A general introduction to the restructuring and insolvency legal framework in India

The Insolvency and Bankruptcy Code 2016 (IBC) was a breakthrough reform to resolve distressed debt in India. It heralded a departure from erstwhile resolution and recovery mechanisms because it established a tool to revive ailing distressed debtors. Since 2016, several measures have been introduced incrementally to improve the efficacy of the IBC. Pre-covid-19, a total number of 3,886 applications for initiation of the corporate insolvency resolution process (CIRP) were admitted under the IBC. During covid-19, the government suspended the IBC in March 2020 for a year. In addition, the government also introduced a slew of measures to provide much-needed relief to borrowers. As a result, there was a significant decrease in the number of applications that were admitted for initiation of the CIRP. Although 1,986 applications were admitted in the year 2019 to 2020, this figure fell to 538 in the year 2020 to 2021. In the year 2021 to 2022, although the suspension of IBC was lifted by the government, the number of admitted applications for CIRP was 834.

One of the key features of the IBC, which distinguishes it from its predecessors, is the 'time-bound' resolution of the debts of the corporate debtor. Before the introduction of the IBC, the average time consumed in debt resolution with mechanisms such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (the SARFAESI Act) was approximately 3.5 to four years. Under the IBC, a CIRP concludes in approximately 1.26 years (459 days), which is less than the timeline of 1.6 years prescribed by the World Bank's Doing Business 2020 report. Having said that, adherence to the statutorily contemplated timeline under the IBC (i.e., 180 days, extendable to 90 days on an application by the resolution professional, and an overall cap of mandatory completion within 330 days) itself has been challenging. As at March 2021, 79 per cent of the total outstanding CIRPs had crossed the 270-day timeline. 2 This delay in the conclusion of CIRPs is attributable to an overall deficiency in infrastructure, including a shortage of fully functional benches of the National Company Law Tribunal (NCLT) and a shortage of judges, a lack of qualified and experienced insolvency professionals, conflicting judgments passed by various benches of the NCLT and other administrative issues. The inordinate delays lead to deterioration of the value of the assets of the corporate debtor, which, in turn, discourages resolution applicants to bid for the corporate debtor.

In the airline sector, Jet Airways Ltd's CIRP has concluded since the closure of its operations in 2019. The resolution plan submitted by a consortium of resolution applicants has been accepted and approved by the NCLT, thus concluding the CIRP of Jet Airways Ltd. The past year witnessed the resolution of one of India's leading distressed non-banking financial companies: Dewan Housing Finance Limited (DHFL). Given the success of DHFL, the government is utilising the IBC to resolve Reliance Capital Limited (RCap) (a core investment company), SREI Equipment Finance Limited (SEFL) and SREI Infrastructure Finance Limited (SIFL) (SEFL and SIFL together are referred to as the SREI Group). We expect the resolution of RCap and the SREI Group this year.

Another severely distressed sector is real estate. Realty developer Supertech Limited (Supertech) has been admitted into CIRP for non-payment of dues amounting to approximately 4.32 billion rupees. Earlier, Jaypee Infratech had been admitted into CIRP on defaulting to pay dues to the IDBI Bank.

Despite the above successes, CIRP has not proved to be wholly successful. CIRPs are being increasingly withdrawn under Section 12A of the IBC. From the time of introduction of the IBC, of the 586 CIRPs withdrawn to 31 March 2022, 249 have been fully settled with the applicant (the entity that filed the application for CIRP of the debtor), 39 have been settled by way of full settlement with the other creditors of the corporate debtor, 34 have been withdrawn through an agreement to settle in the future, 124 have been withdrawn through other settlements with creditors and 138 have been withdrawn on other grounds. However, approximately three-quarters of these withdrawn applications had claim amounts of less than 100 million rupees. 3

General introduction to the restructuring and insolvency legal framework

i Indian legislation and frameworks governing resolution and enforcement

The following are the four broad resolution and enforcement frameworks in India:

