India: Restructuring & Insolvency

Under Indian law, companies may provide security over most kinds of assets to lenders. Assets over which security is created fall under the following broad categories:

• immovable property (both freehold as well as leasehold);
• movable property (including shares and intangible property such as goodwill);
• receivables; and
• intellectual property.

Creation of security in favour of foreign creditors typically requires clearance from an Indian ‘authorised dealer bank’ or the Reserve Bank of India under existing foreign exchange regulations and is subject to certain conditions.

Security over immovable property is typically created through:

• execution of a mortgage deed; or
• a deposit of title deeds (i.e. an equitable mortgage).

Security over movable property is typically created by way of pledge (in the case of shares or other securities) or hypothecation. However, security may also be created by way of lien or charge. Creditors may also opt for creating charge over third party assets in case of the inability of the debtor entity to offer valuable security from amongst its own asset pool.

Stamp duty (which is a fee paid to the revenue authorities) is required to be paid on security documentation at the prescribed rates under local State laws. A security interest created by a company is required to be perfected by making filings with the Registrar of Companies within the prescribed time period in order for the security interest to be effective against a Liquidator and other creditors.

In addition, security over immovable property by way of an indenture or deed of mortgage is also required to be registered (along with a payment of registration fees) with the sub-registrar of assurances under whose jurisdiction the immovable property is situated. However, in some states, a security over immovable property by way of deposit of title deeds is also required to be registered with the relevant sub-registrar of assurances. Further, security created over assets in favour of certain Indian banks and certain financial institutions notified under the Securitisation, Asset Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) is also required to be registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India. Failure to make this registration would disentitle a creditor from enforcing its security interest under the SARFAESI Act.

Details of the security interest created, together with details of the underlying debt are also required to be filed with an information utility (which is a repository of financial information regarding debtors) in the format prescribed under the Insolvency and Bankruptcy Code, 2016 (“Code”). While failure to make the filing with the information utility may result in monetary penalties being imposed on the creditor, it will not impact the creation or perfection of the security interest.

The modes of enforcement of security depend on both the nature of security and the nature of lenders. Lenders may have recourse to:

• the SARFAESI Act. The SARFAESI Act is a special legislation meant for enforcement of security interests. While it covers security interests such as mortgage, charge, hypothecation, or assignments, some rights such as the pledge of shares are excluded from its ambit. Under the SARFAESI Act, a creditor may take possession over such a secured asset, take over the management of the business of the debtor to recover dues, or appoint a manager for the secured assets under its possession, amongst other such remedies. No order from the court is required for any such actions if due process is followed, however, typically, there is some level of court involvement.
• the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”). Under the RDB Act, a summary procedure is conducted before a special tribunal to adjudicate upon the claim of creditors, and a hearing is given to the debtor. If the court is convinced of the existence of a debt and a default on its payment, it issues a certificate for recovery. This may lead to sale or attachment, taking over possession of a property, or the appointment of a receiver to manage the property through an officer of the tribunal called recovery officer, amongst others.
• Most foreign creditors would not be able to pursue actions under the SARFAESI Act or the RDB Act as these remedies are typically available to Indian banks and financial institutions, and certain other specified financial institutions such as the International Finance Corporation.
• a civil suit, in accordance with the provisions of the Civil Procedure Code, 1908 and the Commercial Courts Act, 2015.
• a private sale of assets. A mortgagee may exercise its right to private sale of immovable properties in certain circumstances, such as where the mortgage is an English Mortgage and the parties do not belong to specified religions/ communities; where a power of sale without the intervention of the court is expressly provided for in the mortgage deed and the mortgagee is the Government; or where a power of sale without court intervention is expressly provided as part of the mortgage deed and the mortgaged property is situated within select areas of specified Indian cities. Prior to exercising the power of private sale, the mortgagee must give the mortgagor at least 3 months’ prior notice regarding the default on repayment of principal or interest on the secured debt. The notice may only be issued on or after the default. In case of movable properties, a private sale of assets secured by way of pledge in order to recover the amount outstanding to the secured creditor after providing notice of a reasonable period to the pledgor requiring repayment of the secured debt.

While enforcing their security interest, secured creditors often face issues of delays and litigation by the debtors. Delays may be on account of slow processes of courts (where court-involvement is required), long notice periods for private sale and delaying tactics by recalcitrant debtors including litigation. Foreign lenders must also be conscious of restrictions on whom their security can be sold to, and there may be some regulations regarding repatriating proceeds as well.

A test of ‘default’ is used to determine insolvency. Default is defined as the non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor.

There is no obligation on directors or officers to open insolvency procedures upon the debtor becoming distressed or insolvent. However, directors or officers have the duty to avoid wrongful trading i.e. trading in a manner that does not minimize the potential loss to the creditors of the corporate debtor, when they knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of insolvency proceedings. If directors are found responsible for wrongful trading, they may be inter alia made liable to contribute to the assets of the debtor.

The Code consolidates reorganization and insolvency laws applicable to businesses as well as individuals. The following reorganization and insolvency procedures are available to incorporated businesses:

The Corporate Insolvency Resolution Process (“CIRP”):

The debtor, as well as domestic and foreign ‘financial creditors’ (whose debt is disbursed against the time value of money, such as banks), and ‘operational creditors’ (persons to whom debt is owed in respect of provision of goods and services, including workmen and employees, as well as statutory creditors) may apply for the initiation of the CIRP to rescue the debtor as a going concern. The essential requirement to be satisfied for initiation of CIRP is existence of debt and default, (with certain additional requirements such as issuance of statutory notice, and absence of pre-existing dispute in case of operational creditors). Once the “Adjudicating Authority” (the National Company Law Tribunal constituted under the Companies Act, 2013) is satisfied of the pre-requisites for admitting an application for CIRP, it admits the same and a moratorium or “calm period” is declared and a public announcement is made for creditors to submit their proof of claims.

The CIRP causes a change in control of the management of the debtor and a registered insolvency professional called the Resolution Professional manages the affairs of the corporate debtor with powers of the board of directors remaining suspended. The Resolution Professional also runs the CIRP, invites claims, constitutes a committee of creditors constituted of un-related financial creditors (“CoC”) and in consultation with the CoC invites resolution plan from all eligible persons. Additionally, the Resolution Professional is required to carry out certain actions, such as making a change in the management of the debtor or its subsidiary, raising interim finance, etc., only with prior approval of the CoC.

The CoC evaluates all resolution plans received, and approves a resolution plan by a vote of more than 66% of the committee (by percentage of debt owed). The resolution plan so approved is then placed for the approval of the Adjudicating Authority, which must approve the resolution plan if it meets the minimum requirements of law.

The Code provides that a CIRP should conclude within less than 330 days. Typically the CIRP concludes within 355 days (on an average of CIRPs that concluded in the acceptance of a resolution plan and those that ended in liquidation, till December 31st, 2020, Insolvency and Bankruptcy Board of India, Quarterly Newsletter, October-December 2020)

• The Pre-packaged Insolvency Resolution Process (“PPIRP”):

With effect from 4 April 2021, Micro, Small and Medium Enterprises that have committed default of at least INR 10 lakh (approximately US$13,403) are eligible for a PPIRP and may negotiate a “base plan” with their creditors prior to commencement of the PPIRP.

Once 75% of its members and 66% of its unrelated financial creditors by value, approve the proposal to initiate PPIRP, the corporate debtor may approach the Adjudicating Authority to initiate the process. Once a PPIRP has been initiated, a limited moratorium shall be declared and a registered insolvency professional is appointed to oversee the process.

During a PPIRP, the management of the debtor continues to stay in possession of its directors or partners, albeit with the oversight of the CoC. The CoC itself is formed on the basis of a list of claims provided to a Resolution Professional (who is a registered insolvency professional) by the corporate debtor. Additionally, the corporate debtor must provide to the Resolution Professional a Preliminary Information Memorandum containing all information relevant for formulating a resolution plan, as well as the negotiated base plan. The CoC retains the decision to approve the base plan, or to invite other plans to challenge it. Any plan that receives not less than 66% approval from the CoC is considered approved and is submitted to the Adjudicating Authority. A PPIRP must be concluded within one hundred and twenty days of commencement.

• Liquidation Process:

Insolvent liquidation cannot be commenced directly, and may only be a consequence of the failure of the CIRP. Under the Code, the insolvent liquidation of companies is triggered in the event that the CIRP does not culminate in approval of a resolution plan or if no resolution plan is proposed within the timelines under the CIRP. The company may also be liquidated, if the CoC resolves to liquidate the company during the CIRP before the confirmation of the resolution plan or the debtor contravenes the terms of an approved resolution plan. It may also be initiated exceptionally on failure of the PPIRP.

The most important duties of the Liquidator are (a) to collect, consolidate and verify all the claims against the corporate debtor, (b) to formulate the liquidation estate of the corporate debtor, (c) to sell the assets of the corporate debtor and (d) to distribute proceeds of the sale or auction in accordance with the processes laid down in the Code. The Adjudicating Authority oversees this process, and the Liquidator must submit several reports appraising them about the status of the liquidation. The proceeds from the sale of the liquidation estate are distributed amongst the creditors according to a priority set forth under Section 53 of the Code. When the assets of the corporate debtor have been completely liquidated, the Liquidator makes an application to the Adjudicating Authority for dissolution. The law requires that the Liquidator attempt to achieve this within 1 year. However, it typically takes 384 days between the commencement of liquidation and provision of the final report by the Liquidator (as on December 31st, 2020, Insolvency and Bankruptcy Board of India, Quarterly Newsletter, October-December 2020)

Further, the Companies Act, 2013 includes a court-supervised process for schemes of compromise or arrangements, that may be used for implementing a scheme for the revival of a company through a compromise with the creditors. However, such schemes are not used often for insolvency resolution for reasons such as extensive court involvement, and the absence of a cross-class cram-down, amongst others. Accordingly, they have not been discussed in further detail.

These are in addition to informal procedures that may be resorted to for insolvency resolution of businesses.

Distributions from sales in liquidation would be according to the statutory waterfall which is as follows:

1. insolvency resolution process costs and liquidation costs in full;
2. (a) debts owed to a secured creditor in the event such secured creditor has relinquished its security; and (b) worker’s dues for the period of 24 months prior to liquidation (both of which rank equally amongst each other);
3. wages and any unpaid dues owed to employees other than workmen for the period of 12 months prior to liquidation;
4. financial debts owed to unsecured creditors;
5. (a) dues to the Government; and (b) debts owed to secured creditors for unpaid amounts following the enforcement of security interests outside liquidation (both of which rank equally amongst each other);
6. any remaining debts;
7. preference shareholders, if any; and
8. equity shareholders or partners, as the case may be.1

In the CIRP and PPIRP, costs of the CIRP and PPIRP are to be paid in priority to all other payments. Payments to operational creditors are to be made before any financial creditors are paid, and dissenting financial creditors are to be paid before assenting financial creditors. However, the resolution plan needs to only guarantee liquidation value to dissenting financial creditors. For operational creditors, the resolution plan must guarantee the higher of the liquidation value or the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority above. While there is no specific provision granting power to subordinate claims in CIRP and PPIRP, in practice, the Adjudicating Authority has used its discretionary powers to subordinate claims of certain types of creditors. For instance in J.R. Agro Industries P. Ltd v. Swadisht Oils P. Ltd., CA No. 59 of 2018 in CP(IB)13/ALD/2017 dated 24.07.2018, the Adjudicating Authority ordered the subordination of the claims of a related party to the claims of unsecured operational creditors of the debtor.

Yes, a debtor’ pre-insolvency transactions can be challenged and set aside if they are:

• preferential transactions: transactions that put any person in a better position than they would have been in the distribution waterfall provided for under the Code in the event of a liquidation and which are not in the ordinary course of business;
• undervalued transactions: transactions in which the company has gifted or transferred property to a person for a value which is significantly less than the value of consideration provided by that person and which are not in the ordinary course of business of the company;
• transactions defrauding creditors: undervalued transactions that were deliberately entered into to keep assets beyond the reach of any person entitled to claim against the company, or adversely affect the interest of such a claimant; and
• extortionate credit transactions: transactions where credit has been extended on extortionate terms other than transactions where financial services are provided to the company in compliance with law.

Under the Code, the Adjudicating Authority has exclusive jurisdiction to set aside such transactions upon an application made by the Resolution Professional, the Liquidator or the creditors (only in case of undervalued transactions and transactions defrauding creditors). The Adjudicating Authority is vested with wide powers to remedy the effect of such transactions including the power to reverse the transactions, supplanting obligations and directing payment of adequate consideration. At the same time, interests of persons who acquire property in good faith and for adequate value have been safeguarded under the Code.

Preferential transactions undervalued transactions and transactions defrauding creditors are vulnerable to being set aside if they are entered into within the two years preceding the insolvency commencement date with related parties; or within one year preceding the insolvency commencement date when entered into with persons other than related parties.

Please note that the definition of ‘related party’ under the Code is broad and includes directors, partners, key managerial persons, shareholders having ownership beyond defined thresholds and persons who are involved with the policy making process of the company, amongst others.

‘Extortionate credit transactions’ entered into by a company within the two years preceding the insolvency commencement date are liable to be set aside (irrespective of whether or not such transactions are entered into with a related party).

Under the Code, the Adjudicating Authority is required to declare a moratorium at the time it accepts an application for the CIRP. The moratorium prohibits:

• the institution or continuation of suits or proceedings against the company;
• any actions for foreclosure, recovery or enforcement of any security interest created by the company in respect of its property;
• transferring, encumbering, alienating, or disposing of any of its assets or any legal or beneficial interest in such assets by the company;
• recovery of any property by an owner or lessee where such property is owned by or in possession of the company;
• termination or suspension of a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;
• termination, suspension or interruption of supply of essential goods and services (which includes electricity, water, telecommunication and information technology services to the extent that these are essential services for the company); and
• termination, suspension or interruption of supply of goods and services critical to the preservation of the value of the company and its management as a going concern (as determined by the Resolution Professional), except if they are not paid for during the moratorium period or in such other circumstances as may be specified.

The moratorium is required to continue until the completion of the CIRP. Under the Code, such moratorium will not apply to the guarantor of a company undergoing the CIRP. Apart from this, the Central Government, in consultation with financial sector regulators or other authorities, has the power to carve out certain transactions, agreements or arrangements from the moratorium. The Code does not envisage exceptions to the moratorium on a case by case basis. A moratorium with a similar scope applies to PPIRP proceedings. However, supplies of essential and critical goods and services are not guaranteed typically, as long as the debtor remains in possession during the PPIRP.

In Liquidation, subject to the right of the secured creditors to stand outside liquidation, no suit or other legal proceedings are permitted to be instituted by or against the company after a liquidation order has been passed by the Adjudicating Authority, except with the approval of the Adjudicating Authority.

Since the Code extends only to India, the moratoria in CIRP, PPIRP and Liquidation proceedings would not have extra-territorial effect. However, where actions are instituted outside India, and require enforcement within India, enforcement actions may be prevented by the moratorium.

Please see the response to Question 4 above.

The Resolution Professional has the authority to incur debt and raise interim finance on behalf of the corporate debtor to ensure that it continues as a going concern during the CIRP. Where the amount of interim finance raised is above a threshold decided by the CoC, the Resolution Professional must take the prior approval of the CoC. In case of PPIRP, the debtor in possession may also raise interim finance in a manner similar to the Resolution Professional in the CIRP.

Under the Code, interim finance and costs associated with raising interim finance form a part of the ‘insolvency resolution process costs’. These costs are to be paid in priority to other debts under the Resolution Plan in CIRP/ PPIRP as well as in liquidation.

A restructuring proceeding i.e. a CIRP/ PPIRP culminates in a resolution plan. The resolution plan binds all the creditors and other stakeholders of the corporate debtor only. Consequentially, claims against non-debtor parties cannot be released, except with the assent of the relevant claimants. In practice, resolution plans typically expressly reserve creditors’ rights to pursue remedies in law against non-debtor parties, such as guarantors even where these liabilities are secondary to the discharged liabilities of the corporate debtor. This practice has been upheld by the Supreme Court of India in Committee of Creditors of Essar Steel v. Satish Kumar Gupta, (2020) 8 SCC 531.

A CoC, comprising of all unrelated financial creditors of the corporate debtor, is formed in all CIRPs under the Code. The CoC has key powers and responsibilities during the CIRP. The CoC is required to either appoint the interim resolution professional (a registered insolvency professional appointed by the Adjudicating Authority on the recommendation of the applicant) as the Resolution Professional, or appoint another person as the Resolution Professional. Based on the recommendation of the CoC, the Adjudicating Authority appoints the Resolution Professional. Further, during the CIRP, the CoC has authority to remove and replace the Resolution Professional. After the formation of the CoC, the Resolution Professional is required to obtain prior approval from the CoC for certain specified actions, including but not limited to:

• raising interim finance beyond specified limits;
• creating any security interest over the assets of the company;
• changing the capital structure;
• changing management;
• undertaking any related party transactions; and
• amending constitutional documents of the company.

One of the most important responsibilities of the CoC is to determine whether a debtor’s business is economically feasible. The CoC may then decide to either liquidate the debtor or invite and approve a resolution plan proposed to rescue the debtor as a going concern. The CoC first approves the criteria that a person must meet in order to be eligible to submit a resolution plan as well as the criteria on which it will evaluate all resolution plans it receives. Once resolution plans are received, the CoC must deliberate and record its deliberations on the feasibility and viability of each resolution plan, and vote on all such plans simultaneously. The plan which gets the highest percentage of votes, and at least 66% of the votes of the CoC is considered the approved resolution plan.

Under the Code, the interim resolution professional and the Resolution Professional may appoint accountants, legal, or other professionals to assist her in carrying out the CIRP and running the business as a going concern . The CoC is tasked with approving their fees and expenses. These are included in the insolvency resolution process cost which are to be paid in priority to other debts under the Resolution Plan in CIRP as well as in liquidation. While independent financial creditors and the CoC too may appoint professionals to assist them during the CIRP, these are privately funded by such creditors/ CoC and are not part of the costs to be paid out of the debtor’s estate.

The responsibilities of the CoC under a PPIRP are similar. While the management retains control of the business during a CIRP, the board of directors is required to take approvals from the CoC for the same actions that a Resolution Professionals requires prior CoC approval for. The CoC is also responsible for approving a resolution plan. Within two days of the commencement of the PPRIP, the debtor must submit the base resolution plan to the Resolution Professional, who in turn presents it to the CoC for approval. If a resolution plan does not impair any claims owed by the corporate debtor to the operational creditors, it may be approved by the CoC. Alternatively, prospective third party resolution applicants could be invited to submit resolution plans. This plan will either compete with the base resolution plan, or will be chosen for voting without competition if it is significantly better than the base plan. The CoC may then approve either the base resolution plan, or the best amongst the invited plans, on the basis of the feasibility and viability of the plan and the manner of distribution proposed. A plan may be approved by a 66% vote of the CoC by voting share. Once approved, the plan is placed before the Adjudicating Authority for its approval. During a PPIRP, the Resolution Professional may appoint advisers, the fees for whom would be paid out of the PPIRP costs. While the CoC may also retain advisers during the PPIRP, the costs incurred in this regard would be funded privately.

Generally, on commencement of the CIRP, existing contracts of the debtor continue uninterrupted. The Resolution Professional is empowered to amend or modify contracts that were entered into before the commencement of the CIRP to maintain it as a going concern.

Termination of Contracts

The Code does not contain any clear-cut provision that invalidates ipso facto clauses or termination clauses. Therefore, if contracts contain termination clauses, such termination would ordinarily be effective.

However, there are some exceptions to this rule. Certain parties are obligated to continue performance of their contracts after the commencement of the CIRP under the Code. Once the moratorium is declared, the supply of essential goods or services may not be terminated or suspended during the moratorium period. Accordingly, the supply of electricity, water, telecommunication and information technology services to the extent that these are essential services for the company may not be interrupted. Additionally, any license, permit, registration, quota, concession, clearance or a similar grant or right given by the any Government authority, may not be terminated on the grounds of insolvency- subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period. Furthermore, when the interim resolution professional or Resolution Professional considers the supply of certain goods or services critical to the preservation of the value of the company and its management as a going concern, such contracts may not be terminated; except where the debtor has not paid dues arising from such supply during the moratorium period. Lastly, in some exceptional cases, if a contract is crucial for the success of the CIRP and is therefore intrinsically linked to the preservation of the corporate debtor as a going concern, its termination may be set aside by the Adjudicating Authority (Gujarat Urja Vikas Nigam v. Amit Gupta, 2021 SCC OnLine SC 194).

Under a PPIRP, the termination of contracts for the supply of essential and critical goods or services, has not been expressly barred. However, even under a PPRIP, any license, permit, registration, quota, concession, clearance or a similar grant or right given by the any Government authority, may not be terminated on the grounds of insolvency- subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period.

Under Liquidation, there is no bar on the termination of contracts.

Retention of Title Provisions

Once a moratorium has been declared at the commencement of the CIRP, the recovery of any property by an owner or lessor, where such property is occupied by or in the possession of the corporate debtor, is prohibited. Accordingly, as long as the corporate debtor is in actual physical possession of a property (and does not merely have rights or interests in a property), a contractual counter-party could be prohibited from enforcing recovery after the commencement of the CIRP However, these assets, not being assets of the debtor would not be considered part of the debtor’s insolvency estate. This would be the position of law under a PPIRP as well.

The moratorium during liquidation is generally more limited, and consequently, recovery of assets under a retention of title provision is not barred.

Set-Off Provisions

In CIRP, PPIRP and Liquidation, a creditor filing a claim is required to provide details of the mutual credit, mutual debts, or other mutual dealings between the debtor and itself which may be set-off against its claim. Consequently, an insolvency set-off would be applied in all cases where claims are made and considered/ settled as part of the resolution plan.

However, the jurisprudence on the validity of contractual set-offs that do not fall strictly within the scope of such an insolvency set-off has not been entirely settled under the Code at present.

Disclaimer of Contracts

Under the CIRP and PPIRP, neither party has a right to disclaim contracts. In CIRP, the Resolution Professional may amend or modify contracts of the debtor in accordance with the terms of the contract. On the other hand, once a liquidation process has commenced, a Liquidator has the right to disclaim unprofitable contracts. This is notwithstanding whether she has done anything in pursuance of the contract. The Liquidator may make an application to the Adjudicating Authority within six months from the commencement of the liquidation in this regard.

During the CIRP, unsecured assets amounting to no more than 10% of the claims against the debtor may be sold. These may be sold with prior approval of 66% of the CoC on an as is where is basis.

As part of the resolution plan, while the assets of the corporate debtor may be sold, and the company restructured, courts have held that the company, and not just its business, must be rescued as a going concern. As such, asset or business sales are not common under the CIRP, and usually the whole company is acquired. While technically there is no bar on creditors acquiring the debtor as part of a resolution plan, since the CIRP is intended to rescue the debtor as a going concern and is not viewed as a ‘sale’ proceeding, some judicial decisions have held that rescue plans that envisage that creditors would take over the management of the debtor without infusion of new funds, turn the business around and sell it would not be permissible under the Code (Superna Dhawan & Anr. v. Bharati Defence and Infrastructure Ltd. & Ors. CA(AT)(Insolvency)195 of 2019 – dated 14.05.2019).

