From an investor's standpoint, a robust and effective
bankruptcy regime is a prerequisite for the development of the
corporate debt market. However, the existing insolvency and
bankruptcy framework is highly fragmented, which has led to complex
issues on how to reconcile various statutes with one another.
Further, the existing framework has proved to be time consuming
and cumbersome. As per the World Bank Group's data, resolving
insolvency proceedings in India takes approximately 4.3 years on
average, whereas it takes six months in Japan, eight months in
Singapore, one year in Malaysia and the United Kingdom and 18
months in United States.(1)
In order to resolve this serious issue, the government recently
enacted the Insolvency and Bankruptcy Code 2016, which essentially
consolidates the existing legal regime for insolvency and
bankruptcy proceedings in India.
Debenture and bondholders' right to initiate
The insolvency resolution process under the Bankruptcy Code can
be initiated by:
a financial creditor;
a operational creditor; and
the corporate debtor.
The term 'financial creditor' is defined under the
Bankruptcy Code as any person to which the financial debt is owed.
In turn, the term 'financial debt' includes any amount
raised pursuant to any note purchase facility or the issue of
bonds, notes, debentures, loan stock or any similar
Therefore, a holder of debentures or bonds will be considered a
financial creditor for the purpose of the Bankruptcy Code and will
be entitled to initiate the insolvency resolution process. Although
the Bankruptcy Code has not yet to be notified, the enactment alone
has created a positive outlook for the bond market in India, as
this will allow holders of debentures and bonds to initiate the
insolvency resolution process in the most efficient manner.
Trustees' right to initiate proceedings
The existing provisions for winding up a company under the
Companies Act 1956 provide (in no uncertain terms) that debenture
holders and their trustees will be treated as creditors and can
thus present a petition for winding up a company.(3)
However, the Bankruptcy Code grants no authority to the trustees of
bonds or debentures to initiate the insolvency resolution process.
While the term 'financial creditor' includes debenture
holders and bondholders as stated above, the Bankruptcy Code does
not specifically entitle trustees to initiate the insolvency
Although this may create confusion in situations where the
trustee is entrusted with powers to seek enforcement of bonds,
keeping in mind various court precedents on trustees' authority
to initiate winding-up proceedings on behalf or at the instructions
of holders under the existing regime, the courts are likely to
interpret the term 'financial creditor' to include a
trustee of the holders.
The measures taken by the government – in particular, in
the legal regime and, most importantly, the enactment of the
Bankruptcy Code – will go far in creating a healthy and
conducive environment for the corporate bond market in India.
Similarly, given the peculiar financial restraints being faced by
the banking sector due to the increase in non-performing assets, it
is paramount for India to find a better balance between bank-based
and market-based finance, and to create a more comprehensive
corporate bond market.
(2) Section 5(8) of the Insolvency and Bankruptcy Code
(3) Section 439 (2) of the Companies Act
"A secured creditor, the holder of any
debentures (including debenture stock), whether or not any trustee
or trustees have been appointed in respect of such and other like
debentures, and the trustee for the holders of debentures, shall be
deemed to be creditors within the meaning of clause (b) of
This article was first published in the July 2016 issue of
the International Law Office's Insolvency & Restructuring
– India Newsletter.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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As a demonstration of India's combined political will, the much awaited and debated Insolvency and Bankruptcy Code, 2016 was passed by the Upper House of the Parliament on 11 May 2016 (shortly after being passed by the Lower House on 5 May 2016).
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