1. resolution of defaulting companies by way of the CIRP, failing which liquidation or voluntary liquidation under the IBC;
2. restructuring of distressed companies (i.e., companies that have defaulted on their debt obligations for a period of 30 to 60 days) by Reserve Bank of India (RBI)-regulated institutions under the relevant circulars issued by the RBI;
3. restructuring of assets and liabilities by companies further to a scheme of arrangement under the Companies Act 2013 (the Companies Act); and
4. enforcement or recovery against a defaulting company and its assets or guarantees by way of statutory mechanisms under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 and the SARFAESI Act.

Under the IBC, any financial creditor or operational creditor, or even the company in default of its debts (corporate debtor), may file an application to initiate the CIRP before the NCLT 4 pursuant to a default of 10 million rupees (known as a resolution application).

Once a resolution application is filed, the NCLT will either reject or admit such an application. If the NCLT admits the resolution application, the CIRP will commence. An interim resolution professional shall be appointed, and the erstwhile board of directors will be suspended. During the CIRP or liquidation, the directors are required to cooperate with the resolution professional or liquidator as required.

The interim resolution professional or resolution professional will be responsible for running the operations of the corporate debtor on a going-concern basis. The interim resolution professional will invite claims and constitute a committee of creditors. As part of the CIRP, the resolution professional will invite resolution plans from eligible bidders. A legally compliant resolution plan must be approved by financial creditors holding 66 per cent of the voting share (the approved resolution plan).

The CIRP must be concluded within 330 days of the date of the NCLT's admission of a resolution application, inclusive of any further extension of the CIRP period as may be granted by the NCLT and the time taken in legal proceedings in relation to the CIRP (the CIRP period). If the NCLT does not receive an approved resolution plan before the expiry of the CIRP period or if the NCLT rejects the resolution plan as approved by the committee of creditors, the NCLT will order the corporate debtor's liquidation.

The resolution professional is also required to ascertain whether the corporate debtor has engaged in any avoidance transactions with any third parties or related parties prior to the initiation of the CIRP. The resolution professional will investigate the following transactions:

1. preferential transactions;
2. extortionate transactions;
3. fraudulent transactions; and
4. undervalued transactions.

On identifying any such transaction, the resolution professional is required to make an application to the NCLT seeking a reversal of the transaction. The transactions that have occurred during the period of one year preceding the insolvency commencement date (ICD) (with a non-related party) or two years preceding the ICD (with a related party) are required to be examined for the purpose of preferential and undervalued transactions. The look-back period of extortionate transactions is two years preceding the ICD. However, the IBC does not prescribe any look-back period for fraudulent transactions.

Under the IBC, a corporate person may initiate liquidation in respect of themselves, subject to the condition that the corporate person is (1) not in default on any of their debts and (2) not seeking liquidation to defraud any individual. The liquidator must endeavour to wind up the affairs of the corporate person within one year of the liquidation commencement date.

Since the IBC's inception and as at March 2022, 45,258 companies have undergone CIRP. Of these, 3,406 cases have been closed. Out of the 3,406 CIRPs, 731 cases have been dismissed on review or appeal or are settled, 586 cases have been withdrawn, 1,609 cases have ended in liquidation and 480 have yielded a successful resolution. The total recovery for financial creditors is estimated to be around 32.89 per cent of their claims on average. 5 Set out below is a summary of the number of ongoing and completed CIRPs and liquidations under the IBC as at 31 March 2022, along with average timelines.

Under the RBI Circular dated 7 June 2019, the term 'restructuring' is defined to include modification of terms of advances, rollover of credit facilities, sanction of additional credit facility and release of additional funds for an account in default to aid curing of default and enhancement of existing credit limits, and compromise settlements when time for payment of settlement amount exceeds three months.

