Restructuring and insolvency in India: overview

A Q&A guide to restructuring and insolvency law in India.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and Insolvency Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit www.practicallaw.com/restructure-mjg.

Contents

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. The most common form of creating security over immovable property is by way of mortgage. In India the Transfer of Property Act 1882 recognises six types of mortgage:

  • Simple mortgage.

  • Mortgage by conditional sale.

  • Usufructuary mortgage.

  • English mortgage.

  • Mortgage by deposit of title deeds (equitable mortgage).

  • Anomalous mortgage.

However, the mortgages most commonly used are:

  • A simple mortgage executed in the form of a deed.

  • An English mortgage executed in the form of a deed.

  • Mortgage by deposit of title deeds, where the mortgagor delivers the title deeds of the mortgaged property to the mortgagee.

Formalities. A mortgage over immovable property for an amount exceeding INR100 requires compulsory registration with the Sub-Registrar of Assurances of the relevant district where the immovable properties are located. Registration must be completed within four months from the date of execution of the instrument creating the mortgage.

In addition, any charge created by a company over its assets or securities (whether they are movable or immovable) must be registered with the Registrar of Companies within 30 days of either the:

  • Creation of the charge.

  • Execution of the security document.

Effects of non-compliance. A mortgage must be registered with the relevant Sub-Registrar of Assurances (see above). If the mortgage is not registered, it will not have the effect of creating a valid mortgage or affecting the underlying immovable property, and therefore cannot be received as evidence of the mortgage. If a company does not register a charge created over its assets with the Registrar of Companies, the charge can be held to be void against the official liquidator during the insolvency of the company. In addition, a company that fails to register a charge created over its assets with the Registrar of Companies is liable to a monetary fine, and its officers who were responsible for the default would be liable to a monetary fine and imprisonment.

A secured creditor is now also required to register its security interest over all movable and immovable property within 30 days of creation with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). This is regardless of the form or manner in which it has been created (whether by way of mortgage or hypothecation). While failure to register will not render the charge invalid, it will attract monetary penalties on the creditor and can deprive him/her of enforcement rights without court intervention (available under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI)).

Movable property

Common forms of security and formalities. The most common form of security over movable property is a:

  • Fixed charge. This can be created in respect of movable property which is ascertainable and clearly identifiable in the same manner as immovable property.

  • Floating charge. This can only be created by a company in respect of property that is, by its nature, circulating or fluctuating (for example, stock-in-trade, inventories and raw materials). The floating charge gives the company the flexibility to deal with the property in the ordinary course of business. The charge remains dormant until it crystallises, at which point it becomes a fixed charge.

  • Hypothecation. This is a charge created in respect of existing or future movable property, without actually delivering up possession of that property.

  • Pledge. This is a security created in respect of movable property by delivery of the property to the creditor, who retains possession until repayment of the debt. A pledge over shares of Indian companies, subject to specific banking regulations, is an ordinary additional collateral security provided in India.

Formalities. A charge over movable properties is not required to be registered with the Sub-Registrar of Assurances. However, if the charge is being created over the movable assets of a company, then it must be registered in the same manner as with immovable property (see above, Immovable property: Formalities).

Effects of non-compliance. Charges created over movable property are not compulsorily registrable. However, a charge created over movable property by a company is required to be registered with the Registrar of Companies within 30 days of creation of such charge.

A secured creditor is now also required to register its security interest over all movable and immovable property with the CERSAI within 30 days of creation. This is regardless of the form or manner in which it has been created, whether by way of mortgage or hypothecation,. While failure to register cannot render the charge invalid, it will attract monetary penalties on the creditor and can deprive him of enforcement rights without court intervention as available under the SARFAESI.

 

Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency?

In India, insolvency procedure is governed by the Companies Act 2013 and the Insolvency and Bankruptcy Code 2016 (IBC). Starting from the first ones to be paid, the IBC sets out the order of distributing the proceeds obtained from the sale of assets of a corporate debtor as follows:

  • Cost of the insolvency resolution process and liquidation.

