Restructuring and Insolvency in India 2024

RESTRUCTURING AND INSOLVENCY 2024

INDIA

Pooja S Mahajan, Savar Mahajan

(Chandhiok & Mahajan, Advocates and Solicitors)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The Insolvency and Bankruptcy Code 2016 (IBC) is the umbrella law for insolvencies and reorganizations in India. It is a relatively new law and the provisions relating to insolvency and liquidation of corporate persons only came into force on 1 December 2016.

The provisions in the IBC relating to personal bankruptcy are not fully notified. The government has notified certain provisions of the IBC relating to insolvency resolution of personal guarantors of corporate debtors, which came into effect on 1 December 2019.

The IBC provides for a two-stage process to deal with insolvency of a corporate person. In stage one, the corporate debtor undergoes a corporate insolvency resolution process where the creditors of the debtor attempt to resolve the insolvency of the corporate debtor in a time-bound manner.

To resolve the insolvency, ‘resolution plans’ for the debtor are invited from eligible persons and thereafter approved by the committee of creditors of the corporate debtor. If the corporate insolvency resolution process fails, the corporate debtor enters stage two for its mandatory liquidation.

Besides this, the Companies Act 2013 deals with schemes of reorganization by companies (in a non-insolvency or non-liquidation scenario). The Companies Act provides for schemes of arrangement between the company and its creditors or any class of them or the company and its shareholders or any class of them. The scheme between the company and its creditors can be for any compromise or arrangement and can provide for the restructuring of debt, reduction or preponement of debt, conversion of debt into other instruments and so on.

The scheme of compromise or arrangement between a company and its shareholders can provide for the issuance of additional shares, reorganization of capital, merger and demergers. A scheme could involve compromise or arrangement with both creditors and shareholders.

In addition, the Reserve Bank of India (RBI), the banking regulator in India, has issued various circulars and notifications to the banks under the Banking Regulation Act 1948 (the Banking Act), the latest being on 5 May 2021, for resolution or restructuring of loans given to distressed assets by the banks outside the IBC or the Companies Act.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganizationproceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The IBC applies to all corporate persons (ie, a company, a limited liability partnership or person incorporated with limited liability under any law) other than a ‘financial service provider’. Furthermore, the IBC also applies to partnerships and proprietary concerns (although these sections are not in force yet, except in the case of personal guarantors of the corporate debtor).

Financial service providers are institutions engaged in the business of providing financial services in terms of authorization issued or registration granted by a financial sector regulator (eg, banks, non-banking finance companies and insurance companies). The IBC, however, allows the government, in consultation with the financial services regulators, to notify financial service providers or categories of financial service providers for the purpose of insolvency and liquidation proceedings.

In the exercise of these powers, the government has notified certain rules empowering the government to initiate insolvency and liquidation proceedings of financial service providers, in consultation with the appropriate financial sector regulator. Furthermore, as of the time of writing, these rules apply to non-banking finance companies with an asset size of more than 5 billion rupees, with the RBI as the appropriate regulator. Insolvency and the reorganization of banks are also dealt with under the Banking Act.

As regards insolvency of corporate persons, the assets that are not owned by the corporation are not included within the estate of the corporation (and hence are excluded or exempt from claims of its creditors). For instance, personal assets of any shareholder (unless the assets are held on account of transactions that may be avoided in insolvency), assets held under trust or bailment contracts and assets in security collateral held by financial services providers that are subject to netting and set-off in multilateral trading or clearing transactions are not included in the estate of the corporation.

However, if any creditor holds security over third-party collateral (eg, the personal assets of a shareholder), the creditor may enforce security against such assets, even during insolvency or liquidation proceedings of the principal debtor.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

There is no specific legislation for insolvency of government-owned enterprises. If the government-owned enterprise is a ‘corporate person’ under the IBC (ie, a company or a limited liability partnership is incorporated with limited liability under any law, except a financial service provider), the IBC will be applicable to it and the same procedures will apply for its insolvency, and the creditors will have the same remedies as available to creditors of any other corporate person.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

While financial service providers – such as banks, insurance companies, non-banking finance companies and so on – are not covered as corporate persons under IBC, the government has notified certain rules empowering it to initiate insolvency and liquidation proceedings of financial service providers, in consultation with the appropriate financial sector regulator. Currently, these rules apply to non-banking finance companies with an asset size of more than 5 billion rupees.

Furthermore, the government (under the Companies Act) and the RBI (under the Banking Act) have the right to order an amalgamation of companies or banks (as relevant) in the national or public interest. The RBI, in 2014, released the framework to reduce the risks attributable to domestic systemically important banks.

This framework was introduced to reduce risks attributable to systematic important financial institutions of India. Presently, the RBI has identified three banks (the State Bank of India, ICICI Bank and HDFC Bank) as domestic systemically important banks.

Apart from the above, there is no specific legislation dealing with institutions that are ‘too big to fail’.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The courts of first instance dealing with the IBC and company law matters are the National Company Law Tribunals (NCLT), which are specialized tribunals constituted under the Companies Act. NCLT benches are spread across India. The petition is filed in the NCLT within whose jurisdiction the registered office of the relevant company is situated.

The appeal from the NCLT lies with the National Company Law Appellate Tribunal (NCLAT), which has two benches, in New Delhi and Chennai. The appeal from the order of NCLAT lies to the Supreme Court of India (the highest appellate authority in India). Appeals against the orders of NCLT or NCLAT can be filed on specific grounds mentioned in the IBC, within the specified limitation period.

The right to appeal on such grounds (within the limitation period) is automatic. Appeals beyond the limitation period need to be condoned by the relevant appellate authority. There is no requirement to post security to proceed with an appeal and a simple fee for filing appeal as prescribed by the rules of the relevant court or tribunal would suffice.

Outside the IBC, the specialized courts dealing with enforcement of security interest by banks and financial institutions are the Debt Recovery Tribunals (DRT). The appeal can be filed within the limitation period before the Debt Recovery Appellate Tribunal (DRAT), and from there to the Supreme Court of India. Persons aggrieved by the order of the DRT have to deposit an amount of 50 percent of the amount due from them for purposes of appeal to DRAT.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

Voluntary liquidation proceedings can be commenced by the corporate debtor under the Insolvency and Bankruptcy Code 2016 (IBC) only in a no-default situation (ie, if it has not defaulted on any debt due to any person). If there is a default on the payment of any debt, the only way for the debtor to commence its liquidation is by first initiating its insolvency resolution process (ie, stage one) under the IBC. Only if the debtor’s insolvency cannot be resolved in stage one is it placed into liquidation.

For initiating voluntary liquidation in a no-default situation, the corporate debtor must take the following steps.

The debtor must obtain a declaration by way of an affidavit from the majority of partners (in the case of a limited liability partnership) or individuals constituting the governing body in the case of other corporate persons, stating that they have enquired into the affairs of the debtor and have formed an opinion that:

• either the debtor has no debt or will be able to pay its debts in full from the liquidation estate; and
• the debtor is not being liquidated to defraud any person.

This declaration is to be accompanied with audited financial statements for the two preceding years or for the period since its incorporation (whichever is later) and a report of assets, if any.