1. Restructuring under 7 June 2019 circular: under the Prudential Framework for Resolution of Stressed Assets dated 7 June 2019, lending institutions (as specified under the circular) are required to review a default within 30 days of its occurrence and implement a resolution plan within 180 days of such a review, failing which such institutions are required to make higher provisions. All lenders are required to enter into an inter-creditor agreement to implement the resolution plan.
2. Restructuring under 5 May 2021 circular: by way of its circular dated 5 May 2021 (Resolution Framework 2.0), RBI permitted accounts that were not restructured under the resolution framework for covid-19-related stress dated 6 August 2020 (Resolution Framework 1.0) or the earlier frameworks to be restructured, whereby restructuring should be invoked by 30 September 2021 and implemented within 90 days. This threshold of aggregate exposure being less than 250 million rupees has been increased to less than 500 million rupees by way of a RBI circular dated 4 June 2021.
3. For individuals and small businesses with aggregate exposure of less than 250 million rupees (excluding a few categories as specified under the Resolution Framework 1.0), RBI has permitted lending institutions to implement a resolution plan, while classifying such exposures as standard, by way of its circular dated 5 May 2021, provided that such exposure has not been resolved under Resolution Framework 1.0 and is standard as at 31 March 2021. This threshold of aggregate exposure being less than 250 million rupees has been increased to less than 500 million rupees by way of RBI circular dated 4 June 2021. Given the lack of consensus among creditors in arriving at mutually agreed inter-creditor arrangements, these options are usually not successful.
4. Informal and bilateral workouts: parties may engage in an out-of-court informal workout through a bilateral arrangement between the creditors and the debtor. This allows the parties flexibility in determining the terms and conditions of the restructuring without any judicial intervention in the process. Such restructurings are generally ineffectual given the conflicting interests of different lender groups.
5. Scheme of arrangement: under the Companies Act, a debtor or company can seek to resolve its debts by way of entering into a compromise or arrangement with its shareholders and creditors of any class, supervised by the NCLT. This form of restructuring requires consent of three-quarters of the creditors in value and the majority being present and voting. The process under the Companies Act is a purely debtor-driven process. It is cumbersome to implement (with protracted timelines).

Apart from filing recovery suits before the relevant civil courts, financial creditors have the following options to recover or enforce their debts:

1. the SARFAESI Act: a notified secured financial creditor is entitled to sell the debtor's (whether individual or entity) secured assets by way of an out-of-court process; and
2. the Recovery of Debts Due to Banks and Financial Institutions Act 1993: an unsecured or secured financial creditor (a bank or a financial institution) may file a recovery suit against the corporate debtor before the debt recovery tribunal.

The government introduced the following key amendments to the IBC.

1. The minimum default threshold for filing an application for CIRP was raised from 100,000 rupees to 10 million rupees.
2. The Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy (Amendment) Ordinance 2020 (the Amendment Ordinance), which suspended the initiation of CIRP in respect of a corporate debtor for any default arising on or after 25 March 2020 for a period of six months. The government thereafter extended the suspension of the IBC twice for three months each on 24 September 2020 and 22 December 2020. These changes contributed to a decline in the number of insolvency cases since July 2020.
3. Notification of a pre-packaged insolvency framework for micro, small and medium-sized enterprises (MSMEs). The main aim of the pre-packaged insolvency framework is to provide relief to MSMEs by way of an alternative resolution process.

General introduction to the new restructuring legal framework

General introduction to the insolvency legal framework

Recent legal developments

The Indian law on insolvency resolution or liquidation has evolved over the past six years thanks to several judicial precedents that have led to clarity on relevant topics. This is immensely helpful in setting out the position of law and we welcome such legal clarity across topics. However, there is still a need to resolve other allied issues and increase the scope for judicial interpretation.

Set out below are the key judicial precedents pronounced by courts and tribunals over the past year.

i Definition of 'financial debt'

Under the IBC, 'financial debt' means debt that is disbursed against the consideration for the time value of money. Financial debt, inter alia, includes any amount raised under any other transaction having the commercial effect of a borrowing and guaranteed liability.