However, those who acquire the company do so free and clear of those claims and liabilities extinguished under the resolution plan, which could include disputed and other contingent claims. Consequently, other than as provided in the resolution plan, a stakeholder bound by the plan cannot pursue claims under any other law, after the resolution plan has been approved, except to the extent consistent with the resolution plan so that a successful resolution applicant gets a ‘fresh slate’. (Committee of Creditors of Essar Steel v. Satish Kumar Gupta, (2020) 8 SCC 531) In addition, Section 32A of the Code provides that no action may be taken against the property of the debtor or the debtor itself in regard to any offence committed pre-commencement, as long as control doesn’t continue with pre-existing management or other persons who may have been party to the commission of that offence.

The resolution plan may also release security over assets of the debtor, without the secured creditor’s consent subject to receiving the requisite percentage of 66% of CoC approving the resolution plan. However, such a dissenting secured creditor would have to be paid the liquidation value due to it, or be allowed to retain and enforce its security. The same principles on the scope of ‘sales’ in the resolution plans are applicable to PPIRPs. As such while pre-packaged resolutions are possible, pre-packaged sales of whole businesses as in England or as under Section 363 of the US Bankruptcy Code are not envisaged under Indian insolvency law.

In liquidation, where a piece-meal asset sale is attempted (although a going concern sale of the corporate debtor or business may also be attempted), the assets are sold on an as is where is basis. However, no action may be taken against the assets of the debtor in regard to any offence committed pre-commencement, as long as the assets are purchased by persons who were not part of the pre-existing management of the debtor and were not party to the commission of that offence. Secured creditors are allowed to enforce their security in liquidation and stand outside the collective liquidation proceeding. While the Code doesn’t prevent secured creditors from enforcing their security through credit bidding, the Liquidator has been given the power to propose that the assets be sold at a higher price and identify a purchaser for the same, except in certain circumstances.

The duties of the directors begin during the twilight zone, or the ‘zone of insolvency’- when the directors or partners knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process. During this time, the directors or partners of the debtor are responsible for exercising adequate due diligence to avoid potential loss to the creditors of the company. In case such diligence is not exercised the director may be held liable for wrongful trading during CIRP or Liquidation. The Adjudicating Authority may, on an application by the Resolution Professional, order that the director or partner will be liable to make such contribution to the assets of the corporate debtor as it may deem fit. Moreover, if it is found that the business of the corporate debtor was carried on with the intent to defraud the creditors of the corporate debtor, or for any fraudulent purpose, the persons who were knowingly parties to this would be liable for fraudulent trading and would be ordered to make contributions to the assets of the corporate debtor. If the Adjudicating Authority has made a finding of fraudulent or wrongful trading, it may also pass directions to consider such liability for making contributions a charge on any debt owed by the debtor to herself, her agents and assignees.

During the CIRP, the management of the corporate debtor does not vest with its board of directors. The primary duty of the officers of the company is to extend all assistance and cooperation to the Resolution Professional, as may be required by her in managing the affairs of the corporate debtor. In case any director or partner does not extend such cooperation, the Resolution Professional may file an application before the Adjudicating Authority, which may then in turn direct such personnel to comply with the instructions of the Resolution Professional and to cooperate with her in collection of information and management of the corporate debtor.

Under the PPIRP, the directors retain control over the corporate debtor. On admission of the application, the management of the affairs of the corporate debtor shall continue to vest in the board of directors or the partners, as the case may be, of the corporate debtor. The management will ensure that the value of the debtor is preserved and that it is maintained as a going concern. However, the board of directors or partners will require the approval of the CoC for certain actions as discussed in response to Question 11 above. Further, if the affairs of the corporate debtor are conducted in a fraudulent manner; or there has been gross mismanagement of the affairs of the corporate debtor, the Adjudicating Authority would pass an order vesting the management of the corporate debtor with the Resolution Professional even in PPIRP.

Subject to certain conditions, once a resolution plan is approved, the corporate debtor is absolved of any liability arising from previous claims, and from any offence committed prior to the commencement of the CIRP (as discussed in response to Question 6). However, this does not release directors and other officers from liability for their prior actions and decisions.

Specifically, under Section 32A of the Code, a partner, director or any officer who was in-charge of the business of the debtor, and who was involved in the commission of any offence, will continue to be liable for such an offence committed by the corporate debtor notwithstanding that the corporate debtor’s liability has ceased. The right to an action against the property of any person other than the corporate debtor itself (including the directors and all other stakeholders), has also not been barred. Further, resolution plans also ordinarily reserve the right to hold previous management of the corporate debtor liable for any prior actions and decisions.

Under the Code, bilateral, reciprocal arrangements are the only basis for granting assistance or recognition to foreign insolvency processes. The Code also provides that in cases where a company’s assets are located in a country with which there are reciprocal arrangements, the Resolution Professional and/or the Liquidator may make an application to the Adjudicating Authority, which may then issue a letter of request to the relevant foreign court or authority for necessary assistance. No such bilateral or reciprocal arrangements have been put in place thus far. In 2018, the Indian Government proposed the enactment of a chapter on cross-border insolvency based on the UNCITRAL Model Law on Cross-Border Insolvency with certain modifications. A key rationale behind the proposal is that it will benefit the Resolution Professional (and Indian businesses generally) in being able to seek assistance in other jurisdictions. However, this has not yet been enacted, and a Committee of Experts was constituted in January 2020 to recommend rules and a regulatory framework for the smooth implementation of the proposed cross-border insolvency framework.

While legal reform remains pending, in the case of Jet Airways v State Bank of India, (Company Appeal (AT) (Insolvency) No. 707 of 2019, NCLAT, dated 26.09.2019), the Appellate Authority gave access to a foreign insolvency representative and directed the Resolution Professional to enter into a Cross-Border Insolvency Protocol with the administrator of Dutch proceedings. The Appellate Authority also recognised the Cross Border Insolvency Protocol entered into between the Dutch Administrator and the Resolution Professional and directed that the Protocol should be treated as the direction of the Appellate Authority. As such, it may be possible for Adjudicating Authority to grant recognition or assistance in future cases based on this precedent.

N/A

Debtors incorporated outside India may not enter into restructuring or insolvency proceedings under the Code, as the Code requires that a debtor be incorporated in India to avail of the processes under it.

While the Code does not have an extensive framework to deal with the issues that arise in the insolvency of group companies, judicial precedents have developed on how situations relating to insolvency of companies in corporate groups may be dealt with. Most significantly, in relation to Videocon Industries Limited, first, the National Company Law Tribunal (“NCLT”), Delhi ordered that different CIRPs of different companies be heard by the same bench of the NCLT, Mumbai in order to ensure procedural coordination (CA-1022(PB)/2018, order dated 24.10.2018). Thereafter, the NCLT, Mumbai ordered the substantive consolidation of the assets of 13 out of 15 companies and observed that on a case to case basis, substantive consolidation of group entities could be considered inter alia basis the following parameters i.e. common control, common directors, common assets, common liabilities, interdependence, interlacing of finance, co-existence for survival, pooling of resources, intertwined accounts, interloping of debts, singleness of economics of units, common financial creditors and common group of corporate debtors (MA/2385/2019 in CP (IB) 02/MB/2018, order dated 12.02.2020).

Since then, in various cases, the Adjudicating and Appellate Authorities have ordered consolidation of different group entities undergoing insolvency resolution. In many cases, the Resolution Professional appointed in the CIRPs of different group companies is the same in order to ensure coordination in different cases, and where different, requests for cooperation would be considered favourably.

A Committee of Experts was constituted in January 2020 to recommend rules and a regulatory framework for the smooth implementation of a cross-border insolvency framework discussed in response to Question 16 above. This Committee is likely to consider the adoption of the UNCITRAL Model Law on Enterprise Group Insolvency.

In light of the COVID-19 crisis, the following temporary changes have been enacted to Indian insolvency law:

• Initiation of CIRPs had been suspended where the initiation would have been on the basis of a default that occurs on or after 25 March 2020 to 25 March 2021. However, it is not entirely clear if the CIRP may be initiated for defaults that first occur during this prescribed period but continue after such period.
• Actions for wrongful trading may no longer be filed against directors, in respect of a default for which initiation of the CIRP has been temporarily suspended.
• The relaxation of some timelines (those provided in the Regulations under the Code, and not those provided under the Code itself) relating to the CIRP and Liquidation process.

In addition, the threshold for initiation of the CIRPs has been raised to INR10,000,000 (approximately US$134,035) from INR100,000 (approximately US$1,340) to make it more difficult to initiate the CIRP under the Code. However, this is a permanent measure and had been contemplated by the Government of India even before the onset of COVID-19.

The following changes are expected in the medium-term:

• In February 2020, a Committee of Experts recommended that amendments be made to the Code to inter alia further streamline the CIRP including through enabling a single-window clearance, allow for the Official Liquidator’s office to conduct the Liquidation Process under the Code in some cases, and operationalise a digitally conducted Fresh Start Process for low-income, low-asset individual debtors.
• In September 2019, a Working Group of Experts recommended a framework for Group Insolvency focussed on promoting procedural coordination between the insolvency processes of different Group Entities. However, this recommendation has not resulted in legislative change to date.
• In 2018, the Indian Government proposed the enactment of a chapter on cross-border insolvency based on the UNCITRAL Model Law on Cross-Border Insolvency with certain modifications. A key rationale behind the proposal is that it will benefit the Resolution Professional (and Indian businesses generally) in being able to seek assistance in other jurisdictions. However, this has not yet been enacted, and a Committee of Experts was constituted in January 2020 to recommend rules and a regulatory framework for the smooth implementation of the proposed cross-border insolvency framework.

While Indian insolvency law has historically been debtor-friendly, the Code has transformed the Indian insolvency landscape to become a creditor-friendly regime. This is manifested in the design of the CIRP where control of the debtor is in the hands of Resolution Professional whose appointment is approved by the CoC as well as the huge deference the commercial decisions of creditors is given in insolvency resolution.

Moreover, all persons including existing promoters and management are precluded from presenting a resolution plan for the corporate debtor if they are:

• are undischarged insolvents,
• are wilful defaulters,
• are promoters or managers of the corporate debtor who at the time of submission of the plan, have an account, or have had an account classified as a “non-performing asset” for at least one year from the date of such classification till the date of the commencement of the CIRP (persons who make good their dues before submission of the plan would be eligible),
• have been convicted of certain offences,
• have been disqualified from acting as a director or trading in securities
• have been promoters or in management or control of a corporate debtor win which avoidable transactions have taken place,
• are guarantors of a debtor against which the CIRP has been admitted,
• are subject to similar disqualifications under foreign laws,
• have connected persons that suffer from any of these disqualifications.

This is reflected in the manner in which insolvency proceedings are instituted, with only 6.45% of insolvency proceedings being instituted by the debtors themselves. Even in the PPIRP regime where the debtor would remain in possession of the company, such promoters and managers of the debtor are precluded from initiating the PPIRP.

Socio-political factors have led the legislature to make interventions to protect the interest of consumers such as homebuyers. Specifically, the legislature has introduced amendments to ensure that they are considered financial creditors who may be a part of the CoC. Moreover, while they are considered ‘creditors in a class’ that act together unlike institutional financial creditors, Adjudicating Authorities may intervene to ensure that treatment of these creditors is such that adequately balances their interests. Moreover, while operational creditors and other non-financial creditors are not a part of the CoC, the Adjudicating Authority also routinely intervenes to ensure that payments to these creditors are such that adequately balance their interests as well. While the decision of the CoC is final in such cases, the Adjudicating Authority is empowered to return the resolution plan to CoC for reconsideration, if the amounts proposed for operational creditors are too low.

Similarly, while debts due to the State are considered part of operational debt, and rank lower in priority to financial debts, in some cases involving use of public resources such as spectrum, non-payment of such debts is considered a loss to the public. If payment of such debts is not made, the right to use such resources may be lost. As such, payment of such debts may need to be considered at greater priority.

State support has limited role to play in insolvency proceedings. From time-to-time state support schemes are put in place to deal with sectoral distress e.g. the state sponsored Special Window for Affordable and Middle-Income Housing Investment Fund I which was set up for priority debt financing for stalled housing projects. Funding from these may then be considered sources of interim finance where relied on after or even before the commencement of the CIRP. However, as a large number of institutional financial creditors that are part of the CoC are state-run banks, in some situations, banks may take decisions keeping in mind social objectives as well, in certain circumstances. Similarly, some public sector enterprises may also propose resolution plans for those debtors whose rescue may be in public or social interest.

The greatest barriers to efficient and effective restructuring and insolvencies in India include:

• Time certainty: While proceedings under the Code are time-bound, significant delays, particularly on account of litigation, often cause value destruction during proceedings. The Indian Government has been seeking to address delays by improving the capacity of the Adjudicating Authorities, and by making changes in process that discourage unnecessary litigation.
• Improvement in the quality of information: While the CIRP generally envisages a rescue of the company by third parties, investors often face challenges in carrying out diligence due to the poor quality of information available regarding debtors in insolvency. To improve information symmetry, the Government has been taking steps to increase information availability with the information utility in India.
• Approvals/ Outcome certainty: At present, even after a resolution plan is approved by the CoC and the Adjudicating Authority, approvals envisaged in statute or contract may be required for the resolution applicant to smoothly take control of the corporate debtor. However, these are often not forthcoming. This also creates uncertainty for resolution applicants. Given this the Insolvency Law Committee in its Report of February, 2020 recommended that a single window be created to receive approvals of all government and regulatory authorities prior to approval of the resolution plan by the Adjudicating Authority.