Within four weeks of such a declaration, the debtor is required to obtain the approval of shareholders or partners (as the case may be) for voluntary liquidation and appointment of liquidator by way of special majority or resolution. A special resolution in the context of a company means a vote of shareholders holding 75 percent or more shareholding.

If the debtor owes any debt to any person, creditors representing two-thirds in value of the debt should also approve this resolution. The debtor is then required to notify the Registrar of Companies and the Insolvency and Bankruptcy Board of India about the resolution passed.

The voluntary liquidation proceedings in respect of a corporate person is deemed to be commenced from the date of passing of the special resolution. Once this resolution is passed by the shareholders, the company cannot carry out any business except for the completion of the liquidation. A liquidator is appointed by the shareholders and performs their duties under the IBC.

These include inviting and verifying claims against the company, taking custody of all assets of the company, selling the liquidation estate and distributing the assets to the stakeholders as per the prescribed waterfall mechanism. Once the assets have been completely liquidated, the liquidator makes an application to the National Company Law Tribunals (NCLT) for dissolution of the company. Once the dissolution order is passed by the NCLT, the company stands dissolved.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Under the IBC

A corporate debtor who has committed a default of more than 10 million rupees in the repayment of debt may initiate its own corporate insolvency resolution process (voluntary reorganization) under the IBC by filing an application with the relevant NCLT. This filing requires a special resolution of the shareholders of the corporate debtor (in the case of a company) and a resolution of at least three-quarters of the total number of partners (in the case of a limited liability partnership).

The application to the NCLT must be filed in a prescribed form along with prescribed documents (including documents showing debt and default) and the requisite fees. The NCLT has the power to accept or reject this application (and in the case of rejection, the NCLT is required to give notice to the applicant to rectify the defects in its application within a prescribed period). Once the application is accepted or admitted by the NCLT by way of an order, the corporate insolvency resolution process (ie, the reorganization process) starts.

Upon the passing of the admission order by the NCLT, a moratorium (in respect of actions against the debtor) comes into effect and is in effect during the entire resolution process. An interim resolution professional (akin to an administrator) is appointed for the debtor to oversee the resolution process, and the powers of the board of directors of the debtor are suspended and vest with the interim resolution professional.

The interim resolution professional invites claim against the corporate debtor from its creditors and forms a committee of creditors that can either continue with the interim resolution professional as the resolution professional or replace the interim resolution professional with another resolution professional. The resolution professional manages the debtor as a going concern and invites ‘resolution plans’ for the debtor from persons who satisfy the eligibility criteria laid out by the resolution professional with the approval of the committee of creditors.

Any person who satisfies the eligibility criteria and is otherwise not disqualified to present the plan under the IBC can submit a resolution plan for the debtor.

The resolution plan sets out proposals for resolving the insolvency of the company and can include proposals for debt restructuring, sale of assets, merger, takeover of company and so on. This is essentially a reorganization plan for the company.

All resolution plans that comply with the requirements of the IBC are placed before the committee of creditors for their consideration. If any resolution plan is approved by the committee (with a vote over 66 percent), it is presented to the NCLT for final approval.

Once a resolution plan is approved by the NCLT, it is binding on the corporate debtor and its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan.

The entire corporate insolvency resolution process (from the date of admission of petition or application until the submission of the resolution plan with the NCLT for its approval) must be completed within 180 days (extendable to 330 days in certain circumstances).

If during this period, no resolution plan is approved by the committee of creditors and presented to the NCLT, the company is required to be mandatorily liquidated. The 330-day period can also be extended by the NCLT in exceptional circumstances. The company can be sent for liquidation if the resolution plan presented to the NCLT for its approval is rejected by the NCLT.

Under the Companies Act

A company can voluntarily reorganize itself under the Companies Act by formulating a scheme of arrangement or compromise. The scheme can be between the company and its creditors or any class of them or the company and its shareholders or any class of them. It may involve compromise or arrangement with both creditors and shareholders.

For the approval of a scheme of arrangement or compromise, an application is made by the company to the NCLT, requesting from the NCLT directions to convene separate meetings of creditors or a class of creditors, or shareholders or a class of shareholders to approve the scheme. Based on the application, the NCLT may direct the holding of such meetings of creditors or shareholders and also appoints a chair for the meeting.

Once that direction is given, a notice of the meetings is given to all the creditors, members and relevant government authorities or regulators with disclosures pertaining to the scheme. The government authorities or regulators can make representations in respect of the scheme of arrangement or compromise, if any, to the NCLT within a period of 30 days from the date of receipt of such notice, failing which it will be presumed that they have no representations to make on the scheme.

If, at the NCLT convened meetings, a majority of persons representing three-quarters of the creditors or shareholders (or class thereof, as the case may be), approves the scheme of arrangement or compromise, then the company may file a petition with the NCLT for sanction of the scheme.

Upon hearing of the petition, and objections (if any), the NCLT sanctions the scheme by way of an order. The scheme becomes effective once a certified copy of the NCLT order is filed with the Registrar of Companies.

Once the scheme of arrangement or compromise is sanctioned by the NCLT, it is binding on the company, its creditors, shareholders and contributories.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

Under the IBC, creditors are broadly classified as financial creditors and operational creditors. All financial creditors (secured and unsecured) whose claims have been accepted by the interim resolution professional or resolution professional, except related parties of the corporate debtor, form part of the committee of creditors and have a right to vote on the resolution plan. T

he operational creditors do not form part of the committee of creditors (unless there are no financial creditors) and hence have no voting rights. A financial creditor is a person to whom a financial debt (eg, a loan) is owed by the debtor. An operational creditor, on the other hand, is a person to whom an operational debt (arising from supply of goods and services) is owed by the debtor.

All persons who fulfil the eligibility criteria approved by the committee of creditors and are otherwise not disqualified under the IBC can submit a resolution plan. All resolution plans that comply with the mandatory requirements set out under the IBC are placed before the committee for its consideration. The committee may approve any resolution plan by a vote of not less than 66 percent of the voting share (calculated with reference to the value of financial debt admitted), after considering its feasibility and viability.

Furthermore, the committee of creditors, apart from considering the feasibility and viability of the resolution plan, may also take into account the manner of distribution proposed under the resolution plan. Such distribution may consider the order of priority among creditors as laid down in the liquidation waterfall prescribed under the IBC, including the priority and value of the security interest of a secured creditor.

Once approved by the committee of creditors, the resolution plan is submitted to the NCLT for its approval. If the NCLT is satisfied that the resolution plan is in accordance with the IBC (and accompanying regulations) and has provisions for its effective implementation, it will, by order, approve the resolution plan.

The IBC also recognizes the classification of creditors into secured and unsecured creditors for purpose of ‘distribution waterfall’ in liquidation. There is no classification of creditors into secured and unsecured creditors for the purpose of constituting a committee of creditors or voting in a committee of creditors. However, the IBC provides that under a resolution plan:

• the financial creditors who do not vote in favor of the resolution plan should be paid the amount that is not less than the amount they would have received in the event of liquidation; and
• the operational creditors should be assured a minimum amount, which is linked to their position in the liquidation waterfall. Thus, certain minimum payments, linked to liquidation value payable to dissenting financial creditors and operational creditors are assured under a resolution plan. Furthermore, while approving the resolution plan, the committee of creditors may decide on the distribution of plan proceeds that may take into account the order of priority among creditors as laid down in the liquidation waterfall, including the priority and value of the security interest of a secured creditor. Hence, the liquidation waterfall under the IBC (which recognizes the distinction between secured and unsecured creditors) has also been recognized in the case of resolution plans to a limited extent.