Recently, the National Company Law Appellate Tribunal (NCLAT) has held that banks and financial institutions that have advanced loans to homebuyers should not be considered financial creditors and be included in the committee of creditors of the corporate debtor (CoC). This is because the liability to repay the home loan is on the individual homebuyers. In this case, Axis Bank had sanctioned loans to 44 homebuyers or allottees who had purchased units or flats in the project floated by the corporate debtor. NCLAT relied on Pioneer Urban Land & Infrastructure Ltd & Anr v. Union of India & Ors 6 and reiterated that it is the homebuyers who should be considered financial creditors of the corporate debtor whether they have self-financed their flat or exercised their choice of taking a loan from a bank. 7

ii Rejection of resolution plan by the resolution professional

A recurring issue is the increasing interference by the resolution professional in determining eligibility of prospective resolution applicants or bidders. One such instance is the rejection of the resolution plan of a prospective resolution applicant by the resolution professional citing the applicant's ineligibility under Section 29A of the IBC. The NCLAT, placing reliance on the judgment of the Supreme Court in the case of Arcelor Mittal India Private Limited v. Satish Kumar Gupta, 8 held that the resolution professional should not take a decision regarding the ineligibility of the resolution applicant. They have only to form their opinion on the ineligibility and share it with the CoC. Similarly, in Everest Organics v. Leesa Lifestyle, 9 the NCLAT held that the CoC is empowered to decide and approve the resolution plan of the resolution applicants and even to consider eligibility under Section 29(A)(e) of the IBC. Generally, resolution professionals and CoCs obtain legal opinions on this aspect and also appoint consultants to undertake a detailed factual review of the resolution applicant and its connected persons to determine eligibility under Section 29A of the IBC.

iii Withdrawal of resolution plan

The Supreme Court in Ebix Singapore Pvt Ltd v. CoC of Educomp Solutions Ltd & Anr 10 held that the framework of the IBC enables withdrawals from the CIRP only by following the procedure detailed in Section 12A of the IBC and Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016. Accordingly, a resolution applicant is not permitted to withdraw its resolution plan once the CoC has approved it. Similarly, the NCLAT has held that after the approval of a resolution plan by the CoC, it is not open for the CoC to consider the plan of another resolution applicant that it considers might be a better plan. 11

The IBC does not provide for consolidation of CIRPs. The NCLAT in Jitender Arora, Resolution Professional of M/s. Premia Projects Ltd v. Tek Chand 12 held that assets that are transferred to or from the corporate debtor and that are germane to the CIRP of the corporate debtor, even if held by another company, should be included in the information memorandum as well as the CIRP of the corporate debtor. The NCLAT further observed that the subsidiary's assets cannot be included in the CIRP of the corporate debtor given that the subsidiary is not undergoing CIRP. The matter was remanded to the NCLT with a direction that an admission application for the subsidiary company should be considered.

v Section 29A of the IBC

Eligibility of resolution applicants or bidders under Section 29A of the IBC has led to a slew of litigation. The primary intent behind this provision is to prevent the incumbent management of the corporate debtor from regaining control of the corporate debtor. The Supreme Court in Bank of Baroda & Anr v. MBL Infrastructures Ltd & Ors 13 held that to attract the disqualification under Section 29A(h), a personal guarantee has to be invoked by a single creditor, notwithstanding that the admission application is filed by any other creditor seeking initiation of CIRP against the corporate debtor. Another important judgment 14 was delivered by the NCLAT on the interpretation of 'control' under Section 29A(c) of the IBC. Under Section 29A(c), a person shall be disqualified from submitting a resolution plan if, at the time of submission of the resolution plan, such a person has a non-performing account or a non-performing account of a corporate debtor under its management or control. The NCLAT held that the expression 'control' in Section 29A(c) is only positive control (i.e., mere power to block special resolutions of a company cannot amount to control).