  • Secured creditors (who choose to give up their security enforcement rights and workmen's dues relating to a period of 24 months before the liquidation commencement date).

  • Wages and unpaid dues of employees (other than workmen) for a period of 12 months before the liquidation commencement date.

  • Financial debts owed to unsecured creditors.

  • Statutory dues to be received on account of the Consolidated Fund of India or the consolidated fund of a state (relating to a partial or entire two-year period before the liquidation commencement date) and debts of secured creditors (that remain unpaid after enforcement of security).

  • Remaining debts and dues.

  • Dues of preference shareholders.

  • Dues of equity shareholders or partners (as applicable).

  • A secured debt is first satisfied from the appropriation (by sale or disposal) of the proceeds from the relevant asset against which the debt has been secured. Section 48 of the Transfer of Property Act 1882 allows multiple lenders to have a charge over the same asset. However, a charge created earlier in time ranks higher than a charge created later in time. For example, if banks A and B are lenders to company D and bank A has a charge created over asset X in 2008 and bank B has a charge created over the same asset, X, in 2011. In case of a default, the debt due to bank A will be satisfied first from the proceeds, followed by the debt due to bank B. This is different from a pari passu charge over the asset, where all lenders have an equal right to the share of the assets of the borrowing entity to satisfy their debt claims.

 

Unpaid debts and recovery

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

Trade creditors can use contractual and legally permitted mechanisms to secure unpaid debts. There are no legal and practical limits to which they can secure such payments (provided that the contractual mechanisms used are legally valid).

Trade creditors can take possession and dispose of movable property only if they have a security over the property.

Guarantee

Trade creditors can secure unpaid debts by obtaining a guarantee for payment from a third party in the event the company fails to meet its obligations. A guarantee can come in several forms:

  • Corporate guarantee (that can be provided by a separate company, usually a group company of the borrower)).

  • Bank guarantee/standby letter of credit (where the obligation to repay is undertaken by the borrowing company's bank).

  • Personal guarantee (that can be provided by the promoters of the borrowing company in their personal capacity).

Letter of comfort

This is usually a best effort undertaking by the issuer of the letter of comfort concerning payment of the loan/debt. It is not legally binding but it does provide soft comfort to the lender/creditor.

Lien

A lien is a right of a seller to retain goods, stop goods in transit, or resell goods if their full price is not received.

 
4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

There is no specific set of rules that apply if a foreign bank wishes to enforce its rights in case of a default. Foreign lenders can enforce their security interests (if they are created in accordance with Indian law and regulation) in the same manner as a domestic lender. For example, if the foreign lender wishes to enforce its mortgage rights over an immovable property, the mortgage must have been created in compliance with Indian law and the External Commercial Borrowings guidelines. Such a mortgage can be created after obtaining a no-objection from an authorised dealer bank in India.

However, foreign lenders cannot avail of non-judicial remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) and under the Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions Act 1993 (RDDBFI).

In contrast, domestic lenders can avail of the remedies below:

Debt Recovery Tribunals

The Indian statutory regime on debt recovery provides for several remedies to enable creditors to recover debt, depending on the nature of the lending or borrowing entity. Traditionally, in order to recover their debts from defaulters, creditors used to file a civil suit to obtain a decree to recover their dues in accordance with the provisions of the Indian Civil Procedure Code 1908 (CPC). However, the time and resources used to pursue a full trial in a civil suit can have adverse consequences for the interests of banks and financial institutions. Banks and financial institutions deal in public deposits, and have been accorded distinction from other lenders to ensure the faster recovery of their dues and therefore to protect public interests. Under the RDDBFI, banks and financial institutions can approach specially constituted tribunals called a Debt Recovery Tribunal (DRT) which follow a summary procedure (unlike a full trial followed by civil courts). While DRTs have been much more effective than full trials in the civil courts, an increasing amount of pending DRT matters indicate that DRTs have fallen short of their original intended purpose.

Securitisation

With the increasing number of non-performing assets (NPAs) in the banking sector, coupled with a huge backlog of pending matters in civil courts and DRTs, the SARFAESI was enacted to empower banks and financial institutions to enforce their security to recover debts without court intervention. SARFAESI has strengthened the position of banks and financial institutions in their effort to expeditiously recover their debts in cases of default.

