumbent management of the CD in certain instances.

A resolution plan can propose various measures including, but not limited to:

• a change in capital structure by way of merger;
• amalgamation;
• demerger;
• debt restructuring;
• one-time settlement;
• transfer or sale of assets of the CD; and
• change in the portfolio of goods or services provided by the CD.

The RP examines and scrutinises the plans received for certain mandatory requirements under the Code and places all compliant plans before the CoC.

The CoC, by exercising its commercial wisdom, selects a plan for the turnaround of the CD by a majority vote of 66% in value. The plan approved by the CoC is placed before the NCLT for its final approval, after which it binds all stakeholders of the CD.

PPIRP

The PPIRP was introduced in 2021 for companies that qualify as micro, small or medium enterprises under Indian law. A micro, small or medium enterprise that has committed a default of approximately USD12,158 may, with the approval of 66% of its unrelated FCs in value and subject to certain other prerequisites, file an application for initiation of the 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 OC) or approve a resolution plan invited from the market.

Liquidation upon failure of the CIRP or PPIRP

The liquidation process can be triggered if:

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

In case of failure of the 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 and all the 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 liquidation order is deemed to be a notice of discharge to the officers, employees and workmen of the CD, except when the business of the CD is continued during the liquidation process by the liquidator. Furthermore, no legal proceeding can be instituted by or against the CD. The liquidator may, however, institute a legal proceeding on behalf of the CD with the prior approval of the NCLT.

Secured creditors are given the right to either realise their security interest outside liquidation proceedings or relinquish their security to the liquidation estate and partake in the distribution of proceedings from the sale of assets as per the order of priority mentioned under the Code. A Stakeholders Consultation Committee (SCC) is constituted by the liquidator and is composed of all of the creditors of the CD.

The liquidator is required to consult the SCC on several matters during the liquidation process, such as the sale of assets in liquidation and the appointment and fee of professionals appointed in liquidation, etc. The liquidator may consider the SCC’s advice when making decisions in relation to such matters regarding the CD.

The liquidator issues a public announcement stating the CD is in liquidation. The personnel of the CD are required to co-operate with and assist the liquidator in the discharge of their functions. All creditors of the CD are required to submit their claims to the liquidator along with supporting documents, which are 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 reason, the liquidator is required to make the best estimate of the amount based on the available information. 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 CD; and
• selling the assets of the CD by way of a 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 arrangements under the CA 2013.

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 they consider necessary for its beneficial liquidation. The creditors may require the liquidator to provide them with any financial information relating to the CD.

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

Priority of creditors

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

• 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 the PPIRP costs)) in full;
• 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) rank equally;
• wages and any unpaid dues owed to employees other than workmen (restricted to a period of 12 months prior to liquidation);
• financial debts owed to unsecured creditors;
• amounts owed to the government and debts owed to secured creditors for unpaid amounts following the enforcement of security interest outside liquidation (which rank equally);
• any remaining debts;
• preference shareholders (if any); and
• equity shareholders or partners (as the case may be).

Voluntary liquidation

A corporate person who has not committed any default in 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:

• a declaration of solvency by the majority of the directors of the company; and
• a declaration that the company is not being liquidated to defraud any person.

Such a declaration has to be accompanied by:

• audited financial statements of the company along with a record of its operations for the last two years; and
• a report of the valuation assets of the company prepared by a registered valuer.

Within four weeks of such a declaration:

• 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; and
• 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 its 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 of the value of the debt is required.

The company is required to notify the Registrar of Companies and the IBBI of the resolution passed and liquidate the company within seven days from the date of the resolution of approval of the resolution by the creditors of the company as the case may be. A liquidator will attempt to complete the liquidation process within one year and, after the liquidation of the assets of the company and winding up of all of the affairs, apply to the NCLT for dissolution of the corporate person.

