Often companies finds themselves in a situation where traditional means of revival are not sufficient. It is seen that the burden of increasing debts and pressure of maintaining capital to meet operations adversely affect the frail health of some companies. In addition to above, creditors armed with statutory powers to initiate winding-up proceedings, drive these companies in dark ages and which ultimately results in the civil death of some of these companies. However, there are few beneficial legislations, such as the Sick Industrial Companies Act, 1985 ("SICA") and The Bombay (Maharashtra) Relief Undertaking Act, 1958 ("BRU"), which seeks to rehabilitate such companies or give protection for a limited period for preventing unemployment. Obviously, the above mentioned legislations are for the benefit of companies and undertakings. The creditors, whether secured or unsecured, of such companies have good reasons to complain, as neither the creditor can initiate any legal proceedings against such a company for recovery of its rightful dues, nor can the creditor play an active role in rehabilitating and/or floating a scheme for the revival of such a company. That is so, as these legislations, statutorily protect the company or undertaking by granting immunity against legal proceedings or any coercive action not only against the company but also against any assets of the company.

Therefore, as an institutional mechanism for restructuring of corporate debt, Corporate Debt Restructuring ("CDR") was evolved and detailed guidelines were issued by the Reserve Bank of India ("RBI") for its implementation by banks. CDR primarily implies rescheduling and rehabilitating the loans taken by a corporate entity. CDR helps the lender reduce its impaired assets and reduce the resulting provisions while it gives the borrower the much needed respite from all the extant and imminent financial commitments in the nature of repayment of term loans with interest thereon. Rampant abuse by promoters of companies when CDR kicked in, led several banks and non-banking financial companies ("NBFCs") to criticise the erstwhile CDR mechanisms. These institutions called for an overhaul of the system and demanded higher equity infusion by promoters to about a quarter of the CDR amount and also demanded that the timeline to exit be pre-determined. The RBI itself has denigrated the erstwhile mechanism and subsequently suggested greater involvement of the promoters not only in terms of higher capital infusion but also in terms of increased board representation, and has also insisted on personal guarantee from the promoters as opposed to the earlier norm of providing corporate guarantee. It also aimed to ensure that higher interest rate was given to banks and financial institutions so that they did not suffer losses, but rather, were reimbursed well after a fruitful structuring. In an attempt to execute all these suggestions, the CDR mechanism has undergone several revisions by the RBI (the last guidelines having been issued by the RBI in 2012). CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The DCA and the ICA render legal efficacy to the mechanism. All participants in the CDR mechanism are required to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the CDR system through laid-down policies and guidelines. Asset classification is a principle part of CDR. Despite evolving CDR, it is found that the schemes are ineffective. It is still highly debated, whether all parties to the scheme are benefited and whether the company is rehabilitated in a true sense of the term. The recent Bombay High Court ruling in Tata Capital Financial Services Ltd v Unity Infraprojects Ltd & Ors1 sheds some light on this aspect.


Tata Capital Financial Services Limited (Petitioner), filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 seeking interim protection in terms of an order against Unity Infraprojects Limited (Respondent) for depositing the entire loan amount outstanding and also seeking enforcement of a negative covenant contained in the transaction documents, whereby the company was required to seek the Petitioner's consent before dealing with and/or creating any further charge on the current assets of the company, over which, Petitioner had first pari passu charge.

The Petitioner was an NBFC who had granted a credit facility by way of term loan of INR 50 crore to the Respondent. The directors of the Respondent were guarantors for the advance. A term loan agreement, a deed of hypothecation executed by the Respondent and personal guarantees executed by its directors constituted the transaction documents. The Respondent availed of the loan facility, but committed defaults in the repayment. The Petitioner recalled the entire finance, invoked the personal guarantees, and also invoked the arbitration agreement contained in the term loan agreement, alleging that the Respondent and its directors were in the process of formulating a CDR scheme and arranging assets with the intention to defeat the execution of any arbitral award that the Petitioner might obtain in the reference, also submitting that the transaction documents executed together with the term loan did not allow the Respondent and its directors to execute any contract pertaining to the current assets of the Respondent except with the Petitioner's consent due to the first pari passu charge held by the Petitioner. The Petitioner who has the first pari parsu charge over the current assets of the company, chose to not participate in the CDR scheme. The Petitioner, as part of the reliefs, sought an interim injunction restraining the Respondent from selling the movable and immovable assets or even dealing with them as part of the CDR scheme. The Petitioner also issued a statutory notice under the Companies Act, 1956 for winding up of the Respondent, and filed a petition for winding up on the ground that the company was deemed to be unable to pay its debts.