Mandatory set-off

There is no provision under Indian law for allowing mandatory set-off for mutual debts, as all debts are ranked according to priority and repaid accordingly.

Foreign banks do not have the benefit of approaching the DRTs or invoking provisions of the SARFAESI. They need to approach the courts of a competent jurisdiction (as per the terms of the contract) for enforcing their security or recovering their dues. See Question 13 for the process to be followed where the parties have opted for the contract to be governed by the jurisdiction of non-Indian courts.

 

State support

5. Is state support for distressed businesses available?

In India the insolvency protection regime came into existence with the enactment of the Sick Industrial Companies (Special Provisions) Act 1985 (SICA). The SICA provided that a company's board of directors must make a reference to the Board for Industrial and Financial Reconstruction (BIFR) once the company has sustained losses equivalent to its entire net worth. The reference has the effect of suspending all legal proceedings against the company, whether for the recovery of debts, the enforcement of contracts, and so on. The BIFR subsequently designed a revival package intended to restore the company's financial viability.

However, with the notification of the IBC into law, the process under the SICA is repealed, and the BIFR and the Appellate Authority for Industrial and Financial Reconstruction have been dissolved. Therefore, there is no longer any state support available for distressed businesses.

 

Rescue and insolvency procedures

6. What are the main rescue/reorganisation procedures in your jurisdiction?

Restructuring

Objective. A company has a statutory right to enter into a scheme of arrangement, compromise or amalgamation at any time, regardless of its financial health and of whether this right is enshrined in the company's constitution documents.

Initiation. The process of an arrangement, compromise or amalgamation is initiated on making an application to the court. It must be approved by a 75% majority of the company's shareholders and creditors present and voting at the general meeting that is convened for that purpose.

Substantive tests. Before sanctioning a scheme of arrangement, compromise or amalgamation, the court has a duty to satisfy itself of each of the following:

  • The proposed scheme is bona fide in the interests of the company, and is not fraudulent and intended to cover up any irregularities or illegalities in the company's management or operations.

  • All legal and procedural requirements have been complied with in convening the meeting and arriving at the scheme.

  • The interests of all classes of shareholders and creditors have been adequately reflected in the scheme.

  • There are no reasonable grounds on public policy or otherwise to override the scheme.

Consents and approvals. See above, Initiation.

Supervision and control. The court can control and supervise the entire process and can also unilaterally modify the scheme if it considers necessary.

Protection from creditors. A majority of the creditors must approve the scheme to give it effect, and so the company is accorded significant protection from creditors while the scheme is in place. No petition for winding-up will be entertained by the court while the company is undergoing restructuring. However, existing contracts with counterparties can be terminated if the contracts do not permit the party's corporate reorganisation, and the counterparty does not agree to provide their consent subsequently.

Length of procedure. There is no fixed length for the restructuring process and it varies on a case-by-case basis. The court approval process generally takes five to six months.

Conclusion. The scheme is concluded once the court sanctions and implements it.

Corporate debt restructuring (CDR) mechanism

Objective. The Reserve Bank of India (RBI), realising the need for a forum to address the problem of mounting non-performing assets (NPAs) in the banking system, proposed the introduction of a corporate debt restructuring mechanism in 2002, where the lenders could jointly agree to the restructuring of distressed corporations in a timely and effective manner.

Initiation. The process is initiated by a reference to the CDR cell (see below, Corporate debt restructuring (CDR) mechanism: Supervision and control) either by creditors or by the company with the support of a bank/financial institution. In either case, the applicant must represent at least a 20% share of the company's capital and term finance.

Substantive tests. CDR is a non-statutory mechanism available to all companies with banks/financial institutions as creditors where their exposure to the company exceeds INR100 million. However, it must be ensured that the company is not undergoing any form of statutory restructuring/rehabilitation.

Consents and approvals. Not applicable.