vi Benefits from recoveries under avoidance application

The IBC does not specify which stakeholder is entitled to receive any amounts under avoidance applications. The NCLAT in 63 Moons Technologies Limited v. The Administrator of Dewan Housing Finance Corporation Limited 15 held that the CoC cannot, in its commercial wisdom, decide who would be the beneficiary of the recoveries made under applications filed under Section 66 of the IBC dealing with fraudulent trading and wrongful trading. Such a decision must be made by the adjudicating authority in view of the facts and circumstances of each case.

vii Guarantors to the corporate debtor under the IBC

Under Section 60(1), the adjudicating authority for corporate persons, including corporate debtors and personal guarantors, will be the NCLT. Section 60(2) requires that when a CIRP or liquidation process of the corporate debtor is pending before an NCLT, the application relating to the CIRP of the corporate guarantor or personal guarantor of such a corporate debtor shall be filed before the NCLT.

Recently, in State Bank of India v. Mahendra Kumar Jajodia, 16 the NCLAT dealt with the issue of initiation of the CIRP against the guarantor of the principal debtor under Section 95(1) of the IBC, despite there being no pendency of any CIRP against the principal debtor. State Bank of India had filed an application under Section 95(1) of the IBC seeking initiation of CIRP against the guarantor of the corporate debtor. The NCLT, relying on Section 60(2) of the IBC, held that because no CIRP or liquidation proceeding of the corporate debtor was pending, the application was not maintainable. The NCLAT observed that the purpose and object of Section 60(2) of the IBC is that both proceedings be entertained by one and the same NCLT. Section 60(2) does not in any way prohibit filing of proceedings under Section 95 of the IBC, even if no proceedings are pending before the NCLT against the principal debtor.

viii Issuance of warrant by NCLT

Section 19 of the IBC requires the management of the corporate debtor to extend cooperation to the resolution professional and to provide all required documents for the smooth CIRP of the corporate debtor. The resolution professional is empowered to file an application before the NCLT if the management of the corporate debtor refuses to cooperate with them.

Recently, the NCLAT upheld the issuance of a warrant by the NCLT against the suspended directors of the corporate debtor in an application filed under Section 19 of the IBC. 17 The NCLAT held that it is empowered to issue a non-bailable warrant for enforcing attendance of a person.

Significant transactions, key developments and most active industries

The past year has seen significant traction in large CIRPs, which include the CIRPs of Rcap, the SREI Group and Supertech. More importantly, the past year has seen the resolution of distressed financial services companies ILFS and DHFL as well.

Set out below are the key instances that have occurred under the IBC over the past year. These cases are also indicative of the most active industries.

i Reliance Capital Limited

In December, 2021 the NCLT admitted the RBI's plea to initiate CIRP in respect of Rcap. This was preceded by suspension of the board of directors of Rcap by the RBI citing governance and default issues. Rcap owes its creditors approximately 198 billion rupees. In this case, the prospective bidders have been offered two options: (1) companies could bid for business clusters or subsidiaries of Rcap, individually or in a combination, by forming a consortium among themselves or (2) companies could bid for Rcap at the group level wherein they could submit an all-cash bid or a combination of upfront and deferred payment. 18

According to news reports, the administrator and creditors are finding an appropriate solution to let companies place bids that are compliant with IBC for individual clusters. Further, 54 expressions of interest have been received by the administrator for acquisition of Rcap and the clusters.