The CA 2013

The CA 2013 allows for restructuring by way of schemes of compromise and arrangements (the “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 the members (or class of members). A notice of such a meeting is sent to all creditors, members (and classes thereof) and debenture holders of the company, which is accompanied by details of the compromise and arrangement and a copy of the valuation report (if any), explaining their effect on creditors, key managerial personnel, promoters and non-promoter members and the debenture holders and the effect of 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 that are likely to be affected by the Scheme to enable them to make adequate representations. The Scheme is required to be approved by a majority of 75% of 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 2013 also provides for winding up of companies by an order of the NCLT on various grounds except inability of the company to pay debts. See 1.1 Legal Framework.

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 such 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 an order of winding-up, assets of the insolvent are distributed among the creditors in the order of priority specified under the CA 2013.

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 the sale of the secured assets are subject to a pari passu charge in favour of the workmen of the company.

RBI frameworks

The RBI introduced a Prudential Framework for Resolution of Stressed Assets in June 2019 (the “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. Furthermore, 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 (the “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 will provide that decisions of lenders representing 75% by value of outstanding credit facilities and 60% of lenders in number will be binding on all lenders. A resolution plan must be implemented within 180 days from the end of the Review Period. Failure to adhere to the timelines may lead to additional provisioning requirements.

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

See 1.2 Types of Insolvency.

See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP).

Under a resolution plan, new money claims and administration expenses including fees of the RP, and expenses incurred by the RP to keep the CD running covering post-CIRP rental dues are paid in priority to the payment of other debts of the CD. The plan must provide for a minimum amount not less than the liquidation value to the dissenting CoC members (secured or unsecured) and for operational debts such as tax claims, employee claims and rent arising from lease agreements until the insolvency commencement date. For assenting secured CoC members, the CoC may devise a distribution mechanism of resolution proceeds that may take into account the value and priority of security interest held by them.

During liquidation see 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP), rent arising from a lease agreement is treated as operational debt and ranks sixth in priority under “any remaining debts and dues”. Pension claims of the employees are not considered as CD assets and are therefore released in full to the employees.

Movable Property

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

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

Immovable Property

Security over immovable property is generally created by way of a mortgage. The Transfer of Property Act, 1882 contemplates six different types of mortgages. The two most common forms of mortgage used in financing transactions are an English mortgage or a legal mortgage and a mortgage by way of deposit of title deeds or an equitable 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 pledgor 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 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 legislation such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the “SARFAESI Act”).

Recovery Under the 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 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 only available 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 until the completion of the CIRP.

Under the Code, unsecured trade creditors are categorised as OCs. A resolution plan approved for the CD must provide for priority payments to OCs, which will not be less than the liquidation value of the OCs’ claim.

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

Scheme

Approval by a 75% majority of each class is required for approval of the Scheme under the CA 2013. Therefore, if unsecured creditors form a class, then such creditors can disrupt or delay the process by not providing requisite approvals.

Pre-Judgment Attachments

Pre-judgment attachments may be granted in recovery actions initiated under civil law and other specialised legislation such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, where the court believes that the debtor may frustrate or obstruct the execution of a decree for recovery of debt by the creditor. However, this remedy is sparingly used by the courts.

Under the Code, there is no formal process to grant interim or final relief prior to admission of CIRP applications and, therefore, pre-judgement attachments are not common.

Retention of Title

Operational creditors (excluding workmen and employees) are required to submit details of any retention of title agreement in respect of goods or properties to which the claim refers while submitting their proof of claim to the IRP. Such retention continues to be governed by the contractual terms between the parties during the CIRP.

Set-Off

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 the 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 2013 is silent on the right of set-off or retention of title under a Scheme.

See 1.2 Types of Insolvency (RBI frameworks). The RBI Framework does not specify any standard of care or the consequences for obstructing the conclusion of a restructuring plan or agreement.

Although proceedings under the Code are time-bound, there are delays often on account of pending litigations and the low capacity of the NCLT. Therefore, creditors though not obligated or mandated by the law, prefer to engage in informal negotiations with the debtor prior to commencing a formal CIRP. This has 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 or liquidation proceedings are often nominal or nil and they therefore prefer to settle their claims without judicial intervention. If the debtor does not abide by the terms of the restructuring agreement or settlement, the creditor can file a CIRP provided the prerequisite conditions are met. Since these are informal negotiations, the terms of the restructuring agreement cannot bind any dissenting creditor.