Supervision and control. The CDR mechanism that has been established to regulate the entire CDR process comprises the following units:

  • CDR standing forum. This comprises the general representative body of managing directors and chairmen for all banks and financial institutions participating in the CDR process. They decide the overarching policy and guidelines to be followed in CDR processes.

  • CDR core group. The core group is part of the standing forum and convenes meetings, takes policy decisions, and so on, on their behalf. It comprises the chief executives of the:

    • Industrial Development Bank of India Ltd;

    • State Bank of India;

    • Industrial Credit and Investment Corporation of India (ICICI) Bank Ltd;

    • Bank of Baroda;

    • Bank of India;

    • Punjab National Bank; and

    • Indian Banks' Association.

  • CDR empowered group. This comprises the executive directors of ICICI Bank and the State Bank of India as standing members, along with representative directors of banks and financial institutions exposed to the company undergoing CDR in any particular case as part of the panel. They decide individual debt restructuring cases.

  • CDR cell. This body assists all the others in their functions. It comprises staff members from all the banks and financial institutions participating in the CDR process and can enlist external professional assistance, if required.

Protection from creditors. For an initial period of 90 days from when the CDR cell starts considering a proposal for restructuring, the participating banks and financial institutions cannot initiate any proceedings for recovery of their debts against the company. The CDR cell can extend this period up to a maximum of 180 days. Existing contracts to which the company is a party would ordinarily specify this as a termination event, but such contracts would not automatically be terminated in the absence of such a provision. Any counterparty to such contracts or trade creditors of the company are free to seek enforcement of the contract or damages for the termination as long as they are not participating in the CDR proceedings.

Length of procedure. The CDR process is not limited to a specific period of time and varies in each case.

Conclusion. Once the CDR plan is agreed, it is given effect and concluded. Despite being a voluntary and contractual arrangement, CDR has fared better than BIFR in enabling the timely restructuring of companies under stress, facilitating the revival of some of India's biggest private sector companies (for example, JSW, Maytas, Ispat Industries, Wockhardt Limited and Essar Steel).

Strategic debt restructuring (SDR) mechanism

Objective. The RBI, realising the need for a more comprehensive restructuring scheme in case of borrower entities unable to come out of stress due to operational and managerial inefficiencies, formulated the Strategic Debt Restructuring (SDR) mechanism to convert debt into equity in favour of the lenders. The primary objective is to allow banks and financial institutions to initiate a change in ownership in stressed accounts of borrowing entities. However, the SDR scheme must be used only where a change in ownership is likely to relieve the stressed account.

The SDR is one of the restructuring options exercisable by the creditors of a distressed borrower under the platform of the Joint Lenders Forum (JLF). The JLF is a consortium of all domestic lending banks and financial institutions of a borrower, which is required to be formed if both:

  • The aggregate exposure of the borrower is at least INR1 billion.

  • The borrower has overdue debts (either principal or interest) to any of its creditors which have remained unpaid for over 30 days.

The JLF formation has been mandated by the RBI as a step towards early recognition of stress in high-exposure borrowers and providing a common platform for the lenders to undertake corrective actions jointly.

Initiation. The process is initiated by the JLF. The JLF reviews the stressed accounts and examines if such account is viable on effecting a conversion of debt into equity. If so, then the JLF can decide to invoke SDR by converting the whole or part of the account's outstanding debt into equity of the borrower entity.

Substantive tests. SDR is a non-statutory mechanism available to all companies with banks/financial institutions as creditors where their account has principal or interest payment overdue between 31 to 60 days. However, the company must not be undergoing any other form of statutory restructuring/rehabilitation.

Consents and approvals. The JLF needs to approve the proposed SDR scheme by 75% of the creditors by value and 60% by number.

Supervision and control. The SDR mechanism is supervised and controlled by the JLF.

Protection from creditors. Not applicable.

Length of procedure. The SDR process is required to be completed within 18 months for banks and financial institutions to make provisions for their equity shareholding.

Conclusion. The JLF must approve the package within 90 days from the date of the decision to undertake SDR. Also, the conversion of debt into equity (as approved under the SDR plan) must be completed within 90 days from the date of approval of the SDR package by the JLF. Once approved, it is binding on the borrowing entity, JLF and lenders, who must divest their equity holders in the borrowing entity as soon as possible. The account is then reviewed after 18 months.

