Restructuring and insolvency in India – in a phase of evolution



India is a growing economy, with funds deployed across various sectors, including heavy industry, infrastructure and energy. The equity market has also been on an upswing in terms of investment in listed and unlisted companies. Private equity and alternate investment funds, as well as family offices, have been investing in unlisted companies with growth potential.

The listed market space has also attracted huge interest from mutual funds and foreign portfolio investors, among others. In addition, the legal, regulatory and policy framework has been amended from time to time to ensure continued investor interest in the Indian equity market. Banks and financial institutions have primarily driven the debt market in India. However, given the lack of a cohesive and comprehensive legal framework for restructuring debt and addressing the insolvency situation, non-performing assets of banks and financial institutions have been on the rise, leading to losses and thereby impacting their ability to lend.

Also, uncertainty around the time required to resolve a situation arising out of a debt default did not garner the confidence of foreign lenders and other creditors. This led the Indian government to formulate and implement the Insolvency and Bankruptcy Code for corporate insolvency, which took effect in December 2016.

Insolvency Code

The Insolvency Code is a comprehensive restructuring and insolvency resolution law for corporates. The law intends to enable early resolution in situations where restructuring is feasible by stipulating a time period of 180 days, with the potential for a one-off 90-day extension. Prior to the Insolvency Code, matters were resolved and restructured by a lenders forum under an informal arrangement. As this restructuring mechanism was not very efficient or effective, the situation deteriorated and led to a loss of value to corporates and lenders, and various other stakeholders.

Under the Insolvency Code, the insolvency resolution process can be initiated by a financial creditor, an operational creditor or by the debtor itself by making an application to the National Company Law Tribunal (NCLT). Upon applying, the NCLT declares a moratorium, issues a public notice and appoints a resolution professional. The declaration of a moratorium on the debtor prohibits any commencement or continuation of litigation against the debtor, mandates that the debtor maintains the status quo of the assets and requires the creditors to refrain from enforcing any security interest. During the resolution period, the entire management of the debtor and custody of its assets are placed in the hands of a resolution professional to protect them.

During the resolution period, the resolution professional invites resolution plans from those that fit within the definition of “resolution applicant” under the Insolvency Code, by providing them with the information memorandum in relation to the corporate. A lot of flexibility is given to a resolution applicant proposing a resolution plan. The resolution plan has to be approved by 75 percent of the committee of creditors, comprising financial creditors.

Once approved by the committee of creditors, the plan requires final sign-off by the NCLT. In the eventuality that there is no resolution plan approved by either the creditors or the NCLT, the corporate is to be liquidated by the NCLT. The resolution professional, therefore, takes on the role of a liquidator and is responsible for monetising the assets of the corporate to offset liabilities.

Implementation of the Insolvency Code

At the start of the implementation phase, there was a general reluctance among banks and financial institutions to invoke the Insolvency Code. Generally speaking, there was a fear of entering unchartered territory and a lack of confidence in resolution professionals to manage the corporate during the insolvency resolution period and ensure a timely resolution. This led the Reserve Bank of India (RBI) to intervene and instruct the banks to refer 12 of the biggest corporate defaulters for an insolvency resolution process in June 2017.

In August 2017, the RBI asked banks to refer another 28 corporate defaulters for insolvency resolution. Other than these, after the enactment of the Insolvency Code, 2434 fresh cases have been filed before the NCLT and 2304 cases of companies being wound up have been transferred from various high courts. Of these, according to the NCLT, 2750 cases have been disposed of and 1988 cases were pending as of 30 November 2017. In various matters, as part of the resolution plan, it was envisaged that the debtor assets be sold to a third party. However, it was feared that promoters who were already wilful defaulters would try to purchase their assets in such a sale. This led to suggestions that restrictions be imposed on promoters being resolution applicants.

After much debate and deliberation, the Insolvency Code has been amended so that a resolution applicant cannot be a person or any person acting in concert with someone who is: (i) a wilful defaulter as defined by the RBI; (ii) prohibited from trading in securities or accessing the financial markets by the capital markets regulator, the Securities and Exchange Board of India; (iii) disqualified from acting as a director under the Companies Act 2013; or (iv) in possession of an account of the corporate debtor under the management or control of a person classified as a non-performing asset by the RBI for a period of more than one year.

Given the discomfort and uneasiness shown by lenders toward resolution professionals, using the reference to liquidation value of the corporate debtor as part of resolution process, the corporate insolvency regulations have now been modified to require resolution professionals to seek both fair value – value at which a transaction could happen dehors the fact that the corporate debtor is in insolvency – and the liquidation value of the corporate debtor.

It is also unnecessary to disclose ‘liquidation value’ in the information memorandum. After the receipt of the resolution plans, resolution professionals are required to disclose the liquidation value to every member of the creditors committee after first obtaining an undertaking to the effect that members will keep said liquidation value confidential and not use the knowledge to their advantage.

In order to ensure transparency when inviting persons to participate in the resolution process, corporate insolvency regulations now require a resolution professional to issue an invitation which includes an evaluation matrix – parameters to be applied when considering resolution plans as approved by the committee of creditors.

Until the provisions for individual insolvency under the Insolvency Code are notified, the creditor may – notwithstanding commencement of insolvency proceedings against the corporate debtor for which a personal guarantee has been provided – be entitled to proceed against the personal guarantor, as there is no restriction under the Insolvency Code in this regard. The Allahabad High Court recently took the view that proceedings against a personal guarantor cannot take place when a moratorium has been declared on the corporate debtor. However, in the absence of any such prohibition under the Insolvency Code, such a position would not be sustainable. In fact, the National Company Appellate Tribunal (NCLAT) in Schweitzer Systemtek India Pvt. Ltd, held that Phoenix ARC can continue enforcement against collaterals provided by the personal guarantors.

The Insolvency and Bankruptcy Board of India (IBBI), as the regulatory body set up under the Insolvency Code, has taken various measures to frame guidelines and regulations to ensure that resolution professionals function in a manner that shows faith in stakeholders and, particularly, lenders. In fact, the regulation enables any stakeholder to be a shareholder. A claimant, a creditor, a resolution applicant or a person with an interest in the insolvency resolution process can file a complaint with the IBBI against a resolution professional.

Even after the admission of the insolvency petition and the commencement of the insolvency proceeding, the corporate debtor, after settlement of the debt with the debtor who filed the insolvency petition, has been able to depart from insolvency proceeding by obtaining an order from the Supreme Court of India. In one example, the Court decided that the relevant rules should be amended by the competent authority so as to obviate unnecessary appeals being filed.

The implementation of the Insolvency Code is a work in progress and despite the various issues that crop up from time to time, there is no denying that the implementation of the Insolvency Code will have huge, positive ramifications for the development of India’s debt market. The government and the IBBI should be given credit in taking positive measures to iron out the issues, so as to enable the smooth implementation of the insolvency process and bolster investor and stakeholder confidence.


Ajay Shaw is a partner at DSK Legal. He can be contacted on +91 22 6658 8000 or by email:

© Financier Worldwide


Ajay Shaw

DSK Legal

©2001-2019 Financier Worldwide Ltd. All rights reserved.