The RBI, similar to the board suspension in the case of Rcap, had overhauled the board of SIFL and SEFL citing governance and default concerns. Subsequently, the RBI had initiated CIRP in respect of the SREI Group. The total debt exposure of the SREI Group is approximately 350 billion rupees. Recently, the NCLT has approved the proposal of the administrator and the lenders of the SREI group to conduct a joint group insolvency in respect of both the entities. Currently, although the IBC does not stipulate provisions in respect of group insolvency, there have been a handful of cases in which the group insolvency proposal has been approved. The administrator has received 17 expressions of interest for acquisition of the SREI Group.

iii Supertech Limited

In March 2022, the NCLT admitted the application for initiation of CIRP in respect of Supertech. Supertech is a renowned real estate developer in the national capital region of India. Supertech has 38,041 homebuyers and, of them, homes have been delivered to 27,111 people. As many as 10,930 homes are yet to be delivered and, among them, over 70 per cent of construction is complete in respect of over 8,000 homes. 19 Recently, Supertech filed an application before the NCLAT seeking a stay on the insolvency proceedings initiated against Supertech citing the ongoing settlement discussions between Supertech and its lenders. The NCLAT in April 2022 stayed the insolvency proceedings. However, as the settlement discussions have not been fruitful, the NCLAT has lifted the stay and directed the resolution professional to commence the CIRP of Supertech.

iv Infrastructure Leasing & Financial Services Ltd

International and future developments

International

To date, the IBC does not contain a cross-border insolvency framework. It merely contains enabling provisions in respect of the issuance of letters of requests for assistance to foreign courts. India's cross-border insolvency regime drew attention at the time of initiation of insolvency proceedings against Jet Airways in Holland. The NCLAT vide order dated 4 September 2019 permitted the resolution professional of Jet Airways to take custody and control of the assets of the corporate debtor (Jet Airways) situated in Holland. The resolution professional reached an agreement with the administrator of the assets of Jet Airways in Holland. This agreement was approved by the NCLAT by order dated 26 September 2019.

Further, the insolvency proceedings initiated under the IBC in the case of SEL Manufacturing Company Limited 20 were recognised by the United States Bankruptcy Court on 4 November 2019 under Chapter 15 of the United States Bankruptcy Code. The United States Bankruptcy Court not only recognised the proceedings under the IBC as a foreign main proceeding but also granted relief (e.g., a moratorium) to protect the assets of the corporate debtor (SEL).

In its current form, the IBC is not sufficiently equipped to deal with cross-border insolvency. Accordingly, the insolvency law committee constituted by the Ministry of Corporate Affairs has recommended the adoption of the UNCITRAL Model Law on Cross-Border Insolvency 1997 (UNCITRAL Model Law) with certain modifications to facilitate a uniform cross-border insolvency approach across countries. 21 The Standing Committee on Finance in its sixth report on the Insolvency and Bankruptcy (Second Amendment) Bill 2019 has also recommended the introduction of a draft bill on cross-border insolvency to strengthen the Indian insolvency framework. 22

Future developments

We expect the following measures to be introduced over the coming years.

1. Group insolvency: the IBC provides for the resolution of companies on a stand-alone basis. Corporate debtors that are part of larger conglomerates or groups should ideally be resolved as a group. NCLTs in the past have ordered consolidation of CIRPs for entities belonging to the same group (specifically, the CIRP of Videocon Industries Limited and the SREI Group). However, a comprehensive framework in this regard is yet to be introduced in the IBC.
2. Cross-border insolvency: as mentioned above in Section V, introduction of comprehensive provisions in respect of cross-border insolvency has been pending for some time now and the government is working towards notifying the same.
3. Resolution of individuals and partnership firms: although the IBC provisions in respect of resolution and bankruptcy of personal guarantors have been notified, the IBC provisions in respect of resolution and subsequent bankruptcy of individuals and partnership firms are yet to be notified.
4. Amendments to the IBC: the Insolvency and Bankruptcy Board of India has issued a consultation paper proposing tweaks to the CIRP under the IBC. The regulator has put forth four specific proposals that are aimed at reducing delays in the CIRP process. The consultation paper deals with proposed amendments in relation to admission of CIRP applications filed by operational creditors, facilitation of information for preparing the information memorandum, dealing with avoidance application post the closure of the CIRP and difference in valuations conducted as part of the CIRP.

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