Scheme for sustainable structuring of stressed assets (S4A)

Objective. The RBI formulated the Scheme for Sustainable Structuring of Stressed Assets (S4A) with the objective of addressing the mounting number of non-performing assets (NPA) declared by banks and financial institutions and to enable deep financial restructuring of projects having a chance of revival. The S4A scheme allows resolution of stressed accounts by splitting the total debt into sustainable and unsustainable baskets and allowing banks to take in equity.

The S4A is one of the restructuring options exercisable by the creditors of a distressed borrower under the platform of the JLF.

Initiation. The JLF or the consortium of banks reviews the stressed account and, on the basis of the review, decides whether to undertake a resolution process under the S4A scheme.

Substantive tests. For an account to be eligible under the scheme, the aggregate exposure to all lenders must exceed INR 5 billion, the project must have commenced operations and the outstanding debt must meet the test of sustainability. For a debt level to be sustainable, the JLF must conclude that the outstanding debt can be serviced by the current cash flows of the company by using an independent techno-economic viability (TEV) mechanism .

Consents and approvals. The JLF needs to approve the proposed S4A scheme by 75% of the creditors by value and 60% by number.

Supervision and control. The supervision and control of the scheme is done by the JLF or by the consortium of banks. The resolution plan prepared by the JLF is reviewed by the Overseeing Committee (OC), which is an advisory body set up by the Indian Banks Association.

Protection from creditors. The resolution plan under the S4A Scheme contemplates a bar on any fresh moratorium that is granted or extensions in the repayment schedule for repayment of the unsustainable portion of the debt. This portion of the debt is then converted into equity or quasi-equity instruments.

Length of procedure. The S4A scheme does not stipulate a fixed time period. It is yet to be seen how long the process takes under this scheme.

Conclusion. The post-resolution ownership of the borrowing entity envisages a potential change in ownership in certain circumstances. The promoters can continue to hold majority shareholding or the unsustainable portion of the debt can be converted into equity under a resolution plan, which is prepared by the JLF or the consortium of banks. The lenders can acquire a majority shareholding in the borrowing entity under the SDR mechanism and can allow the current management to continue, subject to management and control rights

Flexible structuring of long-term project loans to infrastructure and core industries (5/25 scheme)

Objective. The RBI, recognising that long gestation periods and large capital investments in infrastructure project financing has created stress in repayments, sought to formulate a flexible mechanism to overcome the asset-liability mismatch in such project financing. It is commonly known as the 5:25 scheme and allows banks to extend long-term loans to match the cash flows expected out of the project, with a refinancing option every five or seven years.

Initiation. The 5:25 scheme is a voluntary arrangement between the lenders and the borrowing entity.

Substantive tests. Flexible refinancing and repayment options under the scheme are available to infrastructure projects where the total exposure of lenders is INR 5 billion or more.

Consents and approvals. Not applicable.

Supervision and control. The restructuring is a voluntary arrangement between the lenders and the borrowing entity and therefore is not supervised or controlled by any regulator or statutory body.

Protection from creditors. Not applicable.

Length of procedure. There is no specified time limit for the process to be completed. The timelines are mutually agreed between the lenders and the borrowing entity.

Conclusion. The lenders and the borrowing entity mutually agree to effect the restructuring and repayment options with respect to the financing.

Insolvency Resolution Process

Objective. The IBC was enacted to bring in a consolidated corporate insolvency resolution process by replacing the previous "debtor-in-possession" model under the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) with a "creditor-in-possession" model under the IBC. The IBC changes the order of priority and payment of statutory dues in the event of insolvency.

Initiation. The corporate insolvency resolution process is governed by the IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporation Persons) Regulations 2016. The process can be initiated by a financial creditor, an operational creditor or the corporate debtor in the event of a default by the corporate debtor. The process is initiated by an application to the National Company Law Tribunal (NCLT).

Substantive tests. The corporate debtor must have defaulted on an amount of INR100,000 or more.

Consents and approvals. Not applicable.

Supervision and control. Once an application has been made before the NLCT, an insolvency resolution professional must be appointed as per the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations 2016. From the date of appointment, the insolvency resolution professional is in charge of managing the corporate affairs of the debtor.

Protection from creditors. After making the application to the NCLT and on the commencement of the insolvency proceedings, all pending suits and proceedings, and any fresh initiation of suits against the corporate debtor are prohibited. The enforcement of security interests under the SARFAESI is also prohibited under this moratorium provision of the IBC. However, supply of essential goods or services (as specified) is not terminated.

Length of procedure. The IBC prescribes a time limit of 180 days from the date of admission of the application for the completion of the insolvency resolution process. However, this is yet to be tested in practice.

Conclusion. After the admission of the application, declaration of moratorium and public announcement of the resolution process, the interim and final resolution professionals conduct the resolution process and submit a resolution plan. This plan is required to be approved by the committee of creditors constituted under the IBC and must be to the satisfaction of the NCLT. The plan is then binding on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders under the resolution plan.

If the resolution plan is rejected by the NCLT or if it has not been submitted within 180 days from the date of admission of the application, the NCLT can pass an order for the corporate debtor to be liquidated.

 
7. What are the main insolvency procedures in your jurisdiction?

Winding-up

Objective. Winding-up is the process of ceasing a company's operations and liquidating its assets to pay off the company's creditors and stakeholders according to the priorities and proportions due to them under law. It can be either voluntary or compulsory.

Initiation. A voluntary winding-up is initiated by the company's shareholders passing either a general or special resolution.

Compulsory winding-up of a company is a court-driven process which is initiated by the company, its creditors, its contributories, the Registrar of Companies or any person authorised by the Central Government filing a petition for the compulsory winding-up of the company.

Substantive tests. There are no tests for voluntary winding-up, and it can be initiated and completed simply by a shareholders' resolution at a general meeting of the company. The company can be wound up by passing an ordinary resolution (requiring a simple majority) where the purpose for which the company was formed has been completed, or the time limit for which the company was formed has expired. The company can also be wound up at any time by means of a special resolution, which requires a 75% majority.

A petition for compulsory winding-up must be filed before the court, and only in the following circumstances:

  • If the company, by special resolution, has resolved that it should be wound up by the court.

  • The company fails to hold the statutory meeting or deliver the statutory report to the Registrar of Companies for registration.

  • The company fails to commence its business within one year of incorporation, or where it suspends its business for more than a year.

  • The number of the company's shareholders is reduced below the statutory minimum.

  • The company is unable to pay its debts.

Consents and approvals. See above, Initiation.

Supervision and control. Voluntary winding-up is under the control of the company itself. It can be either a shareholders' voluntary winding-up, or a creditors' voluntary winding-up. The difference between the two is that the proposal for winding-up originates from the shareholders or the creditors respectively. In either case, it must be approved by 75% of the shareholders in a resolution.

Compulsory winding-up is a court-driven process which is entirely supervised by an official liquidator appointed by the court for this purpose, who assumes control over the company's assets and operations.

Protection from creditors. Not applicable. Liquidation of a company automatically causes the termination of all existing contracts to which it is a party. Normally, the initiation of winding-up proceedings would be specified as a termination event in most contracts.

Length of procedure. The process of winding-up is not limited to a specific period of time and varies in each case.

Conclusion. The process of winding-up concludes with the liquidation of all of the company's assets and the ceasing of all its business, at which point all its liabilities are discharged to the extent possible and the company ceases to exist as a corporate entity.

Liquidation process under the Insolvency and Bankruptcy Code

The liquidation process under IBC is expected to come into force soon.

Objective. The objective of the liquidation process under the IBC is to ensure that remedies are available to the financial creditor if the resolution plan fails to be implemented (see Question 6).

Initiation. The National Company Law Tribunal (NCLT) can pass an order requiring the corporate debtor to be liquidated in the following situations:

  • On expiry of the insolvency resolution process or the maximum period permitted for completion of the resolution process.