The Respondent and its directors, who were also guarantors for the loan availed from the Petitioner, and a consortium of secured lenders comprising 20 (twenty) banks and financial institutions led by the State Bank of India ("Interveners") opposed the petition of the Petitioner. The Interveners opposed on the ground that an enormous debt of over INR 3,000 crore (Indian Rupees Three thousand crore) is owed by the Respondents to the secured lenders. This debt of the company is now attempted to be restructured in the CDR package which entails an infusion of INR 341 crore (Indian Rupees Three hundred and forty one crore) into the working capital of the company so as to enable the company to come around. The CDR package was also stated to be beneficial to the creditors, as pursuant to the infusion, the company was likely to restart its operations and eventually would be in a position to pay off its creditors. As a prerequisite for the CDR package, it was recommended that all current assets of the company held as security by the CDR lenders together with the Petitioner should be combined and a single deed of hypothecation be executed in favour of the CDR lenders. Under such scheme, the Petitioner, as a first pari passu charge holder was allowed to keep holding its security in the current assets of the company.

Arbitration Petition

The Bombay High Court held that since the first pari passu charge is recognised by the CDR lenders and as even after implementation of the CDR scheme, the Petitioner would continue to remain the first charge holder, there was no reason for the Petitioner to argue that it would be aggrieved in any manner through the CDR package. It was held that, as and when the security was realised, the Petitioner being the first pari passu charge holder, would be eligible to participate therein. Further, the properties of the Respondent that were part of the CDR scheme were closely monitored by the RBI and could not be disposed by the Respondent unilaterally. The Petitioner's dues are 0.64% of the dues owed by the Respondents to the secured lenders, and that "no receiver or even injunction, which may prejudicially affect the rights of the consortium of the secured creditors and the CDR Scheme can be granted in favour of the Petitioner". The Petitioner was thus denied injunction on the negative covenant contained in the transaction documents. In so far as relief in terms of directing the company to furnish security, the Hon'ble Court held that since all the properties were subject matter of security for the dues of the creditors, there is no likelihood of the company disposing off the properties to defeat the claim of the Petitioner. However, to protect the interest of the Petitioner, State Bank of India, the Monitoring Institution under the CDR scheme was directed to allow the Petitioner to participate in the CDR scheme. In the event the Petitioner does not participate in the CDR scheme, State Bank of India was directed to intimate the Petitioner, from time to time, on the progress of implementation of the scheme. Further no assets of the company could be disposed in the CDR scheme without prior intimation to the Petitioner.

Winding-up Petition

While the court rendered a finding that the company does not have any defence on the merits of the winding up petition, it refused to entertain or even admit the winding up petition on the ground that it is not in the interest of the company, its workmen and its creditors. This observation was made after considering a series of judicial precedents, including the issue, whether secured creditors could be heard to oppose the winding up petition, prior to its admission.

The Respondent and the Interveners relied upon the judgement of Hon'ble Supreme Court in Madhusudhan Gordhandas v Madhu Woollen Industries Ltd2 to contend that the court must give regard to the wishes of the majority in value of the creditors, and if for some good reason, they object to the order of winding up, the court may in its discretion refuse the order. The Hon'ble Court also considered that, whether creditors i.e., Interveners are entitled to be heard at the admission stage. In this regard, the Hon'ble Court relied upon another ruling of the learned single judge of the Bombay High Court in Bharat Petroleum Corporation Ltd. v National Organic Industries Ltd. and State Bank of India. In Bharat Petroleum Corporation (Supra), the Hon'ble Court while interpreting the judgement of Bipla Chemical Industries v Shree Keshariya Investment Ltd.3 passed by Hon'ble Delhi High Court held, that there is no bar on the company court, even at the admission stage, from considering the wishes of the creditors. The Hon'ble Court thus held, that there is no bar in permitting Interveners even at the admission stage to raise objections to the winding up petition.

In so far the objection of the Interveners with respect to winding up petition, on the ground of CDR scheme being implemented, the Hon'ble Court considered 4 (four) judgements by Bombay High Court and the High Court of Delhi viz. (1) Sublime Agro Ltd v Indnage Vintners Limited4 (2) BNY Corporate Trustee Services Ltd. v Wockhardt Limited5 (3) Citibank N. A. v Moser Baer India Ltd.6 (4) A2Z Maintenance & Engineering Services Ltd.7

All these judgements essentially followed a principle that pendency of CDR schemes cannot bar the winding up petition by a creditor. In BNY Corporate (supra) the court held that the petitioner (creditor) cannot be forced to join a CDR scheme. The law does not postulate any such compulsion on the creditor. Sections 433 (e) and 434 of the Companies Act, 1956 do not confer a right on the debtor but only give him an opportunity to discharge the debt. A CDR scheme essentially seeks creditors' approval to agree to postponement of payment to a future date. Once the creditor does not agree, he is not barred from presenting a winding up petition on the ground that the CDR scheme is pending implementation. In Sublime Agro (supra), the court categorically rendered a finding that all the unsecured creditors who were present before the court have not agreed to the CDR scheme. In-fact it was stated they have no faith in the CDR Cell and hence the Court should prefer the wishes of the unsecured creditors. Borrowing the language used in the Palmer's Company Law, it was stated that "the refusal of the order sought by the unsecured creditors will rob them of what is virtually their only remedy". "the court cannot push back claims of the unsecured creditors and allow the company to keep on creating further liabilities so that ultimately what is recovered from the company upon being wound up is taken away by the secured creditors and the creditors whose claims are to be given priority in law leaving the unsecured creditors high and dry"

The above mentioned principle has been followed in Citibank N. A. (supra) and in A2Z Maintenance (supra).

In the current case, the Bombay High Court after hearing the contentions of the parties held that the CDR Cell established by the RBI was an expert body which had approved the CDR package only after assessing the merits of the proposal and with directions to provide regular reports to the CDR Cell on the progress of the scheme. It was therefore, closely monitored and could not be said to have granted unfettered powers to the secured lenders to the detriment of the Petitioner. Also, the financial structuring in the current case involved a large sum and entailed a substantial sacrifice by the secured creditors who had committed to the infusion of further funds to revive the financial status of the company and therefore "it will not be advisable to rock the boat at such critical and sensitive juncture". It held that the admission of the winding up petition may seriously affect the market position of the company in the current case. The Petitioner was at liberty to file winding up proceedings as a last resort if the CDR scheme failed after expiry of the prescribed timelines. Therefore the court dismissed the winding up petition with liberty to the Petitioner to file a fresh petition on the same facts if the CDR scheme failed or it cannot be implemented.

The Way Forward

An unsecured creditor's only remedy against the company is winding-up.8 This has been widely accepted and courts in general have entertained winding-up petitions against companies, who on demand have failed to pay their creditors. Thus the company is deemed to be unable to pay its debts. This remedy of un-secured creditors gains more importance in countries like India, where un-secured creditors are forced to initiate lengthy legal proceedings and with burdened dockets of courts, effective orders in favour of un-secured creditors often gets delayed. This is however not to say that, winding-up petition by itself, is a guaranteed or even a swifter remedy for recovering the dues. Nevertheless entertainment of winding-up petitions and consequences thereof are itself so severe that companies more often than not, settle the debt out of court. This practise may not be supported by judicial precedents but are certainly a reality, which seems to have been accepted even by the courts. But does the decision in Tata Capital Financial Services (Supra), provide a new ground to the companies who are stuck in the web of debts, to object to winding up order? The hope is that it does not. 

As mentioned above, there already exists protective legislations in form of SICA and BRU. These legislations are meant to protect the interest of the company, its shareholders and employees. SICA intends to rehabilitate companies which have become sick due to factors beyond their control. Despite this, there have been several instances, where promoters of companies have misused the protection available under the law. The judicial precedents on this are rare but are strongly worded. In B.I.L. Industries Limited v AAIFR & Ors.9 the Hon'ble Division Bench of the Delhi High Court has observed "that the principle object of SICA is to rehabilitate genuinely sick companies where due to factors beyond their control, the Companies have become sick, and that this Act is really not meant to help these companies where the company has become sick due to dishonesty, siphoning off of funds and misappropriation of funds by its promoters and management".

In The Bank of New York Mellon, London Branch v Zenith Infotec Limited10, the learned single judge of the Bombay High Court after following the judgement in BIL Industries (supra) observed "I am also conscious of the fact that such dishonest promoters of the company, more often than not, take advantage of a beneficent legislation like SICA and by taking repeated adjournments before BIFR/AAIFR after registration of their reference, deprive the small and bonafide creditors of the Company for more than a decade, seeking protection under the provisions of section 22 of the SICA"

There have also been instances that the companies have registered their reference under SICA post the orders of winding up. In such cases the company would first test its luck before the company court and seek to defend the claim of the creditors and then, when the orders of the winding up are passed, it seeks shelter under SICA. However, such an action under the law is permissible. The Hon'ble Supreme Court in Rishabh Agro Industries Pvt Ltd. v P.N.B. Capital Services Limited11, while interpreting the provisions of SICA and Companies Act, 1956 held that "Learned Counsel appearing for the respondent has submitted that such an interpretation would defeat the ends of justice and make the petitions under the Companies Act, infructuous inasmuch as any unscrupulous litigant, after suffering an order of winding up, may approach the Board merely by filing a petition and consequently get the proceedings in the Company Case stayed. Such a grievance may be justified and the submission having substance but in view of the language of Sections 15 and 16 of the (SICA) Act particularly Explanation to Section 16 inserted by Act No. 12 of 1994, this Court has no option but to adhere to its earlier decision taken in Real Value Appliances (Supra). While interpreting, this Court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the Legislature to amend modify or repeal it by having recourse to appropriate procedure, if deemed necessary".

Somewhat similar protection is provided under Section 4(1)(a)(iv) of BRU, where post notification issued under Section 3(1) of BRU, declaring that an undertaking has been taken over or proposed to be taken over by State Government to serve as a measure of preventing unemployment, any right, privilege, obligation and liability shall stand suspended for a period of 12 (twelve) months. The irony of protection under BRU is that, post the order of winding up, it seeks to defeat the very same objective of unemployment, for which it has been incorporated. Post the order of winding up, Section 529A of the Companies Act, 1956 seeks to pay workmen, in priority of all other claims against the company, which would be suspended, owing to the protection under BRU. 

The words "unsecured creditors' only right" are vital and such rights ought not to be fettered with. Most of these unsecured creditors, as it is found, are laymen, small time traders and earn their livelihood by catering to corporates. They do not have the luxuries of borrowing huge amounts against their stocks or infinite credit limits with banks. These unsecured creditors usually cannot afford to postpone their legitimate receivables from companies. Nor can these unsecured creditors be asked or expected to participate in schemes where the secured creditors frame schemes to suit their personal goals.  An unsecured creditor, would not be in a position to postpone its receivables or defer it, till the company is commercially solvent.

Would it therefore be correct to view implementation of a CDR scheme as a valid and reasonable defence to a winding up petition? It is true that CDR, neither in terms nor impliedly, seeks to confer any protection to any company against any claim or liability, including winding up petitions. But it will also not be correct to out rightly disregard a CDR scheme brought before the court in defence to any legal proceedings. The benefits of CDR schemes for companies and their creditors are worth considering. CDR fundamentally ensures that sustainable companies that are facing a transitory financial crisis which can often be accounted to external factors are given a fair chance to revive and rehabilitate their businesses through this mechanism. This also aids lenders to reduce the value of non-performing assets on their balance sheets. In January-November 2014, the CDR Cell approved 68 cases of restructuring involving INR 82,209 crore of debt, compared with 81 cases involving INR 77,000 crore in January-December 2013.12 The 'Framework for Revitalising Distressed Assets in the Economy' as implemented by the RBI from 1 April 2014 lays down guidelines for early recognition of financial distress, takes ready steps for resolution and, therefore, ensures fair recovery for lenders. It has, to a great extent, helped lenders identify potential non-performing assets by introducing a provision where lenders need to carve out a distinct category of assets named special mention accounts which depict initial signs of stress. It remains to be seen, whether in light of these new Rules, CDR still remains to be an effective mechanism, which is not a precautionary measure but rather, kicks in much later as an attempt at damage control. While the RBI has come a long way to check misuse of CDR mechanisms by companies and promoters, and also at effective repayment of loans which again is reinforced by our Courts which ensure that all stakeholders are adequately addressed; a lot still remains to be achieved especially in treatment of foreign lenders in a CDR package, and in formulating sector-specific guidelines in light of recent boom in certain sectors of the Indian economy as compared to others.

While the decision in Tata Capital Services (supra) appears to be entirely on the facts of particular case and may not be viewed as judicial precedent. However, it is certainly a departure from earlier rulings of courts vis-à-vis CDR schemes as winding up petitions. A robust scheme, protecting the interest of the employees, creditors (secured and unsecured) and shareholders may be beneficial but may not sail through as a defence against liabilities and consequences thereof.


1. High Court, Bombay, Arbitration Petition 800 of 2014 dated 6 July 2015.

2. (1971) 3 SCC 632

3. (1977) 47 Com Cases 211

4. Company Petition No. 960 of 2009, Bombay High Court, order dated 19 March 2011, Coram: J. Kathawala.

5. Company Petition No. 971 of 2009, Bombay High Court, order dated 11 March 2011. Coram: J. Dharmadhikari.

6. Company Petition No. 558 of 2012, Delhi High Court, order dated 17 July 2013. Coram: J. Easwar

7. CS(OS) 217 of 2014, Delhi High Court, order dated 30 July 2014. Coram: J. Manmohan Singh.

8. Palmars Company Law Volume I paragraph 85-06-85-07

9. (2005) 123 Comp Case 357

10. (2014) 123 SCL 30 Bom

11. (2005) 5 SCC 515

12. (Last accessed on 18 August 15).

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at