For FCs certain other considerations come into play. In India, as 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.

The legal status of an out-of-court restructuring is akin to any other intercreditor agreement or contract, governed by the contract law. If the debtor fails to meet its obligation under the agreement, the creditor may enforce provisions within the contract or initiate a CIRP provided the prerequisite conditions are met.

See 1.2 Types of Insolvency.

See 1.2 Types of Insolvency, 2.2 Priority Claims in Restructuring and Insolvency Proceedings and 2.3 Secured Creditors.

A resolution plan approved for the CD can propose various measures including:

• cancellation or delisting of any shares of the CD;
• satisfaction or modification of any security interest;
• termination of contracts in accordance with their terms; and
• releasing guarantors from their liability.

A resolution plan approved for the CD must conform to the mandatory requirements prescribed under the Code and related regulations (the “Mandatory Requirements”). These are as follows:

• payment of insolvency resolution costs in priority to all other debts of the CD;
• payment of debts to OCs and dissenting FCs to the extent of the liquidation value of their claims;
• provision for the management of affairs of the CD after the approval of the resolution plan;
• provision for implementation and supervision of the resolution plan;
• does not contravene any provisions of the law for the time being in force; and
• conforms to other requirements as specified by the IBBI.

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

An approved resolution 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 release as the non-debtor party’s liability is independent from the CD’s. Similarly, group companies are not released from the debt obligations as these remain distinct from those of the CD. Managing directors of the CD continue to be liable for the offences committed by the CD.

A scheme of arrangement under CA 2013 between a company and its creditors or class of creditors may provide for restructuring of the company’s debts, whereby securities available to the creditors are structured so that a non-debtor is released of the liability given as security for and on behalf of the company.

Determination of Value of Claims Against the Debtor

The IRP invites all categories of creditors to submit their proof of claims during a CIRP including creditors with contingent claims. The IRP may also call for such evidence as may be deemed necessary by them for substantiating all or part of the claim.

When the amount of the claim is not precise due to any contingency or other reason, the IRP or RP can make the best estimate of the claim based on the information available and further make appropriate revisions whenever warranted. However, the RP 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 around the treatment of contingent claims is not yet settled and a resolution plan often does not provide for payments in lieu of contingent claims.

Possibility of Opting for Arbitration

Any arbitration proceedings against the CD are stayed on account of the moratorium imposed on initiation of CIRP. See 1.2 Types of Insolvency.

The IRP or RP may however file or continue arbitration proceedings on behalf of the CD if they are against a third party. Thus, arbitration proceedings where the CD is a claimant may continue during the moratorium period.

Any claims against the CD that are extinguished under an approved resolution plan cannot be pursued through arbitration proceedings. Such extinguishment does not occur automatically but by virtue of the resolution plan itself. 

See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP) and 4.2 Statutory Restructuring, Rehabilitation and Reorganisation Procedure.

The process of approving a resolution plan is largely driven by the CoC but must gain the final approval of the NCLT to bind all stakeholders of the CD. The scope of judicial review is limited to ensuring that the resolution plan conforms to the Mandatory Requirements under the Code.

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.

When a resolution plan is contravened by the CD, then any person whose interests are prejudicially affected by such contravention may apply to the NCLT to liquidate the CD. Furthermore, if the CD or any person on whom the resolution plan is binding wilfully contravenes the resolution plan or abets such contravention, then the person is punishable with imprisonment of not less than one year (which may be extended to five years) and/or a fine of at least INR1 lakh rupees which may be increased to INR1 crore.

From the date of appointment of the IRP, the powers of the board of directors of the CD are suspended and the management of the affairs of the CD vests in the IRP. The IRP is duty-bound to make every endeavour to protect and preserve the value of the CD and manage the operations of the CD as a going concern. The moratorium imposed during a CIRP prohibits the CD from transferring, encumbering, alienating or disposing of any of its assets or legal right or beneficial interest therein.

The IRP or RP is authorised to raise new money or interim finance provided that no security interest is created over encumbered properties of the CD without the prior consent of creditors who hold security over such property. The requirement of prior approval of the creditor can be dispensed with if the value of property is at least twice the amount of the debt.

The CA 2013 does not prohibit new money investments during the implementation of a Scheme.

See 1.2 Types of Insolvency. During a CIRP, the RP is endowed with a wide range of responsibilities, which include:

• taking custody of the CD’s assets;
• representing and acting on behalf of the CD;
• appointing accountants, legal or other professionals;
• maintaining an updated list of claims; and
• convening and attending all CoC meetings.

During liquidation, the liquidator is empowered to:

• verify claims of all of the creditors;
• take into custody all the assets of the CD to evaluate the assets and property of the CD;
• carry on the business of the CD for its beneficial liquidation; and
• obtain professional assistance in discharging their duties, obligations and responsibilities.

See 2.4 Unsecured Creditors. Equity owners or shareholders are regarded as owners of the CD and do not retain any ownership or other property on account of their ownership interests.

The CoC is comprised of 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 consequent proportionate voting share, then the vote of such an FC may play a crucial role while approving a resolution plan for the CD or liquidating the CD (which requires 66% voting share of the CoC). Other than this, unsecured creditors do not have the power to stay or defer the process. Shareholders are not included in the CoC and cannot disrupt the process.

Under the Code, creditors can assign or transfer the debt due to them to any other person during the CIRP. Both parties are required to provide the terms of the assignment to the IRP or RP and the identity of the assignee and transferee. The RP notifies each party and the NCLT of any subsequent change in the CoC within two days of such change.

Scheme

Approval by a 75% majority of each class is required for approval of the Scheme under the CA 2013. Therefore, if unsecured creditors form a class, then such creditors can disrupt or delay the process by not providing requisite approvals.

See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP, and Voluntary liquidation).

The liquidation and voluntary liquidation procedures under the Code are only applicable for corporate entities that are composed of companies and limited liability partnerships.

Voluntary Liquidation

See 1.2 Types of Insolvency (Voluntary liquidation).

Involuntary Liquidation

An involuntary liquidation process is initiated on the failure to revive the CD during a CIRP or PPIRP. Such a liquidation process is aimed at bringing the life of the CD to a lawful end when its turnaround or rehabilitation is not feasible in a time-bound manner.

Consequences of initiation of liquidation

For manner of initiation of a liquidation process and its consequences, see 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP).

There is no automatic effect on the operation of pre-insolvency agreements of the CD by virtue of the commencement of liquidation proceedings against it by the NCLT. However, the liquidator is empowered to disclaim onerous property and unprofitable contracts by applying to the NCLT.

Where the liquidator’s request for disclaiming property is granted by the NCLT, the CD will be released from rights and obligations in the contract or property in the manner as provided in the order of the NCLT. Any parties affected by such disclaimer would be deemed to be a creditor of the CD for the amount of the compensation or damages payable in respect of such effect.

The liquidator may also apply to the NCLT to avoid certain types of transactions that may have been carried on as part of a contract. See 8.1 Circumstances for Setting Aside a Transaction or Transfer.

Role of the liquidator, the NCLT and the CD

See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP). The liquidator is empowered to, inter alia, take into their custody and control all the assets, property, effects and actionable claims of the CD and administer them for the benefit of its creditors, members and other stakeholders.

The liquidator works under the overall guidance and directions of the NCLT and is required to report regularly to the NCLT as per the regulations under the Code.

The proceeds from the sale of the liquidation assets will be distributed by the liquidator amongst stakeholders of the CD in the order of priority laid down in the Code. When the assets of the CD are completely liquidated, the liquidator will apply to the NCLT for dissolution of such CD. Pursuant to this, the NCLT will pass an order for dissolution whereby the CD will be considered to have been dissolved. A copy of this order is sent to the authority with which the CD is registered for striking off the name of the CD from the requisite registration.

Role of the creditors

The liquidator establishes an SCC to assist them by giving their advice at various stages of the liquidation process. The SCC consists of all creditors of the CD and is established by the liquidator within 60 days of the commencement of the liquidation process.

Until such time, the CoC acting in the CIRP of the CD acts as the SCC in the liquidation process. The liquidator is required to consult with the SCC on several aspects such as:

• the sale of assets;
• fees of professionals; and
• the manner of pursuing avoidance transactions after closure of the liquidation process.

The SCC’s advice, which is arrived at by a vote of 66% or more of the value of claims of its members, does not bind the liquidator. However, where the liquidator takes a decision that is contrary to the advice of the SCC, they are required to record reasons for the decision in writing and submit records related to the decision to the NCLT and the IBBI. The SCC may also approach the NCLT requesting replacement of the liquidator with another eligible insolvency professional.

Possibility of opting for arbitration

A moratorium is applicable on commencement of liquidation whereby no legal proceeding can be instituted by or against the CD. Arbitration proceedings against the CD are thus stayed. See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP).

The liquidator may, however, institute a legal proceeding, including arbitration proceedings, on behalf of the CD with the prior approval of the NCLT.

Voluntary Liquidation

The liquidator ordinarily sells the assets through a public auction but may conduct a private sale if:

• the asset of the CD is perishable;
• the asset is likely to deteriorate in value or be sold at a higher price than the reserve price of a failed auction; or
• the NCLT has given prior approval.

The liquidator may value and sell the assets of the corporate person in the manner and mode approved by the corporate person. See 1.2 Types of Insolvency (Voluntary liquidation).

Involuntary Liquidation

See 5.2 Course of the Liquidation Procedure. The liquidator is empowered to sell the assets and the actionable claims of the CD through a public auction or private sale. Creditors can participate in the public auction. Auction purchasers acquire a free and clear title to the assets purchased, as the Code and related regulations thereunder permit the sale of assets only upon relinquishment of security interest by the FC, if any.

The liquidator may sell the CD or its business as a going concern during the liquidation proceedings either on the recommendation of the CoC in a CIRP or if the liquidator believes that such a sale will be value-maximising. The regulations under the Code prescribe a timeline of 90 days from the liquidation commencement date for the completion of such sale, failing which the liquidator can sell the assets of the CD via other means. If a CD is sold as a going concern, the liquidator applies to the NCLT for the closure of the liquidation process as opposed to consequential dissolution of the CD in other manners of sale.

Rights of Members and Partners of the CD

All powers of the board of directors, key managerial personnel and the partners of the CD cease to have effect and such powers are vested in the liquidator from the date of their appointment. The promoters, directors, partners of the CD (or their representatives) may attend the meetings of the SCC but will not have any right to vote. In the order of priority for distributions made during a liquidation process under the Code, preference shareholders are placed at the penultimate priority, and equity shareholders and partners are placed at the last priority. See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP).

Third parties or non-debtors are not released from their obligations when the CD undergoes liquidation. For instance, personal and corporate guarantors of the CD remain liable even during or after the liquidation of the CD has been completed. Similarly, associate, holding and subsidiary companies also remain liable for their own debt obligations. Managing directors continue to be liable for offences committed by the CD.

Rights of Creditors

See 1.2 Types of Insolvency (Liquidation upon failure of the CIRP or PPIRP). Secured creditors that have not relinquished their security interest are excluded from the SCC.

Pre-judgment attachments

See 2.4 Unsecured Creditors. Under the Code, there is no formal process to grant interim or final reliefs prior to the commencement of liquidation and, therefore, pre-judgement attachments are not common.

Retention of title

Operational creditors (excluding workmen and employees) and other stakeholders are required to submit details of any retention of title agreement in respect of goods or properties to which the claim refers while submitting their proof of claim to the liquidator. Such retention continues to be governed by the contractual terms between the parties during liquidation.

Set-off

Where there are mutual dealings between the CD and another party, the sums due from one party will be set off against the sums due from the other to arrive at the net amount payable to the CD or to the other party. FCs, OCs and other stakeholders may provide details of mutual dealings to be set off while submitting their claims to the liquidator. Furthermore, the moratorium in the liquidation process does not specifically bar set-off.

The Code does not contain a comprehensive framework to deal with cross-border insolvency, although it allows the Indian government to enter into bilateral treaties with foreign countries prescribing the manner in which cross-border insolvency issues related to each country will be dealt with.

The Indian government has previously expressed its intention to adopt the UNCITRAL Model Law on Cross-Border Insolvency. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 was introduced in August 2025, which empowers the central government to prescribe rules for administering and conducting cross-border proceedings under the Code. However, the final contours of the provisions remain to be seen as the Bill has not yet been enacted into law. 

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

The Code does not lay down any criteria to determine which country has jurisdiction to open a restructuring or insolvency procedure. In the absence of a codified framework, courts have allowed co-ordination and co-operation with foreign courts through protocols.

In the CIRP of Jet Airways (India) Limited, insolvency proceedings were initiated against the CD in India and the Netherlands. The NCLAT directed the Indian RP of Jet Airways and the Dutch trustee to enter into a protocol for the harmonisation of the parallel proceedings. This direction was issued by the NCLAT while staying an order of the NCLT in so far as it declared the Dutch proceedings against the CD a nullity as per Indian law. The protocol provided for identification of India as Jet Airways’ centre of main interests, information sharing and communication, right to appear and attend proceedings, etc.

The Code does not lay down any criteria used to determine which domestic law applies to restructuring and insolvency-related matters.

Recognition of Foreign Proceedings

The Code does not provide for recognition of restructuring or insolvency proceedings in another country.

Enforcement of Foreign Judgments

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

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

Process of Enforcement

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

See 6.2 Jurisdiction.

The Code does not distinguish between domestic and foreign creditors.

Duties and Liabilities Under the CA 2013

The general duties of directors under the CA 2013 include the following:

• to act in accordance with the constitutional documents of the company;
• to act in good faith to promote the objectives of the company;
• to exercise their duties with reasonable care; and
• to avoid situations of conflict with the interests of the company.

Contravention of the duties prescribed under the CA 2013 can lead to the imposition of a fine. In cases of undue gain, the director concerned will be liable to pay an amount equal to the gain.

When a winding-up petition has been filed before the NCLT, the directors of the company must co-operate fully with the company liquidator in the discharge of their functions and duties. Moreover, during winding up:

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

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

Duties and Liabilities Under the Code

Directors’ liability under the Code may be classified into two broad categories: civil liability and criminal liability.

Civil liability

The directors of the CD are duty-bound to exercise due diligence to minimise potential losses to creditors in the period before the insolvency commencement date when the directors or partners knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP or PPIRP against the CD. Failure to exercise such diligence may result in the NCLT requiring the director or partner of the CD to make appropriate contributions to the assets of the CD.

Contribution orders may also be passed against persons who knowingly carried on the business of the CD during a CIRP, PPIRP 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 or RP as required by them to manage the affairs of the CD. In case of noncooperation, the NCLT may direct such personnel to comply with the instructions of the RP and to co-operate with them.

Under the PPIRP, the CD generally remains under the control of its management, which is responsible for protecting and preserving its value and managing its affairs as a going concern. If 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. The NCLT may also impose a penalty against any officer who manages the affairs of the CD with the intent to defraud creditors of the CD or for any fraudulent purpose during the PPIRP.

Criminal liability

The directors or officers of the CD may be punished for certain actions committed by them if such actions fall within the scope of criminal provisions under the Code. For instance, directors or officers may be liable for a fine or imprisonment or both if they have committed certain actions prior to the insolvency commencement date, such as the following:

• concealing property or debt of the CD or fraudulently removing any part thereof;
• concealing, destroying, mutilating or falsifying the books of the CD;
• wilfully creating a security interest over property of the CD that has been obtained on credit and has not been paid for;
• making false representations to creditors of the CD; or
• committing fraud to obtain consent of the creditors to an agreement with reference to the affairs of the CD.

Additionally, under various Indian laws, directors or officers may be vicariously liable for offences committed by the company outside an insolvency scenario. This liability typically arises when they:

• have knowledge of the offence;
• were involved in the offence; or
• did not undertake due diligence in preventing the offence.

Furthermore, the persons who were in charge or responsible for the conduct of the CD’s business or associated with the CD in any manner and were involved in the commission of offences by the CD prior to the commencement of the CIRP will 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.

See 7.1 Duties of Directors. Claims regarding wrongful or fraudulent trading under the Code may only be brought by the RP or the liquidator. Action under criminal provisions of the Code may be initiated on the basis of a complaint made by:

• the IBBI;
• the central government; or
• any person authorised by the central government in this respect.

See 7.1 Duties of Directors.

Under the CA 2013, a person may be disqualified from acting as a director in a company on various grounds such as if they:

• are of unsound mind and have been declared as such by a competent court;
• are an undischarged insolvent;
• have been convicted of an offence of moral turpitude whereby they have been sentenced to imprisonment for at least six months; or
• have been sentenced to imprisonment for a period of seven years or more.

A director may be disqualified from acting as a director in any company where criminal liabilities have been imposed on a director as per the provisions of the Code that satisfy the disqualification criteria contained in the CA 2013.

The Code

An application to set aside an avoidance transaction may be filed by the RP or the liquidator with the NCLT. The Code provides for avoidance of four categories of transactions.

• Preferential transactions that put any person in a better position than they would have been in the distribution waterfall.
• Undervalued transactions in which the CD has gifted or transferred property to a person for a value that is significantly less than the value of consideration provided by the CD.
• Transactions defrauding creditors in which the CD deliberately entered into undervalued transactions to keep the assets beyond the reach of any claimant or to adversely affect the interests of such person in relation to the claim.
• Extortionate credit transactions where credit has been extended on extortionate terms.

Preferential transactions and undervalued transactions are vulnerable to being set aside if they are entered into:

• within the two years preceding the insolvency commencement date with related parties; and
• within one year preceding the insolvency commencement date with persons other than related parties.

Transfers made in the ordinary course of business are excluded from the meaning of preferential transactions and undervalued transactions.

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

The CA 2013

The liquidator has the authority to examine all transactions since the commencement of winding up and initiate appropriate proceedings to declare such transactions as void or invalid by the court. These are as follows.

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

The Code

Applications for the avoidance of transactions may be brought by the RP or liquidator under the CIRP, PPIRP or liquidation. However, in cases of undervalued transactions, an application may be made by a creditor, member or partner of a CD if the RP or the liquidator has failed to file such an application.

Where an application for setting aside an avoidance transaction is successful, the NCLT may pass orders to restore the position as it existed before such transactions and reverse the effects thereof in the manner laid out in the Code. For instance, where a preference transaction is set aside, the NCLT may by order:

• require any property transferred in connection with the giving of the preference to be vested in the CD;
• release or discharge (in whole or in part) any security interest created by the CD; or
• require any person to pay the RP or the liquidator any sums in respect of benefits received by them from the CD.

While the Code gives the NCLT powers to reverse the avoidance transaction and restore the position of the CD as it existed prior to such transaction, it does not specify the treatment of the proceeds thereof. However, there is no restriction on the NCLT in providing the treatment of proceeds of the reversal of an avoidance transaction as part of its order.

Where the NCLT has not directed parties regarding treatment of the proceeds of an avoidance transaction in a CIRP or PPIRP, the treatment of such proceeds would depend on the terms of the resolution plan. In a liquidation proceeding, the liquidator is required to submit an application along with their final report containing the manner of pursuing avoidance transaction proceedings after the dissolution or closure of the liquidation process and the manner in which the proceeds, if any, from such proceedings will be distributed. Such an application will be prepared by the liquidator after consultation with the SCC.

The CA 2013

In case of a fraudulent preference, the NCLT may order as it thinks fit and declare such transaction invalid and restore the position of the company as it existed prior to such transaction. The person who was preferred in such a fraudulent preference transaction will be subject to the same liabilities and have the same rights as if they had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge on the property or the value of their interest, whichever is less.

The treatment of proceeds from avoidance of a transaction under the CA 2013 is based on the order of the NCLT.