  • In case of rejection of the insolvency resolution plan.

  • When the insolvency professional, prior to the confirmation of the resolution plan, intimates the decision of the creditors to liquidate the corporate debtor to the NCLT.

  • When the corporate debtor contravenes the resolution plan approved by the NCLT and any person aggrieved by such contravention makes an application to the NCLT for liquidation of the corporate debtor.

Substantive tests. Not applicable.

Consents and approvals. Not applicable.

Supervision and control. After the NCLT passes an order for liquidation of the corporate debtor, the insolvency resolution professional appointed for the insolvency resolution process (see Question 6) will become the liquidator for the liquidation process (unless replaced by another professional by the NCLT).

Protection from creditors. After the liquidation order has been passed by the NCLT, all pending suits and proceedings and any fresh initiation of suits against the corporate debtor are prohibited. However, this is subject to provisions allowing enforcement of rights by secured creditors and the priority of dues as set out in the IBC.

Length of procedure. The IBC does not prescribe a time limit for completing the liquidation process. However, this is yet to be tested in practice.

Conclusion. After the liquidation of assets as per the order for liquidation by the NCLT, the liquidator files an application with the NCLT for the dissolution of the corporate debtor.

 

Stakeholders' roles

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?

Stakeholders

The outcome of any restructuring or insolvency process rests on balancing the interests of both the shareholders and creditors. However, the creditors enjoy a preference under law and have the greater negotiating power in arriving at any agreement.

Influence on outcome of procedure

Under the IBC, stakeholders are bound by the resolution plan, as approved by the National Company Law Tribunal. The dues owed to the stakeholders are as per the resolution plan.

 

Liability

9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

Director

A director of a company will incur personal liability for the company's debts in the following circumstances:

  • If it comes to the notice of the official liquidators that any business of the company was committed in a fraudulent manner. In this case, the directors (or any other persons of the company responsible for the fraud) can be held to have unlimited liability in respect of that fraud.

  • Any person who is, or at any point in time has been, a promoter, director, officer or liquidator of the company will be liable for any amounts of money misappropriated or misapplied, or for misfeasance or breach of trust. On application from the official liquidator, the court can order those persons to return the money along with interest and damages.

  • A director can be punished with a monetary fine and imprisonment if he fraudulently induces any person to lend the company credit, or if he attempts to defraud the company's creditors with regard to its assets.

  • Any officer of a company that is being wound up is liable to a monetary fine and imprisonment if they falsify the company's books of account with the intention to defraud.

Partner

Partnerships do not have independent legal personality and all partners are jointly and severally liable for any liabilities of the partnership firm. However, this is not the case for limited liability partnerships (LLPs), which are treated under Indian laws as being separate legal entities, distinct from their partners. Partners of LLPs are not personally liable for the obligations of the LLP, unless either the LLP or such partners have acted with the intention of defrauding any creditors of the LLP or any other person, in which case their liability becomes several and unlimited.

Parent entity (domestic or foreign)

A parent entity does not incur any liability to the creditors of its insolvent subsidiary, unless they have provided any collateral for any obligations of the subsidiary.

Other party

Third parties do not have any liability purely on account of the insolvency of another entity.

 

Setting aside transactions

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

The following pre-insolvency transactions of an insolvent company can be set aside by the official liquidator on application to the court:

Fraudulent preference. Any transaction undertaken within six months prior to the company's winding-up that would give any fraudulent preference to any persons can be declared void by the court.

Voluntary transfer. Any transfer of property made within the one year period prior to the winding-up, which was not undertaken in good faith and for good consideration in the ordinary course of the company's business, is void against the liquidator.

Transfer for the benefit of all creditors. Any transfer or assignment of all of the company's properties to trustees for the benefit of all of the company's creditors is void.

Floating charge. A floating charge created on the company's property or undertaking within 12 months preceding the company's insolvency will be invalid, unless the company was solvent immediately after creating the charge.

In addition, Indian law also protects the rights of third parties who while acting in good faith have obtained bona fide title to a property for good consideration. A sale to a third party will not be set aside where that third party:

Purchased undervalued property for good consideration.

