India: Insolvency Code - Resolution Of NPAs Vis-À-Vis Defaulting Promoters

Last Updated: 4 December 2017
Article by Seema Jhingan, Neha Yadav and Monica Benjamin

This article has been co-authored by the team of LexCounsel in collaboration with Ms. Sangeeta Gulati, CFO, Kanodia Technoplast Ltd.

Massive expansion and investments, primarily funded through bank loans (despite a weak promoters' equity base), has given rise to companies which have overleveraged their balance sheets. Coupled with the economic slow-down, industry conditions and global financial crisis in the past, this led to these companies becoming financially stressed. While, certain companies were able to sustain themselves through swapping loans, many have already reached a point where they have financially broken down. Bhushan Steel, Lanco, Essar Steel, Kingfisher, Monnet Ispat and Alok Industries, are just a few reported examples of such broken down stories.

The rise in the number of non-performing assets ("NPAs") was therefore an inevitable consequence. The past decades have seen various legislations and schemes being introduced from time to time to deal with the issue of debt recovery from corporates such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI"); the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA"), the insolvency/winding up process provided under the Companies Act, 1956 and later Companies Act, 2013; and the Corporate Debt Restructuring Scheme and the Strategic Debt Restructuring Scheme introduced by RBI.

The Insolvency and Bankruptcy Code, 2016 ("Insolvency Code"), enacted to consolidate the laws in India relating to reorganization and insolvency resolution process for all forms of corporate entities including individuals, in a time bound manner, has now become the latest game changer. With the amendments introduced by Banking Regulation (Amendment) Ordinance, 2017, followed by the subsequent Central Government's order dated May 5, 2017, the Reserve Bank of Indian ("RBI") was authorized to issue directions to banks to initiate insolvency resolution process in respect of defaults, under the Insolvency Code, and to issue directions with respect to stressed assets.

This led to the formulation of an Internal Advisory Committee ("IAC") by RBI to advise it on cases that may be considered for reference for resolution under the Insolvency Code. Focusing on large stressed accounts at this stage, the IAC has recommended resolution of all accounts with fund and non-fund based outstanding amount greater than Rs. 5000 crores with 60% or more classified as NPAs by banks as of March 31, 2016, and noted that 12 accounts (aggregating about 25% of the current gross NPAs) would qualify for immediate reference under the Insolvency Code. For other NPAs, the IAC has recommended that banks should finalize a resolution plan within 6 months and if a viable resolution plan is not agreed upon within such period, banks should be required to file for insolvency proceedings under the Insolvency Code. Based on IAC's recommendations, RBI issued directions to certain banks for referring the 12 accounts to initiate the insolvency process under the Code and thereafter followed by a second list of 28 defaulters.

The legislative intent of the Insolvency Code was to streamline the insolvency resolution and liquidation process by providing a consolidated mechanism and platform to ensure smooth and easy debt recovery, which appeared to be a useful tool to address the issue of NPAs. However, an issue which recently came into the limelight was the ability of promoters to bid for their own defaulting companies. This invited criticism on the ground of possible misuse of the insolvency resolution process by defaulting promoters.

Under the Insolvency Code, the insolvency resolution professional is required to "invite prospective lenders, investors, and any other persons to put forward resolution plans". In view thereof, promoters were also able to bid for their debtor companies 'as any other person'. Take for instance the case where the National Company Law Tribunal admitted the insolvency application filed by the debtor company (Synergies-Dooray Automotive Limited) and vide its order dated August 2, 2017, approved the resolution plan of Synergies Castings Limited where the cost of the scheme (i.e. the proposed payments to creditors and insolvency process cost) was Rs. 54 crores while the company owed Rs. 972 crores to the lenders. This has been challenged by its financial creditor, Edelweiss Asset Reconstruction Co. Ltd., before the National Company Law Appellate Tribunal, for alleged fraud by the debtor company as per media reports and is currently pending final adjudication. Another example is that of Essar Steel Limited's insolvency resolution, where reportedly one of its own promoters has also submitted its expression of interest and intends to file its resolution plan.

With bidding for major companies like Essar Steel, Bhushan Steel, Bhushan Steel and Power, Alok Industries Ltd., Monnet Ispat and Energy Limited to apparently start soon as part of insolvency proceedings, the above instances led to big industry players (often those intending to bid for such stressed assets) questioning the credibility of the insolvency process if the existing promoters were able to re-acquire their own defaulting companies with a major haircut.

What followed was the passing of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 by the Government on November 23, 2017 ("Ordinance"). This Ordinance primarily disqualifies a person from submitting a resolution plan if such person, or any other person acting jointly with such person, or any person who is a promoter or in the management or control of such person:

  • is an undischarged insolvent;
  • has been identified as a wilful defaulter in accordance with RBI guidelines;
  • whose account is classified as an NPA and a period of 1 year or more has lapsed from the date of such classification and who has failed to make payment of all overdue amounts with interest thereon;
  • has been convicted for any offence punishable with imprisonment for 2 years or more;
  • has been disqualified to act as a director under the Companies Act, 2013;
  • has been prohibited by the Securities and Exchange Board of India from trading in securities or accessing the securities market;
  • has indulged in preferential transaction, undervalued transaction or fraudulent transaction in respect of which NCLT has passed an order under the Insolvency Code;
  • has executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor under the insolvency resolution process or liquidation under the Insolvency Code;
  • where any connected person in respect of such person meets any of the criteria specified in the above categories.1
  • has been subject to any disability corresponding to the aforesaid categories under any law in a jurisdiction outside India.

This Ordinance is being touted by the Government as means to curb instances of fraud being perpetuated through abuse of the process under the Insolvency Code. However, this move is also being criticized by many as reducing the competitiveness of the bids (since promoters who could have upped the bidding have been taken out of the equation, which would ultimately result in lower proceeds for the lenders). In fact, as per certain analysts, this may even lead to a consolidation of power in the hands of few players (especially in the steel sector where various steel companies are being put under the auction hammer soon).

So, has the Government, in a knee-jerk reaction to prevent further controversies, oversimplified this issue by introducing blanket disqualifications as opposed to following a process of case to case determination by NCLT on credibility of resolution plans/bids submitted by the promoters?

The actual ramifications of this Ordinance would become clearer once the bidding results are out and the insolvency resolution plans are implemented. However, in the meanwhile, it is pertinent to note that the prohibition under the Ordinance is not limited to promoters who are wilful defaulters, but also includes within its purview, persons who have executed enforceable guarantees in favour of creditors in respect of the debtor company under the insolvency resolution process, and all of their connected persons. Therefore, even promoters who are not classified as wilful defaulters may be disqualified from submitting a resolution, and lose out on the opportunity of restructuring their company which may have been just a victim of adverse industry conditions. Debt resolution of small and medium enterprises may also become more challenging as there may not be many bidders, besides promoters, who would be interested in such companies. Valuations may in fact be lower as other bidders would tend to place lower bids and purchase the assets at the cheapest cost possible (as opposed to promoters who may have driven up the bid numbers given their personal attachment to the companies).

In addition to the recent developments under the Insolvency Code, the Government has also recently, announcing its approval of a recapitalization plan for infusing capital into public sector banks to the extent of Rs. 2,11,000 crores over the next 2 years, inter alia with the objective of cleaning up of NPAs. However, while this recapitalization may be a welcome move for the banks, one cannot resort to recapitalization alone to resolve the issue of NPAs.

Are there therefore other options that can be examined to address the looming issue of NPAs being faced by the banking sector? According to Ms. Sangeeta Gulati, CFO, Kanodia Technoplast Ltd., "The reason why corporate debt restructuring and strategic debt restructuring failed to a certain extent earlier, was because companies wanted capital infusion to run while banks, who were already suffering, refused to further lend money to such companies which led to these companies being unable to come out of the self-sustaining / revival packages earlier provided by the Government. Some resolutions which can therefore be examined are:

  • Introduction/Reinforcement of self-sustaining/revival package by the Promoters: One such example can be schemes such as the "5/25 refinancing scheme", which provided for longer gestation periods for repayment loans with promoters being at the helm of the company's affairs. In these schemes, promoters can be given the chance to seek for maximum amortisation period say up to 20-25 years, depending upon the nature of industry and viable business model. Although such schemes do not require intervention of the NCLT, however, routing the scheme through the NCLT as part of the insolvency resolution mechanism, may render such schemes more viable and enforceable as both promoters and banks / lenders would be required to adhere to certain haircuts, funded interest, moratorium period, new funding, etc. which may be agreed to before the NCLT and any non-compliance would be strictly dealt with.

    Waiving off / changing management might also be helpful for certain companies but the same cannot be uniformly applied to all companies.
  • Promoters' personal guarantee: The above can be coupled with promoters' personal guarantee wherein all the assets of promoters, whether in India, abroad, in trust, with family including children, shall be applied if the promoters are still defaulters.
  • Involvement of Asset Reconstruction Companies: Extending/allowing asset reconstruction companies to control sick companies and banks to involve/sell distressed assets, can be another viable option".

By appropriately implementing the aforesaid measures, the Government may be able to improve the conditions of debt ridden companies and the overall economy by adequately dealing with the issue of NPAs. While, it remains to be seen whether the Government's attempt to implement these measures is going to be successful in adequately addressing the growing problem of NPAs, however, a positive and firm start has definitely been made in the right direction.


1. The term "connected person" means (i) any person who is promoter or in management or control of the resolution applicant, (ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during implementation of the resolution plan, or (iii) the holding, subsidiary or associate company or related party of a person referred in the first two categories.

Disclaimer: LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Seema Jhingan
Neha Yadav
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions