May 21, 2019

India Chapter: Corporate Recovery & Insolvency 2019 – 13th Edition

1. Overview

1.1 Where would you place your jurisdiction on the spectrum of debtor to creditor-friendly jurisdictions?

One of the main principles driving the design of the Insolvency and Bankruptcy Code, 2016 (Code) was to ensure a balance between creditor rights across classes of creditors on one hand and between creditors and the debtor on the other. The Code is largely creditor- friendly with collective resolution proceedings empowering a committee of creditors to make commercial decisions for the resolution of the corporate debtor. However, sufficient checks and balances have developed through jurisprudence, to ensure that the debtor, represented by its directors, is kept informed of the decisions of the creditors. Recent judgments have also called for sharing of the restructuring plan with the erstwhile board of directors of the corporate debtor.

1.2 Does the legislative framework in your jurisdiction allow for informal work-outs, as well as formal restructuring and insolvency proceedings, and to what extent are each of these used in practice?

The legislative framework in India currently provides for formal restructuring and insolvency proceedings. However, an informal work-out in the form of a settlement is permitted under the Code by way of withdrawal of an ongoing insolvency application. Such withdrawal post-initiation of the corporate insolvency resolution process is only permitted when 90% of the committee of creditors has assented to such withdrawal. Further, to the extent admission of the insolvency application and initiation of the corporate insolvency resolution process has not occurred, parties may enter into out-of- court settlements outside the process stipulated under the Code.

However, informal work-outs have been formulated through private, out-of-court negotiations and the directions of financial sector regulators such as the Reserve Bank of India (RBI). For instance, the RBI issued a circular dated February 12, 2018 on the revised framework for the resolution of stressed assets, under which banks were directed to classify such large stressed accounts as Special Mention Accounts (SMA) and to formulate restructuring plans to resolve such situations within 180 days from such classification, failing which such accounts would be required to be referred for insolvency under the Code.

In addition to the above, an initiative called “Project Sashakt” (“Sashakt” is a Hindi word which means empowered) has also been recommended by an expert committee, for the resolution of stressed assets. Under this initiative, a bank-led resolution approach has been recommended outside of any regulatory processes, which includes the following:

(a) for loans up to USD 7.3 million, a steering committee has been recommended to be formed within the bank for resolution of such debt;

(b) for loans of value between USD 7.3 million to USD 73 million, the banks would be required to work together for resolution of such debts based on an inter-creditor agreement entered into by several banks voluntarily; and

(c) for loans above USD 73 million, the committee had recommended the formation of an asset management company with investment from private players for the acquisition and turnaround of such assets.

2. Key Issues to Consider When the Company is in Financial Difficulties

2.1 What duties and potential liabilities should the directors/managers have regard to when managing a company in financial difficulties? Is there a specific point at which a company must enter a restructuring or insolvency process?

The Code introduces the concept of wrongful trading, which does impose liability on directors and managers. It requires directors and managers to assess whether there is a reasonable prospect of avoiding insolvency proceedings of a company in financial distress.If such prospects are not determined, then the company should file for insolvency proceedings under the Code. The directors/managers are also required to take such steps prior to the insolvency proceedings, as to mitigate losses likely to be suffered by the creditors of the company. The standard for taking such steps is: reasonable due diligence. The point at which insolvency proceedings ought to be initiated by the company has not been provided in the Code but the trigger is a default of USD 1,451. The liability imposed on directors held to have committed wrongful trading is that they may be required to make such contributions to the assets of the corporate debtor as the National Company Law Tribunal (NCLT) may deem fit.

2.2 Which other stakeholders may influence the company’s situation? Are there any restrictions on the action that they can take against the company? For example, are there any special rules or regimes which apply to particular types of unsecured creditor (such as landlords, employees or creditors with retention of title arrangements) applicable to the laws of your jurisdiction? Are moratoria and stays on enforcement available?

The Code makes a differentiation between financial and operational creditors. Financial creditors are creditors whose debt is based on the time-value of money. Such creditors typically include banks and bond holders, both domestic and international. Operational creditors on the other hand, are vendors and service providers to the corporate debtor.Both financial and operational creditors can initiate insolvency proceedings against the corporate debtor upon a default of USD 1,451.

With respect to special rights being granted to unsecured creditors, special rights have been accorded to purchasers of commercial and residential real estate. If such purchasers have dues outstanding against the corporate debtor then such purchasers qualify as financial creditors. Upon admission of insolvency proceedings against a corporate debtor, a moratorium is imposed which prevents security enforcement, sale or transfer of assets and initiation of legal proceedings against the corporate debtor. Special dispensations from the moratorium have been granted in respect of the following:

(a) providers of essential supplies to the corporate debtor are required to continue to provide such supplies;

(b) lessors of immovable property cannot repossess property in possession of the corporate debtor; and

(c) the Central Government may, by notification, notify financial securities transactions which are exempt from the moratorium. This provision is intended to cover financial collateral arrangements, but no such notification has been released by the Central Government so far.

2.3 In what circumstances are transactions entered into by a company in financial difficulties at risk of challenge? What remedies are available?

The Code does permit the resolution professional/liquidator to examine certain transactions for initiating avoidance actions against such transactions. The Code permits the avoidance of the following transactions:

(a) preferential transactions or transactions in which preference is given to one party as against all other persons;

(b) undervalued transactions or transactions involving a gift or transfer of assets at less than the market value of such assets;

(c) transactions where creditors have been defrauded with the objective of moving the assets of the corporate debtor beyond their reach or to prejudice their rights;

(d) extortionate credit transactions or transactions where the corporate debtor has taken a debt at exorbitant rates; and

(e) Fraudulent/wrongful trading or the conduct of business with the intent to defraud creditors or for any other fraudulent purposes.

The look-back period for such actions is two years for transactions with related counterparties and one year for transactions with unrelated parties.

An application to the NCLT made by the resolution professional/liquidator may lead to one or all of the following consequences:

(i) reversal of the transactions;

(ii) release or discharge of any security interest granted by the corporate debtor;

(iii) any person, who is/was a party to the transaction, may be required to repay any amount received by her; or

(iv) payment of such consideration for the transaction as may be determined by an independent expert.

3. Restructuring Options

3.1 Is it possible to implement an informal work-out in your jurisdiction?

3.2 Please refer to our response to question 1.2 above.

3.3 What formal rescue procedures are available in your jurisdiction to restructure the liabilities of distressed companies? Are debt-for-equity swaps and pre- packaged sales possible? To what extent can creditors and/or shareholders block such procedures or threaten action (including enforcement of security) to seek an advantage? Do your procedures allow you to cram-down dissenting stakeholders? Can you cram-down dissenting classes of stakeholder?

As mentioned above, formal rescue procedures available in India are processes under the Code and the RBI circular dated February 12, 2018. Both the Code and the RBI Circular are not prescriptive on the modes of restructuring and it is permissible for lenders to swap debt for equity. At the same time, it is customary for many financial contracts to contain rights of lenders to convert debt into equity upon default by the company. This is a contractual right and can be exercised outside the regulatory or judicial process.

Pre-packaged sales are not possible under the current regime. This is because the resolution professional who takes control over the corporate debtor is required, by law, to invite resolution proposals from all eligible applicants and the committee of creditors is expected to choose the most profitable proposal.

As mentioned above, upon commencement of the corporate insolvency resolution process under the Code, a moratorium is enforced which prevents, among other things, the enforcement of security interest. This prevents creditors and/or other stakeholders from blocking such procedures or threatening action against the corporate debtor.

Approval of a resolution plan under the corporate insolvency resolution process requires 66% consent from the committee of creditors. An approval pursuant to such consent is then binding on all stakeholders, including dissenting stakeholders. However, the Code does provide a right to anyone affected by the resolution plan to be heard by the NCLT.

In addition to the above, the Companies Act, 2013 permits a corporate debtor to enter into a compromise or arrangement with its creditors or a class of its creditors. However, there is no moratorium in such scheme and the creditors are free to enforce their security interest and block the restructuring of debts process.

3.4  What are the criteria for entry into each restructuring procedure?

For initiating insolvency proceedings against a corporate debtor under the Code, there must be a default of payment of more than or equal to USD 1,451 by such corporate debtor. Once such a default takes place, a financial creditor, operational creditor or the corporate debtor itself may initiate insolvency proceedings against such corporate debtor.

3.5 Who manages each process? Is there any court involvement?

Once the corporate insolvency resolution process commences, a resolution professional is appointed. Such appointment is confirmed by the committee of creditors. The tenure of the resolution professional continues till the corporate insolvency resolution process. During such period, the powers of the board of directors of the corporate debtor stand suspended and such powers vest exclusively with the resolution professional. The resolution professional has to run the corporate debtor as a going concern during the corporate insolvency resolution process. For this purpose, the resolution professional is also responsible for operational decisions for running the affairs of the corporate debtor. However, all significant decisions (such as the sale of assets outside the ordinary course of business, equity issuances and creation of security), the resolution professional is required to obtain approval from the committee of creditors. While the NCLT does not oversee the day-to-day functions of the committee of creditors and the resolution professional, it can be approached in case of any deviation from the rules of conduct.

The committee of creditors is primarily responsible for approving resolution plans or deciding to liquidate the corporate debtor. However, the final approval for such decisions is to be made by the NCLT.

If the committee of creditors and NCLT approve the liquidation of the corporate debtor, the committee of creditors is disbanded and a liquidator is appointed. Such liquidator is then answerable to the NCLT.

3.6 What impact does each restructuring procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? What protections are there for those who are forced to perform their outstanding obligations? Will termination and set-off provisions be upheld?

Please refer to our response to question 2.2 in relation to essential supplies, lessors and financial securities transactions notified by the Central Government. Subject to the treatment of such contracts/transaction, contractual counterparties are not restricted from terminating contracts.

No, all parties are not obliged to perform outstanding obligations, only parties providing essential supplies and lessors are obliged to do so. To the extent that such parties are forced to perform their outstanding obligations, dues accruing to such parties are treated as insolvency resolution process costs. Such costs need to be paid out in full before recovery is made by any other stakeholder.

On termination and set-off provisions, while termination is permitted in cases as mentioned above, set off is not permitted for the purpose of the corporate insolvency resolution process. However, the liquidation process does provide for set-off provisions to be upheld.

3.7 How is each restructuring process funded? Is any protection given to rescue financing?

The transaction cost of running the enterprise, fees of the resolution professional, legal fees and other operating expenses and costs are met out of the cash flow of the corporate debtor. Such cost is treated as the corporate insolvency resolution process cost and if unpaid has top priority in the distribution of the proceeds proposed in a resolution plan or recovered upon liquidation.

The Code does provide for fresh debt to be infused into the corporate debtor for working capital requirements or for funding the restructuring process. Such interim finance is also treated as part of the corporate insolvency resolution process cost and has top priority in the distribution of the proceeds proposed in a resolution plan or recovered upon liquidation.

4. Insolvency Procedures

4.1 What is/are the key insolvency procedure(s) available to wind up a company?

Winding up (understood to be liquidation under the Indian law) can be sought under the Companies Act, 2013 on certain grounds such as, when the company has acted against the interests of the sovereignty and integrity of India, friendly relations with foreign states, public order, decency or morality. However, in the event of a payment default, stakeholders cannot seek direct liquidation. They will first have to achieve resolution under the corporate insolvency resolution process, which may last up to a maximum period of 270 days. If resolution is not viable, then liquidation proceedings may be initiated against the corporate debtor. The Code also provides for voluntary liquidation provided the company does not have any debts or if it can discharge its debts from the proceeds of liquidation.

4.2 On what grounds can a company be placed into each winding up procedure?

Please refer to our response to question 4.1 above.

4.3 Who manages each winding up process? Is there any court involvement?

Under the Companies Act and the Code, the liquidator manages the conduct of the liquidation process. However, unlike the liquidation process in the Code, the winding up process under the Companies Act, 2013 is under close supervision and monitoring by the court.

4.4 How are the creditors and/or shareholders able to influence each winding up process? Are there any restrictions on the action that they can take (including the enforcement of security)?

Once a liquidation order has been passed by the NCLT under the Code, a moratorium is imposed on the filing of suits and other legal proceedings against the corporate debtor. However, a specific power is granted to secured creditors to choose to realise their security interest outside the Code.

Additionally, under the Companies Act, 2013 once a winding up order has been passed, no suit or other legal proceeding can be commenced or continued against the corporate debtor, except with the permission of the tribunal.

4.5 What impact does each winding up procedure have on existing contracts? Are the parties obliged to perform outstanding obligations? Will termination and set-off provisions be upheld?

In liquidation, the restrictions placed on lessors and providers of essential supplies are lifted. Further, the liquidator also has the power to disclaim onerous contracts. As mentioned above, set-off provisions may be upheld in liquidation.

4.6 What is the ranking of claims in each procedure, including the costs of the procedure?

The Code ranks claims of creditors and costs of the process in the following manner, for the distribution of the liquidation estate:

(a) insolvency resolution process costs and the liquidation costs (which include interim finance, fees paid to the insolvency professional, etc.);

(b) in equal priority: (i) workmen’s dues for the period of 24 months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security;

(c) wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) in equal priority: (i) any amount due to the Central Government and the State Government including the amount 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 period of two years preceding the liquidation commencement date; and (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

4.7 Is it possible for the company to be revived in the future?

The corporate insolvency resolution process under the Code is intended for the revival of the corporate debtor. If liquidation is ordered, then the Code provides for the distribution of all assets of the corporate debtor, its dissolution and the striking out of its name from the records and registers of the relevant authority (being the Registrar of Companies). However, recent judicial precedents indicate that liquidation of a corporate debtor may be conducted as a going concern but it is not clear how this will play out in practice.

5. Tax

5.1 What are the tax risks which might apply to a restructuring or insolvency procedure?

Dues accruing to tax authorities constitute operational debt. Therefore, during the corporate insolvency resolution process, such authorities are required to submit a proof of claim as operational creditors. The Code mandates that all operational creditors must be provided at least the liquidation value of their debts in resolution plans. The same applies to tax authorities as operational creditors. In liquidation, however, such authorities rank fifth in the waterfall as described in our response to question 4.6.

The Code also provides an exemption from applicability of tax laws in accordance with Schedule III of the Code. Further, in respect of computation of the Minimum Alternate Tax, the book profits of the corporate debtor undergoing the corporate insolvency resolution process can be reduced by the amount of total loss brought forward and the unabsorbed depreciation.

6. Employees

6.1 What is the effect of each restructuring or insolvency procedure on employees? What claims would employees have and where do they rank?

The Code differentiates between two categories of persons employed by the corporate debtor: workmen; and employees.

For the corporate insolvency resolution process, both employees and workmen qualify as operational creditors. Therefore, they must be provided at least the liquidation value of their dues.

In liquidation, dues of workmen owed for the two years preceding the liquidation commencement date are treated at par with the dues of secured creditors and are second only to the insolvency resolution process and liquidation process costs, in ranking. For employees on the other hand, dues preceding one year prior to the liquidation proceeding date rank third in the waterfall of distribution.

7. Cross-Border Issues

7.1 Can companies incorporated elsewhere use restructuring procedures or enter into insolvency proceedings in your jurisdiction?

The Code is not currently applicable to companies (i.e. corporate debtors) incorporated outside India. However, foreign creditors may file an application under the Code to initiate CIRP against companies incorporated in India.

7.2 Is there scope for a restructuring or insolvency process commenced elsewhere to be recognised in your jurisdiction?

The Code provides recognition to restructuring or insolvency processes commenced in foreign jurisdictions, provided reciprocal arrangements are in existence with such jurisdiction. The Code also empowers the Central Government to enter into agreements with foreign jurisdictions for enforcing the provisions of the Code. The Central Government may also, by notification, direct that the Code be applied in relation to assets or property of the corporate debtor located in a jurisdiction with which reciprocal arrangements have been made.

7.3 Do companies incorporated in your jurisdiction restructure or enter into insolvency proceedings in other jurisdictions? Is this common practice?

Under several foreign laws, companies not incorporated in a jurisdiction can also initiate insolvency proceedings under the laws of such jurisdiction (including Chapter 11 of the US Bankruptcy Code). The Code does not prohibit Indian companies from going through, say, Chapter 11. However, Indian creditors are likely to oppose such proceedings especially when proceedings under the Code have been imitated. In such case, the Courts and tribunals in India are unlikely to recognise such foreign proceedings.

8. Groups

8.1 How are groups of companies treated on the insolvency of one or more members? Is there scope for co-operation between officeholders?

Currently, there is no provision for substantial consolidation in insolvency proceedings of group companies. However, attempts have been made towards procedural coordination where a common resolution professional is appointed and all proceedings with group members are transferred to a single bench of the NCLT. The Insolvency and Bankruptcy Board of India has recently constituted a Working Group to recommend the complete regulatory framework for group insolvencies.

9. Reform

9.1 Are there any other governmental proposals for reform of the corporate rescue and insolvency regime in your jurisdiction?

The following reforms are being contemplated in India:

(a) introducing a regulatory structure for group insolvencies;

(b) introduction of provisions for cross-border insolvency; and

(c) notification and implementation of the personal insolvency,including that of personal guarantors to corporate debtors.


Bahram N. Vakil, Founding Partner
Gausia Shaikh, Associate





These are the views and opinions of the author(s) and do not necessarily reflect the views of the Firm. This article is intended for general information only and does not constitute legal or other advice and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author/AZB. AZB does not claim that the article's content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.