Acted in good faith.

Acted without knowledge of the property having been purchased at a deliberately undervalued price.

However, the sale will not be set aside unless possession has already been transferred to the third party at the time the undervaluation comes to light and the sale is challenged. Where this is not the case, the sale can still be set aside. If the third party has further sold the property to another buyer who has purchased the property in good faith and for adequate consideration, and such party has already acquired the title to and possession of the property, then he will have acquired a good and valid title to the property which will not be set aside. This is even if the seller had acquired the property at an undervaluation, which had not come to light until the final purchaser had already acquired the property.

 

Carrying on business during insolvency

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

Corporate debt restructuring (CDR) mechanism

Unless the CDR scheme specifically removes the directors, they continue to remain on the board and can continue the operations of the company as before.

Strategic Debt Restructuring (SDR) mechanism

Under the SDR scheme, the company continues to carry on its business as before. Only the shareholders change in case of SDR.

Scheme for Sustainable Structuring of Stressed Assets (S4A)

Under the S4A scheme, the company continues to carry on its business as before. Only the shareholders change and, in certain cases, the management.

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (5/25 Scheme)

Under the 5/25 Scheme, the company continues to carry on its business as before.

Winding-up

In the case of compulsory winding-up, it is the official liquidator who is vested with the power to continue any of the company's operations at his discretion. The board of directors loses all power in this regard.

In the case of a shareholders' voluntary winding-up, the liquidator can carry on the business of the company if empowered to do so by the shareholders in a special resolution.

In the case of a creditors' voluntary winding-up, the liquidator can carry on the business of the company if approved by the court or the creditors (acting on their own or through a committee of inspection appointed by them for this specific purpose).

 

Additional finance

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

There is no express bar preventing a company undergoing insolvency proceedings from obtaining additional finance through sponsors' funding. Creditors who provide additional funding to a company undergoing corporate debt restructuring will have a preferential claim over existing lenders.

 

Multinational cases

13. What are the rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to submit claims in a local restructuring or insolvency process?

Recognition

Indian courts recognise foreign judgments under section 44A of the Indian Civil Procedure Code 1908 (CPC). In order to be recognised by an Indian court, a foreign judgment must be a final, conclusive judgment rendered in a jurisdiction that has been notified as a reciprocating territory under section 44A of the CPC.

Concurrent proceedings

Indian courts are not required to co-operate with any foreign courts for proceedings running concurrently in different jurisdictions. However, their co-operation can be sought to enforce a foreign award or judgment from a reciprocating territory under section 44A of the CPC.

International treaties

India is not a signatory to any international treaties regarding insolvency laws.

Procedures for foreign creditors

There are no special procedures that foreign creditors need to comply with, and Indian law does not differentiate between foreign and domestic creditors. Creditors wishing to enforce a foreign decree must submit a certified copy of the decree and a certificate from a superior court issuing the decree, stating the extent to which it has been satisfied or adjusted.

However, foreign creditors may need the approval of the Reserve Bank of India (RBI) to remit the decree amount outside India.

 

Reform

14. Are there any proposals for reform?

In May 2016, the Insolvency and Bankruptcy Code (IBC) introduced a new mechanism for corporate insolvency in India. The implementation of the IBC is still in progress as regulations governing insolvency professionals, insolvency resolution process and liquidation process have been recently brought into force. It therefore remains to be seen how they will operate in practice.

 

Contributor profiles

Kumar Saurabh Singh, Partner

Khaitan & Co

T +91 22 6636 5000
F +91 22 6636 5050
E kumarsaurabh.singh@khaitanco.com
W ww.khaitanco.com

Professional qualifications. Lawyer, India, BA LLB (Hons), National University of Juridical Sciences, Kolkata, India

Areas of practice. Banking and finance.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1247475937154", "objName" : "ACT_OWNED - READ_ONLY - 6-506-0854", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/6-506-0854?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "2-62dceab2:15aff4982df:5283", "analyticsSessionCookie" : "2-62dceab2:15aff4982df:5284", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }