Restructuring & Insolvency Comparative Guide

Restructuring & Insolvency Comparative Guide for the jurisdiction of India, check out our comparative guides section to compare across multiple countries
India Insolvency/Bankruptcy/Re-Structuring

1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

Insolvency and restructuring matters are primarily regulated by the Insolvency and Bankruptcy Code, 2016, which came into force on 1 December 2016. The Insolvency and Bankruptcy Code governs insolvency and liquidation proceedings for all limited liability entities, except financial services entities (eg, banks, insurers and pension funds). The code also governs insolvency and bankruptcy proceedings for individuals and partnerships; however, these provisions have not yet been notified. The government recently notified certain provisions of the code relating to personal guarantors of corporate debtors, which came into effect on 1 December 2019.

The Companies Act, 2013 deals with voluntary schemes of arrangement and compromise between a company and its creditors (in respect of company debts).

In addition, India's central banking regulator, the Reserve Bank of India (RBI), issues circulars and notifications to banks and non-banking finance companies from time to time under the Banking (Regulation Act), 1948, setting out directions for the resolution or restructuring of distressed loans outside the framework of the Insolvency and Bankruptcy Code.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

No such international or cross-border instruments currently have effect in India. The government has set up an expert committee to make recommendations on the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997. The committee's recommendations are currently under active consideration by the government.

Further, the Insolvency and Bankruptcy Code provides that the government may enter into bilateral agreements with foreign governments in order to enforce the provisions of the code. Pursuant to the implementation of such bilateral agreements, bankruptcy tribunals in India can issue letters of request to a foreign court if any evidence or action is required in relation to the assets or property of a debtor situated in that country. However, no such bilateral agreements have been entered into thus far.

1.3 Do any special regimes apply in specific sectors?

The Insolvency and Bankruptcy Code covers all corporate entities except financial services entities (eg, banks, insurers and pension funds). Otherwise, there are no special regimes applicable in specific sectors.

As yet, there is also no special regime for financial services entities. The Insolvency and Bankruptcy Code allows the government, in consultation with the financial services regulators, to notify financial service providers (FSPs) or categories of FSPs for the purpose of insolvency and liquidation proceedings in such manner as may be prescribed.

The government recently notified certain rules to establish a generic framework for insolvency and liquidation proceedings for systemically important FSPs (other than banks). The rules shall apply to such FSPs/categories of FSPs as will be notified by the government, and provide that the Insolvency and Bankruptcy Code shall also apply to insolvency and liquidation proceedings involving such FSPs, subject to certain modifications. This special framework will serve as an interim mechanism pending the introduction of dedicated insolvency legislation for banks and other systemically important FSPs.

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

Prior to the enactment of the Insolvency and Bankruptcy Code, the regime was perceived to be debtor friendly. However, the code has changed the applicable regime from a debtor in control regime to a creditor in possession regime. Once a debtor is admitted to insolvency, its board of directors is suspended and the management of the debtor is vested in an independent insolvency professional appointed by the bankruptcy tribunal. The insolvency professional can be replaced by the creditors and will manage the proceedings under the overall supervision of the creditors. As a result of this change, the insolvency and restructuring regime is perceived to be more creditor friendly.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

The enactment of the Insolvency and Bankruptcy Code introduced a new restructuring and insolvency regime for corporate entities. Although the instrument is relatively new, it has already undergone multiple legislative changes. The code has also created a new specialist ecosystem relating to the restructuring and insolvency of corporate entities, with the Insolvency and Bankruptcy Board of India as the regulator and insolvency professionals as the administrators of the process. As the code is still in its infancy, it is continuously evolving - as is the infrastructure surrounding it, including specialist advisers.

The specialist tribunals that handle insolvency and liquidation proceedings for corporate entities and voluntary schemes of arrangement are the National Company Law Tribunal (NCLT) (tribunal of first instance) and the National Company Law Appellate Tribunal (appellate tribunal). The NCLT has benches across the country. The specialist tribunals that will handle insolvency and bankruptcy proceedings for individuals and partnerships (once these provisions in the Insolvency and Bankruptcy Code have been notified) are the Debt Recovery Tribunal (tribunal of first instance) and the Debt Recovery Appellate Tribunal (appellate tribunal).

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

Various forms of security interest can be taken over immovable and movable property in India. With respect to immovable property, mortgages are the principal form of security interest and can take the following forms:

  • Simple mortgage: Possession of property is not transferred to the mortgagee and in the event of failure to pay, the mortgaged property can be sold and the proceeds of sale applied to satisfy the mortgage.
  • Mortgage by conditional sale: The mortgagor ostensibly sells the mortgaged property on condition that, on default of payment of the mortgage, the sale will become absolute.
  • Usufructuary mortgage: The mortgagor delivers possession of the mortgaged property to the mortgagee until repayment of the loan.
  • English mortgage: This differs from a usufructuary mortgage, in that the property is transferred to the mortgagee until repayment of the mortgage.
  • Mortgage by deposit of title deeds (or equitable mortgage): The mortgagor delivers the title deeds of the property to the mortgagee in order to create security.
  • Anomalous mortgage: This mortgage does not fall within any of the above categories, but is rather a mix of any two or more of the above types.

With respect to movable property, other than a mortgage, the following types of security can be created:

  • Pledge: The bailment of goods as security for payment of a debt or performance of a promise.
  • Hypothecation: A charge in or on any movable property, existing or future, where both title and possession of the property remain with the debtor.
  • Charge: A right created by the debtor over its movable property in favour of the creditor for extending financial assistance.
  • Lien: A security whereby actual or constructive possession of the property is usually retained by the creditor until the debt is paid.

With respect to intangibles and contractual rights, assignment is the principal form of security.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

The enforcement of a security interest depends on the nature of the security, the nature of the creditor and the terms of the security.

Certain types of security can be enforced without court intervention. For instance, a pledge can be invoked and power of sale can be exercised by the pledgee without court intervention. Similarly, in the case of an English mortgage over immovables, the mortgagee can sell the mortgaged property without court intervention, subject to certain notification requirements. However, for certain other forms of security – for instance, in the case of an equitable mortgage – the mortgagor must apply to the court for a decree to sell the mortgaged property for recovery of the debt.

In the case of security over movables, the rights and remedies of the creditor are regulated by the terms of the deed of hypothecation, which can be enforced by either compelling delivery of the moveable property or selling or obtaining a decree for sale or the appointment of a receiver to take possession of and sell the assets.

The security can also be enforced directly by the lender (by banks in India and certain recognised financial institutions) without court intervention under the provisions of, and following the procedure sect out in, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.

In case of sale with court intervention, delays in the court process and the costs and duration of litigation serve as impediments to the enforcement of security. Even in case of sale without court intervention, the debtor may try to create an impediment by filing cases with courts or tribunals on one or other ground, which could result in a delay in enforcement.

3 Restructuring

3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

Yes. Informal workouts can be negotiated between the lender and the debtor. The Reserve Bank of India (RBI) issues circulars and directions to banks and non-banking finance companies in respect of informal workout arrangements.

The latest circular issued by the RBI, dated 7 June 2019, concerns the prudential framework for the resolution of stressed assets. Under this circular, banks and certain types of non-banking finance companies have been given broad powers to restructure accounts and formulate a resolution plan for the debtor, which can include provisions for the sale of exposures to other entities/investors, change in ownership, change in existing terms of the debt and so on. The framework requires the lenders to identify incipient stress in loan accounts and take prompt corrective action in case of default. Pursuant to a review of a 30-day default, lenders are empowered to decide on a resolution strategy for such defaulting accounts. Lenders are required to enter into an inter-creditor agreement to set out the ground rules for finalisation and implementation of a resolution plan. Any decision agreed to by lenders representing 75% by value of total outstanding credit facilities and 60% by number is binding on all lenders.

The circular also provides for the implementation of the resolution strategy within 180 days of the end of the review period. If the resolution plan is not implemented within 180 days of the end of the review period or within 365 days of its commencement, additional provisions must be made by all lenders.

3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

Formal restructuring proceedings in India can take place under the Insolvency and Bankruptcy Code or under the Companies Act.

Insolvency and Bankruptcy Code proceedings: The Insolvency and Bankruptcy Code is the key formal restructuring framework in India. It provides for a two-stage process to address insolvency. Once a corporate debtor has been admitted to insolvency by the National Company Law Tribunal (NCLT), a corporate insolvency resolution process starts. The initiation of this process leads to the appointment of an interim resolution professional (akin to an administrator) to oversee the resolution process. The powers of the debtor's board of directors are suspended and are vested in the interim resolution professional. The interim resolution professional then constitutes the creditors' committee, comprised of the debtor's creditors. The creditors' committee can then continue with the interim resolution professional or appoint another insolvency professional as resolution professional. The resolution professional invites eligible persons to submit a ‘resolution plan' (ie, a plan for resolution or restructuring of the debtor). All resolution plans are evaluated by the creditors' committee, which may approve them by 66% of the voting share. If a resolution plan is approved by the creditors' committee, it will be presented to the NCLT for final approval. The entire corporate insolvency resolution process should be completed within 330 days (including any time taken for litigation). If no resolution is approved during this period, the debtor enters into mandatory liquidation.

The benefits of restructuring proceedings under the Insolvency and Bankruptcy Code include the following:

  • A moratorium is available during the corporate insolvency resolution process.
  • The debtor's consent is not required for the restructuring. It is the creditors' committee that is vested with the power to approve the restructuring or resolution plan.
  • Any eligible person who is not disqualified under the Insolvency and Bankruptcy Code can submit a resolution plan, which can also provide for a takeover of the debtor through the resolution process. Hence, this is a competitive bidding process aimed at maximising the value of the debtor's assets.
  • Once the resolution plan has been approved by the NCLT, it is binding on all creditors and stakeholders of the debtor (not just the creditors that approved the plan). Hence, the resolution plan can achieve the extinguishment of past liabilities and enable the debtor to start with a clean slate.
  • The proceedings are time bound.

The drawbacks include the following:

  • the practical challenges of achieving a resolution within a relatively short timeframe;
  • delays at the NCLT;
  • regulatory uncertainty around the process and effect of the resolution plan (primarily due to the fact that the law is new and there is a lack of judicial precedent); and
  • strict criteria that disqualify certain parties from submitting a resolution plan.

Companies Act proceedings: Under the Companies Act, a reorganisation can be undertaken by a debtor by formulating a scheme of arrangement or compromise. The scheme can be between the debtor and its creditors or any class thereof, or between the debtor and its shareholders or any class thereof. A scheme may involve a compromise or arrangement with both creditors and shareholders. The scheme also requires approval from the NCLT, which is obtained by filing an application in a prescribed format, along with the scheme and prescribed documents. Further, the NCLT may also direct that meetings of creditors or classes of creditors, or shareholders or classes of shareholders, be convened. Government authorities and regulators can also make representations in respect of the scheme to the NCLT. If, in the meetings convened by the NCLT, a majority of persons representing three-quarters of the creditors or shareholders approve the scheme, a petition will be filed with the NCLT and may then be sanctioned by way of an order.

The benefits of restructuring proceedings under the Companies Act from the debtor's perspective include the following:

  • This is a voluntary mechanism which allows the debtor itself to propose the scheme.
  • There are no prescribed disqualifications and no competitive bidding process (which may result in a takeover of the debtor by a third party).
  • The law in respect of schemes is well settled and there is thus limited regulatory uncertainty.
  • Once a scheme has been sanctioned, it is binding on all creditors (whose debts are being restructured).

The drawbacks include the following:

  • the non-availability of a moratorium;
  • the relatively high approval threshold;
  • the lack of a time-bound process; and
  • the inability to achieve a cross-class cramdown.

3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, the basic criterion for initiating a corporate insolvency resolution process is ‘debt' and ‘default' exceeding INR 100,000. The process can be initiated by any of the following:

  • Financial creditors: Financial creditors are parties that have extended financing to the debtor. In case of a default in payment exceeding INR 100,000, a financial creditor can apply to the jurisdictional bench of the NCLT (in a prescribed form) to initiate a corporate insolvency resolution process. In order to succeed, the application should be complete and the NCLT must be satisfied of the existence of a financial debt and default in payment of the same.
  • Operational creditors: Operational creditors are parties to which the debtor owes operational debt (including claims for goods and services, employment debts and debts due to the government). On the occurrence of a default in payment exceeding INR 100,000, an operational creditor must issue a prescribed notice to the debtor. If the debtor fails to pay after receiving the notice or does not issue a ‘notice of dispute', the operational creditor can apply to the jurisdictional bench of the NCLT (in a prescribed form) to initiate a corporate insolvency resolution process. In order to succeed, the application should be complete and the NCLT must be satisfied of the existence of an operational debt, default in payment of the same and the non-existence of any ‘dispute' in respect of payment.
  • Corporate applicants: These include the debtor itself, its shareholders and certain officers that satisfy specific criteria. The applicant can apply to the jurisdictional bench of the NCLT (in a prescribed form) to initiate a corporate insolvency resolution process. The initiation requires shareholder approval (75% by way of shareholders' resolution). In order to succeed, the application should be complete and the NCLT must be satisfied of the existence of an operational or financial debt and default in payment of the same (exceeding INR 100,000).

Companies Act proceedings: Under the Companies Act, any creditor or shareholder, or the debtor itself, can apply to the NCLT proposing a scheme of arrangement or compromise between the debtor and its creditors. An application is made to the NCLT in a prescribed form (along with prescribed documents), requesting the NCLT to convene meetings of creditors or shareholders. The NCLT will then order a meeting of creditors and appoint a chairperson for the meeting. Notice of the meeting is sent to the creditors and government authorities. If, at the meeting, a majority of persons representing three-quarters in value of the creditors or shareholders, as the case may be, agree to the scheme, another petition is filed with the NCLT, which can then sanction the scheme after hearing the parties.

3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, once the NCLT has admitted an application for the initiation of a corporate insolvency resolution process:

  • a moratorium is declared;
  • an interim resolution professional is appointed to take charge of the affairs of the debtor and take custody and control of its assets;
  • the powers of the debtor's board of directors are suspended and vested in the interim resolution professional, who then runs the debtor as a going concern; and
  • the interim resolution professional makes a public announcement inviting claims from creditors and constitutes the creditors' committee.

Companies Act proceedings: Under the Companies Act, there are no effects prescribed in respect of the commencement of scheme proceedings.

3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, once a debtor has entered into a corporate insolvency resolution process, a moratorium comes into effect prohibiting all of the following:

  • the institution of suits or the continuation of pending suits or proceedings against the debtor;
  • the transfer, encumbrance, alienation or disposal of its assets (including legal rights or beneficial interests therein);
  • any action to foreclose, recover or enforce any security interest created by the debtor in respect of its property, including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act; and
  • recovery by the owner or lessor of any property occupied by or in the possession of the debtor.

The moratorium is not applicable to a surety in a contract of guarantee to the debtor. The moratorium takes effect as soon as the debtor enters into a corporate insolvency resolution process and remains effective until the process is completely finished.

Companies Act proceedings: No moratorium applies in case of a scheme under the Companies Act.

3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?

The broad restructuring process under the Insolvency and Bankruptcy Code is as follows:

  • The debtor enters into a corporate insolvency resolution process by order of the NCLT and an interim resolution professional is appointed.
  • The interim resolution professional makes a public announcement within three days of his or her appointment, inviting claims from creditors of the debtor.
  • After receiving, collating and verifying the claims, the interim resolution professional constitutes a creditors' committee within 23 days of commencement of the corporate insolvency resolution process.
  • At its first meeting, the creditors' committee may decide to continue with the interim resolution professional or replace him or her with a new resolution professional.
  • The creditors' committee sets the eligibility criteria for applicants proposing to submit a resolution plan for the debtor.
  • The resolution professional, on behalf of the creditors' committee, invites the submission of resolution plans by issuing an invitation of expression of interest within 75 days.
  • Eligible persons who are otherwise not disqualified from submitting a plan under the Insolvency and Bankruptcy Code can submit an expression of interest showing their preliminary interest in the resolution of the debtor.
  • The resolution professional conducts due diligence on the applicants to ascertain their eligibility and issues both provisional and final lists of prospective resolution applicants.
  • Thereafter, the resolution professional will issue an information memorandum and other relevant documents/information within 105 days, to enable the applicants to conduct due diligence and submit their resolution plans.
  • Once the plans have been submitted, the resolution professional will check them for compliance with the Insolvency and Bankruptcy Code and submit all compliant plans to the creditors' committee for its consideration.
  • The creditors' committee may negotiate with the resolution applicants and, after considering the feasibility and viability of the plans, approve the resolution plan that they deem is best suited for the debtor (with 66% of the voting share).
  • The resolution professional will submit the plan approved by the creditors' committee to the NCLT.
  • The NCLT will review and approve the plan, if it finds that it is compliant with the Insolvency and Bankruptcy Code.

The entire process must be completed within 180 days, which may be extended to 270 days and further to 330 days (including all extensions and the time taken in legal proceedings). The Supreme Court has recently held that this 330-day timeframe can also be extended by the NCLT in exceptional cases.

The broad restructuring process under the Companies Act is as follows:

  • A scheme of compromise or arrangement is proposed between the debtor and its creditors and an application is made to the NCLT to convene a creditors' meeting.
  • The NCLT orders a meeting of the creditors or classes of creditors and appoints a chairperson in respect of the same.
  • Notice of the meetings is sent to all creditors or creditors in the relevant classes. Notice is also sent to the central government, income tax and other statutory authorities, which may be affected by the scheme.
  • During the creditors' meeting, a majority of persons representing three-quarters in value of creditors or the classes of creditors may approve the scheme.
  • A petition is then filed along with the approved scheme for NCLT approval.
  • The NCLT will approve the scheme after considering any objections.

3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.

(a) Debtor

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, no role, rights or responsibilities are prescribed. Once the debtor has entered into insolvency, its board of directors is suspended and the management is vested in the (interim) resolution professional. Hence, the debtor for all purposes is represented by the (interim) resolution professional during the corporate insolvency resolution process.

Companies Act proceedings: In respect of a scheme under the Companies Act, it is the debtor that proposes the scheme and files applications with the NCLT for approval of the scheme, along with the necessary reports, statements and so on. The entire process for obtaining the approval of the scheme (including sending notices to creditors) is run by the debtor.

(b) Directors of the debtor

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, once the debtor has been admitted to a corporate insolvency resolution process, the powers of the board of directors are suspended and are exercised by the (interim) resolution professional. The directors must extend all assistance and cooperation to the (interim) resolution professional, to enable him or her to manage the affairs of the debtor. The directors have the right to attend the meeting of the creditors' committee (without any voting rights), and can provide their comments and suggestions on the resolution plans submitted.

Companies Act proceedings: In respect of a scheme under the Companies Act, no specific roles, rights and responsibilities are prescribed, except that the scheme must be sanctioned by the board of directors of the debtor.

(c) Shareholders of the debtor

No role, rights or responsibilities are prescribed.

(d) Secured creditors

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, no separate role, rights or responsibilities are prescribed for secured creditors. During the corporate insolvency resolution process, a moratorium applies, so no creditor can take any action or enforce its security. Instead, the creditors have a right to submit their claims to the (interim) resolution professional, which will then be dealt with in the resolution plan. The creditors' committee comprises all financial creditors (including secured and unsecured financial creditors). Each financial creditor (secured and unsecured, other than a related party to the creditor) has the right to vote in the creditors' committee accordingly to its voting share. All creditors are expected to provide cooperation and assistance to the (interim) resolution professional, to ensure the smooth conduct of the process. If any resolution plans are received, the creditors' committee is expected either to approve or reject it after considering its feasibility and viability.

Companies Act proceedings: In respect of a scheme under the Companies Act, the NCLT will typically constitute classes of creditors and call for meetings of secured and unsecured creditors. The scheme should be approved by a majority of creditors in a class holding three-quarters in value. However, a person holding not less than 10% of the shares or with outstanding debt amounting to not less than 5% of the total outstanding debt can object to the scheme.

(e) Unsecured creditors

The role, rights and responsibilities are the same as those for secured creditors.

(f) Employees

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, employees have a right to submit their claims to the (interim) resolution professional, which will then be dealt with in the resolution plan. Employees must report to the (interim) resolution professional and provide all assistance and cooperation necessary to enable him or her to manage the affairs of the debtor.

Companies Act proceedings: In respect of a scheme under the Companies Act, no separate role or responsibilities of employees are prescribed.

(g) Pension creditors

No separate role, rights or responsibilities are prescribed.

(h) Insolvency office holder

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, the interim resolution professional and the resolution professional are the NCLT-appointed insolvency professionals, and have the following (broad) roles, rights and responsibilities:

  • invite, collate and verify claims from creditors;
  • manage the affairs of the debtor and run the company as a going concern;
  • take control and custody of the debtor's assets;
  • constitute the creditors' committee and conduct its meetings;
  • prepare the information memorandum and invite prospective resolution applicants to submit resolution plans for the debtor;
  • review the resolution plans for compliance with the Insolvency and Bankruptcy Code and present all compliant resolution plans to the creditors' committee;
  • file applications for the avoidance of transactions; and
  • submit the resolution plan approved by the creditors' committee to the NCLT.

Companies Act proceedings: There is no insolvency office holder in respect of a scheme under the Companies Act.

(i) Court

Insolvency and Bankruptcy Code proceedings: The NCLT is the adjudicating authority under the Insolvency and Bankruptcy Code. It:

  • admits the petition for commencement of the corporate insolvency resolution process;
  • appoints the (interim) resolution professional;
  • passes orders on various applications that may be filed by the (interim) resolution professional under the Insolvency and Bankruptcy Code, such as applications for seeking cooperation and avoidance applications; and
  • approves or rejects the resolution plan approved by the creditors' committee (though it can reject the resolution plan only if it is not in compliance with the Insolvency and Bankruptcy Code).

The NCLT also has the jurisdiction to entertain and dispose of:

  • any application or proceedings by or against the debtor;
  • any claim made by or against the debtor, including claims by or against any of its subsidiaries in India; and
  • any question of priorities or any question of law or facts arising from or in relation to the corporate insolvency resolution process.

Companies Act proceedings: The NCLT is also the sanctioning authority for approval of the scheme under the Companies Act. On an application filed for compromise by way of the scheme, the NCLT calls for meetings of the creditors or classes of creditors and appoints a chairperson for the meetings. It also hears the petition for approval of the scheme and objections to the scheme, and has the power to order modification of the scheme.

The National Company Law Appellate Tribunal (NCLAT) is the appellate authority that hears appeals against decisions of the NCLT. An appeal against a decision of the NCLAT can be made to the Supreme Court of India.

3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?

Insolvency and Bankruptcy Code proceedings: For the purposes of the corporate insolvency resolution process, the Insolvency and Bankruptcy Code classifies the creditors into financial and operational creditors. A creditors' committee consists of all financial creditors (secured and unsecured). The creditors' committee approves the resolution plan with 66% of the voting share. The voting share of each financial creditor is assigned on the basis of the amount of financial debt owed to that creditor. Except for creditors' committee approval, the resolution plan does not require the approval of any other creditor or class of creditor. Once the resolution plan approved by the creditors' committee has been approved by the NCLT, it becomes binding on all creditors and stakeholders, including dissenting creditors and operational creditors (which do not form part of the creditors' committee). Hence, a ‘cross-class cram-down' is available.

Companies Act proceedings: Under the Companies Act, for approval of a scheme of compromise with creditors, meetings of different classes of creditors are held and the scheme must be approved by each class. While the Companies Act does not provide for composition of classes, broadly speaking, secured and unsecured creditors form separate classes. The relevant voting thresholds are a majority in number holding three-quarters in value. Since the scheme must be approved by each class of creditor, a cross-class cram-down is not available.

3.9 Can restructuring proceedings be used to compromise secured debt?

Yes. Please see question 3.8.

3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

In liquidation proceedings, the liquidator can avail of the provision for disclaimer of contracts. However, there is no provision for disclaimer of contracts during a corporate insolvency resolution process. There are some precedents allowing for termination of onerous contracts by way of a resolution plan under the Insolvency and Bankruptcy Code; however, the position in this regard is not fully settled.

There is no provision for disclaimer of contracts in restructuring proceedings by way of a scheme under the Companies Act.

3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

This will depend on the terms of the restructuring. In the context of the Insolvency and Bankruptcy Code, the Supreme Court has held that the resolution plan can provide for the continuation of liabilities of third parties towards the creditors and this will be binding on such third parties.

In the context of a scheme, there is some precedent that without guarantor consent, the guarantor may be released from its liabilities, since the scheme may amount to a variation/composition without the consent of the guarantor.

3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?

Insolvency and Bankruptcy Code proceedings: Under the Insolvency and Bankruptcy Code, providers of interim finance during a corporate insolvency resolution process or liquidation process enjoy priority of payment, as such finance is considered part of the corporate insolvency resolution process costs or liquidation costs. Under the waterfall mechanism, the corporate insolvency resolution process costs or liquidation costs are paid in priority if the corporate debtor goes into liquidation. Further, the Insolvency and Bankruptcy Code provides that under the resolution plan, the corporate insolvency resolution process costs are to be paid in priority by the resolution applicant.

Companies Act proceedings: No such provisions apply to restructurings under the Companies Act.

3.13 How do restructuring proceedings conclude?

Insolvency and Bankruptcy Code proceedings: In the case of restructuring proceedings under the Insolvency and Bankruptcy Code, if a resolution plan is received and approved by the creditors' committee (with 66% of the voting share), it is submitted to the NCLT for approval. The restructuring proceedings will successfully conclude with approval of the resolution plan by the NCLT. If the corporate insolvency resolution process fails – that is, if the resolution professional receives no resolution plan or if a resolution plan is not approved by either the creditors' committee or the NCLT, then the NCLT will pass an order for liquidation of the debtor.

Companies Act proceedings: In the case of restructuring proceedings under the Companies Act, the proceedings conclude with approval of the scheme of compromise by the NCLT.

4 Insolvency

4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?

The Insolvency and Bankruptcy Code is now the umbrella law for insolvency resolution and liquidation in India. Hence, with effect from 1 December 2016, proceedings under the Insolvency and Bankruptcy Code are the only insolvency proceedings available in India for corporate entities. Although the Insolvency and Bankruptcy Code also covers insolvency and bankruptcy proceedings for individuals and partnerships, the provisions relating to the same are yet to be notified. The government recently notified certain provisions of the Insolvency and Bankruptcy Code relating to personal guarantors of corporate debtors, which came into effect on 1 December 2019. For the benefits and drawbacks of insolvency proceedings under the Insolvency and Bankruptcy Code, please see question 3.2.

4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?

Insolvency proceedings under the Insolvency and Bankruptcy Code are conducted in two stages. In the first stage, the corporate insolvency resolution process is conducted and the debtor is restructured based on a resolution plan. If the first stage fails, the debtor enters into mandatory liquidation. Direct liquidation under the Insolvency and Bankruptcy Code is no longer possible for insolvent entities.

The corporate insolvency resolution process can be initiated under the Insolvency and Bankruptcy Code by a financial creditor, an operational creditor or the debtor itself, by filing an application with the bench of the National Company Law Tribunal (NCLT) with jurisdiction over the registered office of the debtor, in the event of a default of INR 100,000 or more. Please see question 3.3 for details.

The instigating party can select the relevant insolvency professional (or interim resolution professional), who will typically be appointed by the NCLT as long as no disciplinary proceedings are pending against the professional. However, the interim resolution professional can be replaced by the creditors' committee.

As regards liquidation, the NCLT will orders liquidation if the corporate insolvency resolution process fails. It can fail if:

  • no plan is received;
  • the creditors' committee orders liquidation prior to receipt of a plan;
  • no plan is approved by the creditors' committee; or
  • the NCLT rejects the plan approved by the creditors' committee.

The resolution professional will typically continue as liquidator (subject to his or her consent). If the resolution professional does not consent to act as liquidator or the resolution plan is rejected by the NCLT for non-compliance, the NCLT can appoint another liquidator.

4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?

Please see question 3.4 for details.

In case of liquidation, once an order of liquidation has been passed by the NCLT:

  • a public announcement is issued stating that the debtor is in liquidation;
  • a liquidator is appointed, who takes control and custody of the debtor's assets and conducts the liquidation process;
  • the order for liquidation is deemed to be a notice of discharge to the officers, employees and workmen of the debtor, except where the debtor's business is continued during the liquidation process by the liquidator;
  • all powers of the board of directors, key managerial personnel and the partners of the debtor cease to have effect and are vested in the liquidator; and
  • a limited moratorium is declared – while secured creditors can stand outside the liquidation process and enforce their security, all other creditors must file their claims and wait in line to receive money through the liquidation waterfall.

4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Please see question 3.5 for details of the moratorium during a corporate insolvency resolution process. In case of liquidation, once the order for the liquidation has been passed, a limited moratorium applies and no suit or legal proceeding can be initiated against the debtor. However, secured creditors can stand outside the liquidation process and enforce their security, subject to certain prescribed processes and conditions.

4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?

Please see question 3.6 for details.

In case of liquidation:

  • once appointed, the liquidator makes a public announcement inviting claims from creditors of the debtor;
  • a period of 90 days is also prescribed during which any person can propose a scheme for compromise, even for a company in liquidation;
  • the liquidator verifies the claims of the creditors, takes control and custody of the debtor's assets and forms the liquidation estate;
  • the liquidator sells the liquidation estate (through auction or otherwise) and distributes the proceeds pursuant to the waterfall prescribed under the Insolvency and Bankruptcy Code;
  • upon distribution of the assets to the stakeholders, the liquidator makes an application to the NCLT for dissolution of the debtor; and
  • once the dissolution order is passed by the NCLT, the company stands dissolved.

This process must be completed within one year; if it is not, the liquidator can apply to the NCLT for an extension.

4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.

(a) Debtor

In liquidation, the debtor is represented for all purposes by the liquidator.

(b) Directors of the debtor

The board of directors remains suspended. All directors, personnel and so on are expected to cooperate with the liquidator in the liquidation process.

(c) Shareholders of the debtor

No role, rights or responsibilities are prescribed.

(d) Secured creditors

Secured creditors have the right either to relinquish their security interest in the liquidation estate or to realise their security interest in the debtor's assets on their own.

(e) Unsecured creditors

Unsecured creditors cannot file or continue any proceedings against the debtor and must stand in line to recover their claims as per the liquidation waterfall.

(f) Employees

No separate role, rights or responsibilities for employees are prescribed.

(g) Pension creditors

No separate role, rights or responsibilities are prescribed. However, there is some precedent that in certain cases, pension claims will enjoy priority in case of liquidation.

(h) Administrator, insolvency office holder

The liquidator conducts the liquidation process with the following (broad) role, rights and responsibilities:

  • invite, collate and verify claims from creditors;
  • take control and custody of assets of the debtor and form the liquidation estate;
  • sell the assets of the debtor;
  • file applications for the avoidance of transactions;
  • distribute the proceeds/assets to stakeholders; and
  • file an application for dissolution after distribution of the liquidation proceeds.

(i) Court

The NCLT is the adjudicating authority under the Insolvency and Bankruptcy Code. It:

  • passes the liquidation order;
  • appoints the liquidator; and
  • passes orders on various applications that may be filed by the liquidator, such as an application to seek cooperation, avoidance applications or an application for dissolution.

The National Company Law Appellate Tribunal (NCLAT) is the appellate authority that entertains any appeals against decisions of the NCLT. Decisions of the NCLAT may be appealed to the Supreme Court of India.

4.7 What is the process for filing claims in the insolvency proceedings?

Upon admission of the debtor into a corporate insolvency resolution process, the NCLT appoints an interim resolution professional to take over the management of the debtor. Thereafter, the interim resolution professional issues a public announcement (in a prescribed manner) within three days of his or her appointment, inviting claims from creditors of the debtor.

In response to the announcement, creditors must submit their claims to the interim resolution professional in a specified form along with proof of claim within 14 days of the date of appointment of the interim resolution professional. If a creditor fails to submit claims within this period, it may submit the same on or before the 90th day from the insolvency commencement date. However, the bankruptcy tribunals have held that such claims may be submitted even after this deadline.

For the purposes of liquidation, the liquidator shall form a liquidation estate from the debtor's assets. As per Section 38 of the Insolvency and Bankruptcy Code, the liquidator shall receive or collect the claims of creditors within 30 days of the date of commencement of the liquidation process. A creditor may withdraw or vary its claim under Section 38 within 14 days of its submission. Upon verifying the claims submitted, the liquidator may admit or reject the claim of a creditor, in whole or in part. The liquidator then has seven days to communicate his or her decision to admit or reject a claim to the creditor and debtor.

4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?

The Insolvency and Bankruptcy Code does not provide for a payment waterfall to be followed by a resolution applicant in respect of payments under a resolution plan. However, certain minimum requirements must be followed in the plan, as follows:

  • The corporate insolvency resolution process costs must be paid in priority to all other payments.
  • Operational creditors must be paid:
    • an amount not less than that which they would have received in the event of liquidation. Amounts due to operational creditors under a resolution plan must be paid in priority to any payments to financial creditors; or
    • an amount that would have been paid if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in the liquidation waterfall. The amounts due to operational creditors are to be paid in priority to payments to financial creditors.
  • Financial creditors that do not vote in favour of the resolution plan must be paid an amount not less than that which they would have received in the event of liquidation.

In liquidation, the debtor's assets of the debtor are distributed in the following order of priority:

  • the costs involved in the insolvency resolution process and the liquidation costs, which must be paid in full;
  • workmen's dues for the 24 months preceding the liquidation commencement date and debts owed to secured creditors which have relinquished their right to realise the security (pari passu);
  • wages and unpaid dues owed to employees other than workmen for the 12 months preceding the liquidation commencement date;
  • financial debts owed to unsecured creditors;
  • any amount due to the central government and the state government, including amounts to be received on account of the Consolidated Fund of India and the consolidated fund of a state, if any, in respect of the whole or any part of the two years preceding the liquidation commencement date; and debts owed to a secured creditor for any amount unpaid following the enforcement of a security interest (pari passu);
  • any remaining debts and dues;
  • claims of preference shareholders, if any; and
  • claims of equity shareholders or partners, as the case may be.

4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?

The effect will depend on the terms of the existing contract. There is no specific protection in the Insolvency and Bankruptcy Code in respect of ipso facto clauses; hence, the moratorium protection under the Insolvency and Bankruptcy Code does not extend to termination of contracts by the counterparty. However, there is some precedence that while the debtor is undergoing a resolution process, the counterparty cannot terminate a contract solely on the grounds that the debtor has been admitted to restructuring proceedings.

Under the Insolvency and Bankruptcy Code, rejection of a contract by the insolvency professional is possible if it relates to an avoidance transaction (ie, preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction), as described in the Insolvency and Bankruptcy Code.

4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?

Yes, the following types of transactions may be challenged and set aside.

Preferential transactions:

Grounds: These are transactions where the debtor has transferred any property (or interest thereof) for the benefit of any creditor, surety or guarantor for or on account of any antecedent debt or liabilities owed by the debtor, where such transfer has the effect of putting the creditor, surety or guarantor in a more beneficial position than it would have been in in the case of a distribution of assets in liquidation.

Defence: Transactions that are in the ordinary course of business of the debtor or the transferee and transactions that create security for new value are not considered preferential.

Look-back period: If undertaken in the two years preceding the insolvency commencement date (if preference is made to a related party) or one year preceding the insolvency commencement date (if made to any other party).

Undervalued transactions:

Grounds: These are transactions where the debtor gifts or transfers its assets for consideration that is significantly less than their value.

Defence: Transactions in the ordinary course of business of the debtor.

Look-back period: If undertaken during the two years preceding the insolvency commencement date (in case of transaction with a related party) or one year preceding the insolvency commencement date (in case of any other party).

Transactions defrauding creditors:

Grounds: These are undervalued transactions that are deliberately entered into by the debtor to keep its assets beyond the reach of any person entitled to make a claim against the debtor or to adversely affect the interests of such person in relation to the claim.

Defence and look-back period: None prescribed.

Extortionate credit transactions:

Grounds: These are transactions that require the debtor to make exorbitant payments in respect of any credit provided or that are unconscionable under the principles of law relating to contracts.

Defence: An exception is available for debt extended by any financial services provider that is in compliance with the law applicable in relation to such debt.

Look-back period: Two years preceding the insolvency commencement date.

Fraudulent trading: See questions 6.1 to 6.3.

Disclaimer of onerous contracts: See question 3.10.

4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?

Insolvency proceedings may end either in the approval of the resolution plan by the NCLT, resulting in the revival of the debtor, or in the failure of the resolution process, resulting in the commencement of liquidation.

If the NCLT approves the resolution plan, the creditors are paid under the terms of the resolution plan. However, if the debtor goes into liquidation, the creditors are paid in accordance with the waterfall mechanism set out in the Insolvency and Bankruptcy Code. Once the liquidation estate has been liquidated and distributions made to stakeholders, the liquidator applies to the NCLT for dissolution of the debtor. Once the debtor has been dissolved, no liabilities survive.

In case of a resolution of insolvency, the survival of liabilities depends on the terms of the resolution plan. A resolution plan will typically provide for the extinguishment of past liabilities (except payments proposed under the plan) and the order passed by the NCLT in respect of the same will be binding on the stakeholders.

5 Cross-border / Groups

5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?

No, foreign debtors are not covered under the Insolvency and Bankruptcy Code, as it pertains only to companies incorporated in India.

5.2 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?

The Insolvency and Bankruptcy Code has very limited and one-sided provisions (which also have not been enforced thus far) with respect to insolvency and restructuring proceedings with cross-border aspects. They provide as follows:

  • The Indian government may enter into an agreement with a foreign government with a view to enforcing the provisions of the Insolvency and Bankruptcy Code. Further, the Indian government can issue notification stipulating conditions which will govern the application of the Insolvency and Bankruptcy Code provisions in relation to assets or property of a debtor situated in a foreign country with which India has entered into reciprocal arrangements.
  • If, in the course of proceedings under the Insolvency and Bankruptcy Code, the resolution professional, liquidator or bankruptcy trustee is of the opinion that assets of the debtor are situated in a foreign country with which India has made reciprocal arrangements, an application may be made to the adjudicating authority seeking evidence or action in relation to such assets, following which the adjudicating authority may issue a letter of request to a competent court or authority of such foreign country.

The framework for cross-border insolvency and restructuring is evolving. In October 2018, an expert committee tasked with making recommendations to the government on the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997 submitted its report, along with a draft chapter proposed for introduction to the Insolvency and Bankruptcy Code. The committee's recommendations are under active consideration by the Indian government. It is expected that the Insolvency and Bankruptcy Code will soon be amended to incorporate a new cross-border insolvency regime based on the UNCITRAL Model Law principles of access, recognition, cooperation and coordination.

However, under the Code of Civil Procedure, 1908, high courts in India have the power to order the examination of witnesses (under their respective jurisdiction) or the discovery or production of documents upon receipt of a letter of request from a foreign court. Hence, if a foreign liquidator seeks the examination of witnesses in India or the discovery or production of documents located in India, it may be possible to do so by obtaining a letter of request from a foreign court to the concerned Indian court. The code also contains conditions which must be satisfied for the recognition of foreign judgments in India.

5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?

The framework for cross-border insolvency and restructuring is evolving. The recommendations of the committee regarding the incorporation of a chapter in the Insolvency and Bankruptcy Code on a cross-border insolvency regime based on the UNCITRAL Model Law is under active consideration.

Meanwhile, an interesting development took place in a case involving Jet Airways. An order passed by a Dutch court initiating insolvency proceedings and appointing an administrator was not recognised by the National Company Law Tribunal (NCLT), which admitted Jet Airways into a corporate insolvency resolution process under the code. On appeal, the National Company Law Appellate Tribunal (NCLAT) directed the resolution professional to explore the possibility of reaching an agreement with the Dutch administrator with respect to the insolvency proceedings in India and the Netherlands. Pursuant to such directions, the Indian resolution professional and the Dutch administrator submitted an agreement arrived at between them covering the cross-border aspects of the insolvency of Jet Airways, which was sanctioned by the NCLAT in a landmark order. Significantly, the Dutch administrator was even allowed to participate as an observer in the creditors' committee meetings of Jet Airways.

5.4 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?

Indian law treats each corporate entity as having a separate legal existence, with well-defined rights, duties, powers and liabilities. Occasionally, the Indian courts pierce the ‘corporate veil' to hold a company liable for the actions of another group/affiliated company. However, this is more of an exception than a rule. Ordinally, the debtor's parent or subsidiary company, or any other group/affiliate company, cannot be held liable for the debtor's debts, unless it stands in the capacity of guarantor or security provider to the debtor.

The Insolvency and Bankruptcy Code has no framework for group insolvencies. In fact, the assets of subsidiary companies of the debtor are specifically excluded from the ambit of assets of which the (interim) resolution professional can take custody and control during a corporate insolvency resolution process under the Insolvency and Bankruptcy Code.

The Insolvency and Bankruptcy Board of India constituted a working group to recommend a framework to facilitate group insolvencies and restructurings. The working group submitted its report in September 2019, recommending an enabling framework with an emphasis on facilitation, flexibility and choice, to be implemented in a phased manner. The first phase is proposed to focus on facilitating procedural coordination of companies in domestic groups; it is suggested that cross-border group insolvency and substantive consolidation will be addressed at a later stage, depending on experience and need. As per the recommendations of the working group, it will be optional for the stakeholders of the distressed company to use the group insolvency framework. However, the provisions on communication, cooperation and information sharing between insolvency professionals, creditors' committees and adjudicating authorities will have mandatory application for group companies admitted into a corporate insolvency restructuring process. The recommendations of the working group are under consideration by the relevant authorities.

Also, in a recent case, the NCLT allowed the consolidation of proceedings initiated against Videocon Industries Limited and its subsidiaries. In doing so, the NCLT took into consideration various factors, such as the parties' common businesses, group interlinkage, the cumulative high value of the consolidated assets and the expected positive impact on the proposed resolution plan value for potential investors.

5.5 How is the debtor's centre of main interests determined in your jurisdiction?

The recommendations on the introduction to the Insolvency and Bankruptcy Code of a chapter on cross-border insolvency are under active consideration by the Indian government, and it is expected that the necessary amendments are just around the corner. The October 2018 report of the committee tasked with recommending a framework for cross-border insolvency in India followed the UNCITRAL Model Law by including a rebuttable presumption that the registered office of a corporate debtor is its centre of main interests (COMI), in the absence of proof to the contrary. While recognising that this presumption affords speed and convenience of proof in non-controversial cases, the committee also noted the risks of abuse and forum shopping. Given that the code itself and the surrounding ecosystem are in their infancy, the committee has suggested proactive enquiry by the NCLT, along with the adoption of a look-back period of three months, when enforcing the COMI presumption in the Indian context.

5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

Like domestic creditors, foreign creditors can also avail of the provisions of the Insolvency and Bankruptcy Code on the restructuring and insolvency of corporate entities, including the possibility to file an application for a corporate insolvency resolution process under Section 7 or Section 9, depending on whether the foreign creditor is a financial or operational creditor. In the case of foreign operational creditors, the hurdle of having to obtain a certificate from a financial institution confirming non-payment of the debt has been removed, since the Supreme Court ruled that this requirement is directory only.

In the course of insolvency proceedings involving Jet Airways, which is also undergoing restructuring proceedings in the Netherlands, the NCLAT held that under the Insolvency and Bankruptcy Code, it was one of the duties of the interim resolution professional to collate the claims of all ‘offshore creditors' of Jet Airways after reaching agreement with the Dutch administrator appointed pursuant to the proceedings initiated in the Netherlands.

Certain conditions are also imposed by the foreign exchange regulations in India governing the remittance of assets of Indian companies in liquidation. For instance, the remittance must comply with an order issued by an Indian court or by the liquidator.

6 Liability risk

6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

Under the Insolvency and Bankruptcy Code, the debtor's directors can be held liable for ‘fraudulent trading' and ‘wrongful trading'. The wrongful trading provisions deal with directors' liability for acts or omissions in the zone of insolvency.

The provisions state that the resolution professional can apply to the National Company Law Tribunal (NCLT) for an order against a director to contribute to the debtor's assets if, before the insolvency commencement date:

  • the director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of the debtor; and
  • the director did not exercise due diligence in minimising the potential loss to creditors of the debtor.

Hence, the directors must exercise due diligence to minimise the potential loss to creditors. A director is deemed to have fulfilled this requirement if he or she exercises such diligence as would reasonably be expected of a person in the same role.

While there is no express obligation on the directors to commence insolvency proceedings at any particular time, the due diligence to minimise the potential losses to creditors could arguably include the voluntary commencement of resolution proceedings.

6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?

Yes. The directors may be held liable for fraudulent trading and wrongful trading. Under the fraudulent trading provisions, if the directors are knowingly party to a fraudulent transaction, they can be held personally liable to contribute to the debtor's assets. Under the wrongful trading provisions, the directors can be held personally liable to contribute to the debtor's assets for failure to exercise due diligence to minimise the potential losses to creditors while in the zone of insolvency.

6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?

In fraudulent trading cases involving a corporate entity, anyone that was knowingly party to fraudulent trading can be held liable and contribution orders can be passed by the NCLT against such parties. Thus, if a lender or shareholder of a debtor is found to have participated in fraudulent trading by the corporate entity, such party may incur liability to the extent and measure as ordered by the NCLT.

7 Other

7.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

The restructuring and insolvency regime in India does not allow for pre-packaged insolvency resolutions of stressed assets under the Insolvency and Bankruptcy Code. However, in April 2019 the Ministry of Corporate Affairs invited comments from stakeholders on various insolvency- related matters, including pre-packaged insolvency resolution. The recommendations of the committee on the introduction of a pre-pack mechanism is awaited. Meanwhile, interested bidders have increasingly resorted to one-off out-of-court settlements to acquire stressed assets.

7.2 Is "credit bidding" permitted?

Credit bidding is not specifically addressed in the existing insolvency and restructuring legal framework. Generally, the treatment of a security interest under a resolution plan is a matter of negotiation between the resolution applicant and the secured creditor(s). However, the Insolvency and Bankruptcy Code permits a financial creditor to be a resolution applicant and even to vote on the resolution plan in the capacity of a creditors' committee member. A resolution plan submitted by a secured financial creditor may contain provisions on credit bidding. However, the consideration of any such resolution plan by the creditors' committee will hinge on whether the plan meets the mandatory conditions of the Insolvency and Bankruptcy Code and applicable regulations. Also, under the code, one of the mandatory conditions for a resolution plan is that any dissenting creditors (ie, creditors that do not vote in favour of the plan) be paid the liquidation value of their security. Hence, if the liquidation value for a secured creditor is greater than the amount proposed to be paid under the resolution plan, the creditor can dissent to the plan and receive the liquidation value of its security.

8 Trends and predictions

8.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The introduction of the Insolvency and Bankruptcy Code in December 2016, coupled with swift legislative changes (by way of various timely amendments) and fast-evolving jurisprudence (in the form of landmark case law), has given a significant boost to the restructuring and insolvency landscape in India. The latest amendments to the Insolvency and Bankruptcy Code, introduced in August 2019, gave the creditors' committee the freedom to decide on the distribution of value proposed under resolution plans, which may take into account the order of priority among creditors, including the priority and value of security interests of secured creditors.

One of the burning topics in the Indian insolvency regime is the treatment of different stakeholders under resolution plans. In Essar Steel India Limited, the Supreme Court of India recently upheld the primacy of the creditors' committee to decide on how the proceedings from a resolution plan will be distributed, and held that the National Company Law Tribunal and the National Company Law Appellate Tribunal cannot interfere on the merits with the commercial decision taken by the creditors' committee in this regard. The Supreme Court has thus unequivocally confirmed that as long as the provisions of the code and the underlying regulations have been met, the requisite majority of the creditors' committee is free to negotiate and accept a resolution plan, which may involve differential payments to different classes of creditors; and to negotiate with a prospective resolution applicant for better or different terms, which may also involve differences in distributions between different classes of creditors. Equitable treatment is to be accorded to each creditor depending on the class to which it belongs (ie, secured or unsecured; financial or operational).

Another hot topic pertains to process timelines. In Essar, the Supreme Court interpreted the latest Insolvency and Bankruptcy Code amendments on timelines and held that 330 days is generally the outer limit within which resolution of the stressed assets of the debtor must take place before the debtor is put into liquidation. However, in certain exceptional cases, this timeframe can be extended.

Other prevailing trends include cross-border insolvency, group insolvency, individual insolvency, liquidation as a going concern, treatment of statutory dues and the binding effect of resolution plans on government authorities.

Expected developments and legislative reforms in the near future include those pertaining to the establishment of regulatory mechanisms for group insolvencies and cross-border insolvency. Also in the pipeline is the development of a framework for individual insolvency, encompassing individuals, proprietorship firms, partnership firms and personal guarantors.

9 Tips and traps

9.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?

As the Insolvency and Bankruptcy Code continues to evolve, new challenges are continually encountered. Potential sticking points include:

  • strict adherence to timelines;
  • the balancing of stakeholders' interests;
  • how to tackle entrenched management/hostile promoters;
  • the wide and rigorous scrutiny of Section 29A (which disqualifies certain parties from submitting resolution plans);
  • routine court interventions during ongoing corporate insolvency resolution processes;
  • multiple and protracted litigations;
  • clogged judicial infrastructure and limited bandwidth;
  • regulatory uncertainty;
  • creditors' reluctance to take prompt decisions; and
  • information asymmetry.

Addressing the above sticking points would go a long way towards facilitating the smooth and efficient restructuring of stressed assets in India.

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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