The Companies Act also recognizes the concept of ‘class of creditors’ for the purpose of a reorganization plan. Broadly, courts in India have held secured and unsecured creditors as separate classes of creditors for the purpose of convening meetings and voting for a reorganization plan under the Companies Act.

Release of non-debtor parties

Once approved by the NCLT, the resolution plan and the scheme of arrangement or compromise (as relevant) are binding on the company and its stakeholders. Hence, the discharge of non-debtor parties would depend on the terms of the resolution plan or scheme. However, there are exceptions to this rule, and the law in this regard is not fully settled.

For instance, the resolution plan or the scheme may not discharge the officers of the company in respect of breach of their statutory or fiduciary duties or from criminal liabilities. As regards guarantors, the Indian Contract Act provides for the discharge of surety in cases where the principal debtor is discharged or released, where the creditor compounds with the principal debtor or where the contract with the debtor is varied (without the guarantor’s consent).

Hence, there is some case law to suggest that a voluntary scheme or composition will discharge the guarantors. In the case of a resolution plan, the Supreme Court has expressed the view that once a resolution plan is approved, it will be binding on all stakeholders, including guarantors, and hence the resolution plan may provide for the discharge or continuation of liabilities of the guarantors.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Under the IBC, where a company has defaulted on the payment of its debts, direct liquidation of debtor by the creditors is not possible. The debtor will first need to undergo the corporate insolvency resolution process under the IBC, and only once this fails is the debtor placed into liquidation.

A financial creditor or operational creditor of the debtor can initiate the resolution process of the debtor by filing an application with the NCLT (having jurisdiction over the registered office of the debtor) if there is a default of 10 million rupees or more. In general, there are some differences between filings made by a financial creditor and filings made by an operational creditor.

Once the application of the creditor for initiating insolvency resolution is admitted by the NCLT, the corporate insolvency resolution process of the corporate debtor starts. If the corporate insolvency resolution process is successful (ie, a resolution plan for the debtor is approved by the committee of creditors and then by the NCLT), then the debtor will not be placed into liquidation. On the other hand, the NCLT will pass a liquidation order for the debtor if:

• no application is filed with the NCLT for approval of the resolution plan within the prescribed timeline (180 days extendable to 330 days from admission);
• the resolution plan (if filed before the NCLT) is rejected by the NCLT for non-compliance;
• prior to confirmation of a resolution plan, the committee of creditors decide to liquidate the debtor; or
• a resolution plan approved by the NCLT is contravened by the corporate debtor.

While passing the liquidation order, the NCLT also appoints a liquidator and the liquidation process commences from the date of this order. The order for liquidation will be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

Just like a resolution professional, the liquidator takes control and custody of the assets of the debtor (the board of directors remains suspended) and invites claims from the creditors of the debtor. The liquidator forms a liquidation estate, sells the assets forming part of the estate and makes distributions to the stakeholders as per the distribution waterfall provided under the IBC.

Once all the assets are liquidated and the proceeds distributed, the liquidator makes an application to the NCLT for the dissolution of the debtor. During the liquidation period, no suit or legal proceedings can be instituted against the debtor. Notably, during the liquidation process also, a scheme of arrangement or compromise may be proposed or the company may be sold as a going concern by the liquidator.

The process for initiation of an insolvency resolution process is materially similar in cases of voluntary and involuntary filings, except that the resolution of the shareholders or partners of the corporate debtor is not required. Furthermore, while voluntary proceedings are generally non-contentious, proceedings filed by creditors are contentious and certain defenses against admission are available to the debtor.

Once the corporate insolvency resolution process commences, the process of finding a resolution is the same in voluntary and involuntary insolvency resolution proceedings. In both cases, if the resolution is not achieved during the prescribed timelines, the NCLT passes a liquidation order and the process of liquidation remains the same.

However, there is a material difference in the process of starting voluntary and involuntary liquidation. Voluntary liquidation can only be started by the debtor itself in no-default cases, and NCLT approval is not required for starting voluntary liquidation proceedings. As opposed to this, involuntary liquidation by a creditor can only be done after first going through the resolution process and it is the NCLT that passes the liquidation order upon failure of the resolution process.

Once the liquidation starts, the process followed by the liquidators in liquidating the estate is similar. However, NCLT supervision is much greater in cases of involuntary liquidation, which follow a corporate insolvency resolution process, as opposed to voluntary liquidation, which is commenced in a no-default situation.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

The IBC

Under the IBC, a financial creditor or operational creditor of the debtor can initiate the corporate insolvency resolution process of the debtor by filing an application under the IBC to the NCLT (having jurisdiction over the registered office of the debtor) if there is a default of 10 million rupees.

Generally, there is some difference between filings made by operational and financial creditors.

A financial creditor may file an application with the NCLT for initiation of the corporate insolvency resolution process of the debtor not only in cases of default on the payment of debts owed to it, but even in cases of default on any financial debt owed to any other financial creditor. The financial creditor is also required to nominate an interim resolution professional for the corporate debtor. The NCLT reviews the application, checks if it is complete and may admit the application if there is a debt and default.

On the other hand, the operational creditor can file an application only in the case of default on the payment of operational debts owed to it. Before filing the application, the operational creditor must issue a statutory demand notice on the debtor.

The debtor has 10 days to either pay or issue a notice of dispute, bringing to the notice of the creditor, the existence of a dispute on payment of the debt. The dispute should exist prior to receipt of the demand notice by the debtor. If the debt is not disputed, the operational creditor can file an application to the NCLT. The NCLT reviews the application, checks if it is complete and admits it if there is a debt and default and provided there is no existence of a dispute.

In either case, the NCLT will issue notice to the corporate debtor and give it an opportunity to oppose the admission. Once the application of the creditor is admitted by the NCLT, the corporate insolvency resolution process of the corporate debtor starts.

Companies Act

Under the Companies Act, a creditor can file an application before the NCLT for compromise or arrangement between the debtor and its creditors by way of a scheme of arrangement or compromise.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (eg, ‘prepackaged’ reorganizations)?

Chapter III-A on pre-packaged insolvency resolution process (PPIRP) was introduced in the IBC in 2021 and provides for the conclusion of PPIRP within 120 days of its commencement. The PPIRP is applicable to micro, small and medium-sized enterprises (MSMEs), which are classified under the MSME Development Act 2006. Only MSMEs that are incorporated as companies or limited liability partnerships are entitled to initiate PPIRP.

In a PPIRP, corporate debtors that have committed default of at least 1 million rupees are eligible for this resolution process and may negotiate a base plan with their creditors.

Once 75 percent of its members and 66 percent of its unrelated financial creditors approve the proposal to initiate the PPIRP, the corporate debtor may approach the NCLT to initiate the PPIRP process. During a PPIRP, the corporate debtor’s management continues to stay in possession of the company, with the oversight of the committee of creditors. The committee of creditors is formed on the basis of a list of claims provided to the resolution professional by the corporate debtor.

Additionally, the corporate debtor must provide the resolution professional with a preliminary information memorandum containing all information relevant to formulating a resolution plan, as well as the negotiated base plan. The committee of creditors retain the decision to approve the base plan or to invite other plans to challenge it. Any plan that receives 66 percent approval from the committee of creditors is considered approved and is submitted to the NCLT.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Reorganization by way of a resolution plan

Under the IBC, a proposed reorganization is by way of a resolution plan. The resolution plan must be submitted by eligible persons and must comply with certain mandatory provisions specified in the IBC (and related regulations) and should be approved by the committee of creditors (by not less than 66 percent voting share) within the mandated time frame. Once approved by the committee of creditors, the plan is required to be approved by the NCLT.

A proposed reorganization is defeated if no resolution plan is received or if the committee of creditors do not approve any resolution plan within the mandated time frame or if after the constitution of the committee (and prior to confirmation of a resolution plan), the committee of creditors decide to liquidate the debtor. The reorganization is also defeated if the NCLT rejects the resolution plan submitted to it (although the scope of judicial review is limited). If the proposed reorganization is defeated, the NCLT passes an order for liquidation of the debtor.

If the debtor contravenes a resolution approved by the NCLT, any person (other than the corporate debtor) whose interests are prejudicially affected by such contravention can make an application to the NCLT for liquidation of the debtor. Furthermore, a corporate debtor is liable to be punished with imprisonment from one to five years, or with a fine from 100,000 to 10 million rupees, or both.

Reorganization by way of a scheme of arrangement or compromise

A proposed reorganization (ie, scheme of arrangement or compromise) under the Companies Act may be defeated if it is not approved by the majority of people representing three-quarters in value of the creditors, class of creditors, shareholders or class of shareholders (as relevant). Furthermore, the NCLT may reject the scheme if the requirements under the Companies Act are not met or if any objection to the scheme is made (and it agrees with such objection) or if it is contrary to the public interest.

The scope of judicial review by the NCLT is limited. If the scheme is not approved by the NCLT, the reorganization fails and does not have any effect. Once the scheme of arrangement or compromise is sanctioned by the NCLT, the NCLT has the power to supervise its implementation and if it is satisfied that the sanctioned scheme cannot be implemented satisfactorily with or without modifications, and the company is unable to pay its debts as per the scheme, it may make an order for liquidation of the company.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

In bankruptcy proceedings, once a liquidation order is passed against the debtor, the liquidation process is carried out by the liquidator. After all assets of the debtor are liquidated and monies distributed by the liquidator to the stakeholders, the liquidator files an application to the NCLT for dissolution of the corporate debtor. The NCLT, on receiving such application, orders the dissolution of the debtor and from the date of the dissolution order, the debtor stands dissolved.

In a non-bankruptcy scenario, dissolution can take place in the manner outlined below.

In the case of voluntary liquidation, similar to liquidation in a bankruptcy scenario, the liquidator files for dissolution once the assets of the corporation are liquidated and monies distributed to the stakeholders. In this case, the NCLT supervision is limited when compared to liquidation in a bankruptcy scenario.

Under the Companies Act, a company can be wound up by the NCLT (and thereafter dissolved after the liquidation process) if, among other things:

• a default is made by the company in making filings of its balance sheet and profit and loss account or annual return to the Registrar of Companies for any consecutive five years;
• the company does not commence its business within a year from its incorporation or suspends its business for a whole year; or
• the NCLT is of the opinion that it is just and equitable that the company should be wound up.

The process of dissolution is similar to bankruptcy scenario cases, except that here the liquidator is appointed under the Companies Act and the liquidation process is different in some respects from a liquidation process under the IBC.

There are also provisions under the Companies Act for striking off of a company from the Registrar of Companies (without following the liquidation process) in the following circumstances:

• if a company fails to commence its business within one year of its incorporation;
• if a company is not carrying on any business or operations for a period of two consecutive financial years and has not made any application for obtaining a status of the dormant company; or
• where the company after extinguishing all its liabilities, obtains a special resolution or consent of shareholders holding a 75 percent.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

The liquidation proceedings are formally concluded by passing of the dissolution order by the NCLT (once the assets of the debtor are distributed). This order is also filed with the Registrar of Companies. The company stands dissolved from the date of the NCLT order and the Registrar of Companies will record the same in their minute book, recording the dissolution of the company and deleting the name of the company from its records.

However, it is possible to sell a company as a going concern in liquidation. If such a sale takes place, liquidation is ‘closed’ without dissolution of the company.

In the case of reorganization under the IBC, the process is successfully concluded when the NCLT passes an order approving the resolution plan. In the case of failure of reorganization, the liquidation order is passed. Under the Companies Act, the reorganization is concluded when the NCLT passes an order approving the scheme of arrangement or compromise and the said order is filed with the Registrar of Companies. In addition, the reorganization then has to be carried out in terms of the resolution plan or scheme (as relevant).

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

Under the Insolvency and Bankruptcy Code, insolvency is tested by checking if there is a default of 10 million rupees or more in payment of financial debt or operational debt. In addition, in cases of operational debt, the National Company Law Tribunals will also test if the debt is undisputed.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

A company may file (but is not mandated to file) for initiation of insolvency proceedings if it commits a default of 10 million rupees or more.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

The directors are not mandated to commence insolvency proceedings and there are no specific provisions in the Insolvency and Bankruptcy Code 2016 (IBC) penalizing directors or officers for carrying on business while insolvent.

However, there are wrongful trading provisions in the IBC that make directors liable to contribute to the assets of the debtor if, before insolvency commencement, the director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of the debtor’s resolution process, and the director failed to exercise due diligence in minimizing the potential loss to the creditors of the debtor.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

The directors or officers are not ordinarily personally liable for the company’s obligations. In respect of pre-insolvency actions, apart from liability for wrongful trading, under the IBC, the directors and officers of the company can be made liable for fraudulent trading.

Hence, if they are knowingly parties to the carrying on of the business of corporate debtors with intent to defraud creditors or for any fraudulent purpose – in this case, they can be made liable to make such contributions to the assets of the corporate debtor as the National Company Law Tribunals (NCLT) may deem fit. This is a civil sanction.

In addition, under the IBC, directors or officers can be punished for the following offenses committed by them prior to the insolvency commencement date. These are criminal sanctions where they can be punished with imprisonment for a term of three to five years or with a fine of between 100,000 rupees to 10 million rupees, or both:

• if they are involved in the concealment of any property or any debt that is due to or from the company or fraudulently removing any part of the property of the company within 12 months immediately preceding the insolvency commencement date;
• if they are involved in concealment, destroying, mutilating or falsification of the books of the company within 12 months immediately preceding the insolvency commencement date;
• if they have willfully created any security interest over, transferred or disposed of any property of the company that has been obtained on credit and has not been paid for within 12 months immediately preceding the insolvency commencement date, unless the creation, transfer or disposal was in the ordinary course of business; or
• if, prior to the insolvency commencement date, they have made a false representation to the creditor of the company or committed any fraud for the purpose of obtaining the consent of the creditors to an agreement with reference to the affairs of the corporate debtor.

Under various Indian laws, directors or officers can be made vicariously liable for offenses committed by the company. This liability typically arises when they have knowledge of the offence or were involved in the offence or did not undertake due diligence in preventing the offence.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

In respect of claims for fraudulent trading, the directors and officers would need to show that they were not knowingly parties to the carrying on of the business in a fraudulent manner. In respect of claims for wrongful trading, the defense available to the directors is to show that the director did not know or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of the company or that the director exercised due diligence in minimizing the potential loss to the creditors of the corporate debtor.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Yes, under wrongful trading provisions, directors have a duty to exercise due diligence to minimize the potential loss to the creditors during the period when they knew or ought to have known that there is no reasonable prospect of avoiding the insolvency commencement of the company.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

When insolvency or liquidation proceedings under the IBC are admitted, the powers of the board of directors are suspended and are instead exercised by the insolvency professional appointed by the NCLT (interim resolution professional or resolution professional). During this time, the directors and officers are required to report to the insolvency professional and extend all cooperation to them, as required for managing the affairs of the company.

The directors have a right to participate (but not vote) in the meetings of the committee of creditors of the company. Apart from this, the directors or officers do not exercise any powers after the commencement of insolvency or liquidation proceedings under the IBC. However, in a prepackaged insolvency process, the management continues to be in possession and control of the company.

If the company is reorganizing itself under the Companies Act 2013, the powers of the directors and officers are not affected unless provided in a scheme of arrangement or compromise.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Upon admission of an application by the National Company Law Tribunals (NCLT) for initiation of the corporate insolvency resolution process, a statutory protection or moratorium is available to the debtor. The moratorium extends during the entire period of corporate insolvency resolution and prohibits the institution or continuation of a suit or proceedings against the debtor, as well as recovery and enforcement of security by the creditors.

During the moratorium, there is a bar on the suspension or termination of any license, permit, registration, quota, concession, clearance or a similar grant or right given to the debtor by the central government, state government, local authority, sectoral regulator or any other authority on the grounds of insolvency, provided there is no default in payment of current dues arising for the use or continuation of the license and so on.

Furthermore, there is also a bar on the suspension or termination of certain essential goods or services to the debtor except where the corporate debtor has not paid dues arising from the supply during the moratorium period. In the case of liquidation, a limited moratorium is available.

After the liquidation order is passed by the NCLT, no suit or legal proceeding can be initiated against the debtor. However, a secured creditor can choose to stand outside the liquidation process and enforce its security in accordance with the law.

Even though the provisions of the moratorium are absolute, and creditors cannot obtain relief from the prohibitions, the government may exempt certain transactions, agreements or other arrangements from the application of moratorium. The government recently exempted certain contracts relating to production sharing, revenue sharing, exploration licenses and mining leases from moratorium provisions.

In the case of a reorganization under the Companies Act, no moratorium protection is available.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

After the commencement of insolvency resolution of the debtor under the Insolvency and Bankruptcy Act 2016 (IBC) (ie, after the passing of insolvency commencement order by the NCLT), the insolvency professional carries out the business of the debtor as a going concern. To ensure that the debtor is able to continue its business as a going concern, there is a bar on suspension or termination of certain essential goods or services to the debtor except where the corporate debtor has not paid dues arising from such supply during the moratorium period.

There is also a bar on suspension or termination of any license, permit, registration and similar given to the debtor by the government or any other authority on the grounds of insolvency, provided there is no default in payment of current dues arising for the use or continuation of the license.

While no protection is given to creditors who supply goods or services after filing (ie, filing of application for insolvency), the dues payable to creditors who supply goods or services after the admission of the application are protected as insolvency resolution process costs and accorded highest priority in payment, both in cases of resolution and liquidation.

During the insolvency resolution period, certain key actions by the insolvency professional require prior approval of the committee of creditors. Except for this, the approval of the creditors or the NCLT is not required for carrying out the business activities of the debtor, although the insolvency professional functions under the overall supervision of the committee or creditors and the NCLT.

Also, in cases of liquidation, the powers of the board vest with the liquidator. However, in liquidation, the liquidation order discharges all employees and officers of the company unless the business of the company is continued during the liquidation process by the liquidator. Where the business is continued as a going concern, the dues to suppliers of goods or services during this period are protected as liquidation costs and accorded the highest priority in the liquidation waterfall.

While the liquidator is required to form a stakeholders’ consultation committee (to advise the liquidator), the recommendations of the committee are not binding on the liquidator and the liquidator does not need their approval for conducting the business activities of the debtor. The liquidator carries out the debtor’s business activities subject to the directions of the NCLT (although they do not need any specific approval from the NCLT for carrying out such business activities).

In cases of reorganization under the Companies Act, the existing management continues and there is no specific bar on them (in law) carrying out the company’s business. Neither the creditors nor the NCLT plays any role in supervising the debtor’s business activities in this case. No special treatment is given to creditors who supply goods and services during the reorganization under the Companies Act.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Under the IBC, after the commencement of the insolvency resolution process, the interim resolution professional can raise interim finance (secured or unsecured). The creation of security over already encumbered assets requires the prior consent of the relevant secured creditor, unless the value of such property is not less than the amount equivalent to twice the amount of the debt.

Once the committee of creditors is formed (this takes about a month), the resolution professional can also raise interim finance and create security with the approval of the committee (66 percent vote). The amount of interim finance forms part of the insolvency resolution process costs and is given priority along with other such costs in reorganization as well as in liquidation.

Raising of loans or credit in cases of reorganization under the Companies Act is not regulated.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

During the corporate insolvency resolution process under the IBC, the resolution professional may sell unencumbered assets of the debtor outside the ordinary course if the sale is necessary for the better realization of value under the facts and circumstances of the case and if the book value of all assets sold in aggregate do not exceed 10 percent of the total claims admitted by the resolution professional. Such a sale requires the approval of the committee of creditors.

The purchaser acquires a free, clear and marketable title to these assets notwithstanding the terms of the constitutional documents of the corporate debtor, shareholders agreement, joint venture agreement or other documents of similar nature. Other than this, the resolution plan for the company may provide for the sale of assets of the company or business.

In liquidation, the liquidator sells the assets forming part of the liquidation estate. The sale may take place through auction or by way of private sale (subject to certain conditions). The liquidator may do the piecemeal sale of assets or may carry out a ‘slump sale’ (by consolidating assets) or may even sell the business or the company itself as a going concern.

In liquidation, the liabilities of the company are dealt with by way of distribution against such liabilities as per the distribution waterfall. While the sale of assets in liquidation is on an ‘as is where is’ basis, the monetary liabilities owed to the company for the past period are settled as per the liquidation waterfall. However, there may be certain non-monetary ‘claims’, such as title defects that will pass with the assets.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

Neither the IBC nor the Companies Act deals with stalking horse bids or credit bidding in sales. The process of calling for a resolution plan under the IBC is regulated and all complying resolution plans need to be placed before the committee of creditors for its consideration. The plans are then tested on an evaluation matrix, which is approved by the committee. The committee may follow a negotiation or bidding process with applicants that it deems suitable, including a Swiss challenge or open bidding.

However, entering into an interim sale agreement during this process with a bidder may not be possible given that only a resolution plan can be voted by the committee. As far as credit bidding is concerned, the IBC or the court do not regulate this. A resolution plan submitted by a creditor could possibly provide for credit bidding (provided other mandatory requirements of a resolution plan are met).

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

There is no provision for rejection or disclaimer of unfavorable contracts in a reorganization process. Such a disclaimer may not be possible in reorganization under the Companies Act. However, in the case of reorganization under the IBC, rejection of a contract is possible if it is part of an avoidance transaction (ie, preferential transaction, undervalued transaction and extortionate credit transaction) or a fraudulent transaction.

In this case, the resolution professional will make an application before the NCLT for the setting aside of the contract, and the NCLT may, if conditions of the provisions relating to avoidance or fraudulent transactions are met, set aside or modify such transactions. Furthermore, a resolution plan under the IBC could possibly provide for the termination of an unfavorable contract; however, the legality of this is not finally settled yet.

Disclaimer of onerous contracts is possible in liquidation. The liquidator can make an application to the NCLT within six months of the liquidation commencement date to disclaim a property or contract if any part of the property of the corporate debtor consists of:

• the land of any tenure, burdened with onerous covenants;
• shares or stocks in companies;
• any other property not saleable thereof being bound by a performance of any onerous act; or
• unprofitable contracts.

The liquidator is required to serve notice to persons interested in the onerous property, at least seven days prior to making an application for disclaimer.

There are no specific provisions dealing with the effect of a debtor breaching a contract after the initiation of insolvency proceedings. Such contracts continue to be binding and the counterparty could have a claim against the debtor under contract law. However, this is subject to the moratorium provisions, which provide that no suit or arbitration proceedings can be commenced against the debtor during the corporate insolvency resolution process.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

This would depend on the terms of the IP agreement. Neither the Companies Act nor the IBC provides protection against the termination of IP contracts. In a reorganization, the insolvency professional can take control and custody of the intangible assets of the debtor and continue to use them to carry on business, subject to its terms. Similarly, in liquidation, if the liquidator is continuing the business of the company, they may continue to use the IP, subject to its terms.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

In the case of corporate insolvency resolution process under the IBC, all confidential information of the company is shared with potential purchasers (who wish to conduct due diligence), subject to receipt of a confidentiality undertaking. Furthermore, the insolvency professional is required to maintain confidentiality of all the information relating to the insolvency resolution process and liquidation process.

However, the insolvency professional can share the information with the consent of the parties or as required by law. Moreover, the law relating to the protection of ‘personal information’ will continue to apply. In India, the ‘sensitive personal data’ or ‘personal information’ of individuals is protected under the Information Technology Act, and they cannot be transferred except with the consent of the relevant individual.

In addition, the Digital Personal Data Protection Act 2023 has been passed for protecting the digital personal data; however, the Act has not yet been enforced.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

Once insolvency proceedings are admitted or liquidation commences under the IBC, there is a moratorium on all arbitration proceedings against the company. During the corporate insolvency resolution process, a company may continue arbitration proceedings that are for its benefit and in liquidation, the liquidator can commence legal proceedings on behalf of the company with NCLT consent.

However, the arbitration proceedings are not used in relation to liquidation or reorganization proceedings as only the NCLT (and the appellate authorities) has jurisdiction to resolve legal issues arising in such proceedings.

The following types of disputes may not be arbitrated:

• disputes related to rights and liabilities arising from criminal offenses;
• matrimonial disputes;
• guardianship matters;
• insolvency and winding-up;
• fraud;
• anti-trust or competition;
• patent, trademark and copyright; and
• matters related to eviction of tenants.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Once the application for initiation of the corporate insolvency resolution process is admitted under the Insolvency and Insolvency and Bankruptcy Code 2016 (IBC), the creditors cannot enforce security or seize assets of the company during the moratorium period. There is no process by which any creditor may do this.

However, in cases of liquidation, a secured creditor may choose to either relinquish its security interest to the liquidation estate or realize its security interest outside the liquidation proceedings. The secured creditor is required to inform the liquidator of its decision to relinquish or realize its security interest in a prescribed form within 30 days of the liquidation commencement date and in cases of failure to so inform, the assets covered under the security interest will be presumed to be part of the liquidation estate.

Banks and financial institutions that are covered under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 or the Recovery of Debts Due to Banks and Financial Institutions Act 1993 may enforce their security in accordance with these statutes, without any interference from the liquidator. The other secured creditors need to inform the liquidator of the price at which they propose to realize their secured asset.

The liquidator can inform the secured creditor within a specified period if any person is willing to buy the asset at a higher price within a specified period, in which case, the creditor must sell the asset to the person. If the liquidator does not so inform the creditor or if the buyer does not buy the asset, the secured creditor may realize the secured asset in the manner it deems fit, but at least at the price intimated to the liquidator.

As per a recent amendment to liquidation regulations, where a secured creditor proceeds to realize its security interest, it must pay its share of dues and costs that have priority over secured creditor dues in the liquidation waterfall prescribed under the IBC.

Except for the above, there is no process by which a creditor can seize assets forming part of a liquidation estate.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

Before the admission of the insolvency petition, an unsecured creditor can file recovery suits before the Indian civil court for recovery of its debt or initiate arbitration proceedings (in the case of an arbitration clause in the agreement). If the financial unsecured creditor is a bank or financial institution, it can file an application for recovery under the provision of Recovery of Debts Due to Banks and Financial Institutions Act 1993 before the Debt Recovery Tribunal.

Criminal proceedings can also be started by the creditor in the case of dishonor of cheques. Such processes are time-consuming. Pre-judgment attachments may be available by way of court order if the court is satisfied that the debtor may dispose of the asset.

Once insolvency proceedings are admitted, the unsecured creditor cannot maintain or continue recovery proceedings against the company and can only file a claim form with the interim resolution professional or resolution professional. If the claim is rejected, the unsecured creditor can appeal against the rejection to the National Company Law Tribunals (NCLT). In a resolution process, the claim of the unsecured creditor will be dealt with in the resolution plan.

In liquidation, the remedy available to the unsecured creditor is to file a claim with the liquidator. If the claim is rejected, the unsecured creditor can appeal against the rejection to the NCLT. Once the claim is admitted, the distribution takes place only as per the prescribed waterfall mechanism in the IBC.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The Insolvency and Bankruptcy Code

Both during the reorganization (resolution) of the debtor as well as in liquidation, the interim resolution professional or liquidator (as relevant) makes a public announcement calling upon the creditors of the debtor to submit their respective claims. These claims are then verified and admitted by the insolvency professional.

In cases of reorganization under the Insolvency and Bankruptcy Code 2016 (IBC), the insolvency professional constitutes a committee of creditors (comprising of financial creditors) and holds regular meetings of the committee. The meetings of the committee are called by giving notice to the participants (of a prescribed number of days). The resolution professional may convene a meeting as and when they consider it necessary and must convene a meeting if a request is made by members of the committee representing 33 percent of the voting shares.

All important information about the company is shared with the committee during the insolvency process, including claims received and admitted and the information memorandum of the company (containing prescribed details of the company including a list of assets). The liquidation value and fair value of the company (as per valuations commissioned by the resolution professional) is also shared with the committee once the resolution plans are received.

In liquidation, there is no committee of creditors. However, the liquidator is required to constitute a stakeholders’ consultation committee to advise and assist the liquidator in the sale of assets. Stakeholders’ consultation committees comprise a prescribed number of representatives of various classes of creditors as well as a representative of shareholders.

The liquidator convenes a meeting of the consultation committee when they consider it necessary and must convene a meeting when a request is received from at least 51 percent of representatives in the consultation committee. Subject to the provisions of the IBC and the regulations, representatives in the consultation committee are provided access to all relevant records and information as may be required by them to provide advice to the liquidator.

However, the advice of the consultation committee is not binding on the liquidator. Furthermore, a liquidator has extensive reporting requirements to the National Company Law Tribunals (NCLT) (eg, a liquidator is required to prepare and submit to the NCLT a preliminary report, an asset memorandum, progress reports, sale report, minutes of consultation with stakeholders and final report prior to dissolution). The asset memorandum containing details of assets of the company is not accessible to any person during the course of liquidation; however, a creditor may apply to the NCLT to get such access.

Companies Act

In cases of reorganization under the Companies Act 2013 through a scheme of arrangement or compromise, a meeting of creditors is called pursuant to the order of the NCLT. A notice of the meeting is given to creditors and this meeting is required to be conducted as per the directions of the NCLT.

The notice of the meeting given to the creditors is accompanied by all important details about the scheme, including the terms of the proposed reorganization or arrangement, a copy of the valuation report (if any) and a report capturing the effect of the reorganization on the creditors, key managerial personnel, promoters, non-promoters and so on.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The IBC

A committee of creditors is constituted by the interim resolution professional during the corporate insolvency resolution process, comprising financial creditors whose claims against the debtor have been admitted. Related parties of the debtor do not have any right of participation or vote in the committee. If there are no financial creditors or if all financial creditors are related parties then the committee can comprise 18 of the largest operational creditors by value, one representative elected by all the workmen and one representative elected by all the employees.

The committee oversees the resolution process and all key decisions during this period can be taken by the resolution professional only after the committee’s approval. These include decisions on raising of interim finance, creation of security interest over the assets of the corporate debtor, change in the capital structure, change in management and, most importantly, approval or rejection of a resolution plan for the debtor.

Both the resolution professional as well as the committee can appoint or retain professional advisers including counsels. The fee or expenses of advisers of the resolution professional forms part of the insolvency resolution process cost (to the extent they are ratified by the committee) and are paid in priority in the case of resolution or liquidation of the company. However, the expenses of advisers of the committee are borne by members of the committee (in accordance with their inter se creditor arrangements).

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The IBC does not provide the creditor with any right to pursue an estate’s remedies on their own. However, the liquidator may sell the actionable claims of the corporate debtor in liquidation by auction or by private sale and in such a case, the buyer (who may also be a creditor) can pursue the actionable claim and retain the fruits of the remedies.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Submission of claims

Once the NCLT admits a corporate debtor into the corporate insolvency resolution process, a public announcement is made by the interim resolution professional (within three days of their appointment) inviting claims from the creditors of the debtor. Thereafter, the creditors are required to submit their claims in a specified format to the interim resolution professional within 14 days of the date of appointment of the insolvency resolution professional.

If a creditor fails to submit its claim within 14 days, then the creditor may submit the claim on or before the 90th day from the insolvency commencement date. However, the NCLT and the National Company Law Appellate Tribunal (NCLAT) have generally held that such claims can be submitted even after 90 days if they are prior to the approval of the resolution plan by the committee of creditors.

In a liquidation process, once the NCLT passes the liquidation order, the liquidator appointed by the NCLT issues a public announcement within five days of their appointment, calling upon the creditors to submit their claims within the last date for submission of their claims (which is within 30 days of the liquidation commencement date). Thereafter, the stakeholders are required to submit their claims in a specified format along with proof of their claims to the liquidator.

Rejection of claims and appeal

Both under the corporate insolvency resolution process and liquidation, the insolvency professional (ie, the interim resolution professional, resolution professional or liquidator) verifies the claims received and may direct the creditor to provide evidence or documentary proof for such claim. The professional may reject such claim (on the grounds that such claim does not exist) by providing reasons in writing for such rejection. An appeal against the decision of the insolvency professional for rejection of the claim may be made by the creditor by filing an application with the NCLT.

Contingent or unliquidated amounts

Yes, claims for contingent or unliquidated amounts can be made. The insolvency professional is required to make a best estimate of such claims on the basis of information available to them. Furthermore, in liquidation, a person may prove for a claim whose payment was not yet due and subject to any contract to the contrary, where a stakeholder has proved for a claim and the debt has not fallen due before distribution, they are entitled to distribution of the admitted claim reduced as per a specified formula.

Transfer of claims

Both under the reorganization and the liquidation process under the IBC, transfer of claims by a creditor is permitted; however, the terms of such assignment or transfer and the identity of the assignee or the transferee must be disclosed to the relevant insolvency professional. The amounts involved in such claim would be the amount owed by the corporate debtor to the original creditor (as opposed to the amount at which such claim was transferred to the transferee).

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

A security collateral held by financial services providers, which is netted and set off in multilateral trading or clearing transactions, does not form part of the debtor’s liquidation estate. Furthermore, in liquidation, where there are mutual dealings between the corporate person and another party, the sums due from one party are required to be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or the other party.

In a resolution process, a set-off exercised by a creditor (for an amount due prior to the insolvency commencement date) may amount to a breach of moratorium provisions as it may be viewed as a recovery action, which cannot be undertaken by a creditor during the corporate insolvency resolution process.

In respect of a scheme of arrangement or compromise under the Companies Act, there are no specific provisions on set-off. Hence, a set-off of claims of creditors can be accounted for in the scheme of arrangement or compromise.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

In liquidation, the order of priority of claims is set out in the IBC and the courts cannot change this.

In the case of reorganization (ie, resolution) under the IBC, the resolution applicant may provide for payments to the debtor’s creditors in the resolution plan. While there is no payment waterfall prescribed for resolution and the applicant is free to decide what payments it will make under the resolution plan, the following minimum requirements must be met in a resolution plan:

• the insolvency process resolution cost must be paid in priority to all other payments;
• the operational creditors must be paid an amount no less than the higher of:
• the amount they would have received in the event of liquidation of the debtor; and
• the amount that they would have received if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in the liquidation waterfall prescribed in the IBC;
• the financial creditors who do not vote in favour of the resolution plan (dissenting financial creditors) are required to be paid the amount that must not be less than the amount to be paid to such creditors in the event of liquidation; and
• the operational creditors are required to be paid in priority to the financial creditors. The dissenting financial creditors are required to be paid in priority to the assenting financial creditors.

Furthermore, while approving the resolution plan, the committee of creditors may also take into account the manner of distribution proposed under the resolution plan, which may take into account the order of priority among creditors as laid down in the liquidation waterfall prescribed under the IBC, including the priority and value of the security interest of a secured creditor. Hence, the committee of creditors can decide the priority of distribution in resolution, which may take into account the liquidation waterfall.

Provided the mandatory payments are provided in the resolution plan, the NCLT will not by itself change the rank or priority of payments in the resolution plan.

In the case of reorganization pursuant to a scheme of arrangement or compromise under the Companies Act, no priority of claims are prescribed.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

In liquidation, the assets of the debtor are distributed in the following order of priority:

• the costs involved in the insolvency resolution process and the liquidation costs are to be paid in full;
• workers’ dues for the period of 24 months preceding the liquidation commencement date and debts owed to a secured creditor where the secured creditor has relinquished its right to realize the security (pari passu);
• wages and unpaid dues owed to employees other than workers for the period of 12 months preceding the liquidation commencement date;
• financial debts owed to unsecured creditors;
• any amount due to the central government and the state government, including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a state, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date and debts owed to a secured creditor for any amount unpaid following the enforcement of a security interest (pari passu);
• any remaining debts and dues;
• preference shareholders, if any; and
• equity shareholders or partners as the case may be.

The costs involved in the insolvency resolution process and the liquidation costs are the major privileged claim in liquidation and have priority over secured creditors. Workers’ dues for the 24-month period preceding liquidation commencement date rank pari passu with secured creditors’ claims. Furthermore, it has been held in multiple cases that amounts due to workers and employees in respect of provident fund, pension fund and gratuity do not form part of the liquidation estate and are required to be paid in priority.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

In the case of termination of employees’ contracts during the reorganization process (under the IBC or the Companies Act), the claims of the employees would be as per the employment contract and the applicable labor laws governing the payment of gratuity, pension, provident fund and similar employee dues.

There is no specific procedure prescribed for the termination of an employment contract during reorganization. The procedure for termination, including the requirement of giving sufficient notice, would be as per terms of the contract between the employee and the corporate debtor and applicable labor laws.

In the case of liquidation, the liquidation order of the NCLT is deemed to be a notice of discharge to the employees and, therefore, there is no requirement of separately terminating employment contracts. An exception to this is where the liquidator continues the business during the liquidation process. In such a case, if an employment contract is to be terminated, such termination would have to be as per the terms of the contract and applicable labor laws.

There are no provisions in the IBC or Companies Act whereby employee claims are wholesale increased in the case of large-scale termination of employees’ contracts or if the business of the corporate debtor ceases operations, whether in reorganization or liquidation. However, there are labor laws providing for compensation in the case of retrenchment or lay-off of employees.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Sums due to employees from the provident fund, the pension fund and the gratuity fund do not form part of the liquidation estate. Hence, monies from such funds are to be paid out to employees and cannot be distributed to other stakeholders. Once a corporate insolvency resolution process or liquidation process starts, the employees can file their claims as operational debts, and these claims may include pension-related claims.

If there are unpaid pension contributions or deficiencies in the plan, the IBC itself does not specify remedies available to employees against the liquidation estate for pension claims or whether these will be paid in priority in a resolution of the liquidation process. However, there are recent case laws that the resolution applicant (in the case of a resolution plan) and liquidator (in the case of liquidation) should make good the contributions or deficiencies and pay the employees in full for their pension relation claims.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

In the case of resolution under the IBC, the treatment of liabilities of a corporate debtor would be as per the resolution plan approved by the NCLT. This would include liabilities due to financial and operational creditors. Barring the liabilities that are proposed to be paid under the resolution plan, the resolution plan would typically provide for settlement, extinguishment or waiver of all other liabilities, including statutory liabilities. Hence, the resolution applicant takes over the company on a ‘clean slate basis’.

In the case of reorganization under the Companies Act, the scheme of arrangement or compromise with creditors will deal with the liabilities of the debtor qua such creditors (and does not deal with statutory or other liabilities). Therefore, these other liabilities (except liabilities compromised with creditors in a scheme) would survive.

In the case of liquidation, once distributions are made, the company is dissolved and no liabilities survive.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

In the case of resolution under the IBC, the treatment of liabilities of a corporate debtor would be as per the resolution plan approved by the NCLT. This would include liabilities due to financial and operational creditors. Barring the liabilities that are proposed to be paid under the resolution plan, the resolution plan would typically provide for settlement, extinguishment or waiver of all other liabilities, including statutory liabilities. Hence, the resolution applicant takes over the company on a ‘clean slate basis’.

In the case of reorganization under the Companies Act, the scheme of arrangement or compromise with creditors will deal with the liabilities of the debtor qua such creditors (and does not deal with statutory or other liabilities). Therefore, these other liabilities (except liabilities compromised with creditors in a scheme) would survive.

In the case of liquidation, once distributions are made, the company is dissolved and no liabilities survive.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

In the case of corporate insolvency resolution, distributions are made as per the resolution plan that is approved by the committee of creditors and the NCLT. The resolution plan will provide the timeline for payment to be made to the creditors, provided that the payments to the operational creditors and dissenting financial creditors are to be made in priority to payments to financial creditors.

In the case of a scheme of arrangement or compromise under the Companies Act, the distributions are made as per the timelines in the scheme, once the NCLT approves the scheme and the order is filed with the Registrar of Companies.

In the case of liquidation, the liquidator can commence distribution only after the list of stakeholders of the corporate debtor and the asset memorandum (containing details regarding the liquidation assets that are intended to be realized by way of sale) has been filed with the NCLT. The distribution of proceeds realized from the sale of liquidation assets must be made by the liquidator to the stakeholders within 90 days from the receipt of the amount, after deducting pending insolvency resolution process costs and the liquidation costs.

If there are assets that cannot be readily or advantageously sold because of their peculiar nature or other special circumstances, the liquidator may distribute such assets among the stakeholders, with the permission of the NCLT. The assets are to be distributed as per the liquidation waterfall provided for in the IBC.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

In India, the principal security taken on immovable property is a mortgage over the property in favor of the creditor. There are six kinds of mortgages that can be created, outlined below.

• Simple mortgage: the possession of property is not transferred to the mortgagee. The mortgagor binds themself to personally pay the mortgage money. In the event of failure to pay the mortgage money, the mortgaged property can be sold and the proceeds of such sale are applied in payment of the mortgage money.
• Mortgage by conditional sale: the mortgagor sells the property on the condition that the sale will become absolute in the case of default in payment of the mortgage money. However, in the event of repayment of the loan, the sale becomes void.
• Usufructuary mortgage: the mortgagor delivers the possession of the mortgaged property to the mortgagee and authorizes them to retain such possession until repayment of the loan. The mortgagee also has the right to receive the rents and profits accruing from the property.
• English mortgage: the property is transferred to the mortgagee until the repayment of the mortgaged money. On payment, the property is re-transferred to the mortgagor.
• Mortgage by deposit of title deeds (or equitable mortgage): the mortgagor delivers title deeds of the property to the mortgagee with the intention to create security.
• Anomalous mortgage: a mortgage that does not fall into any of the aforementioned categories but is a mixture of any two or more of the aforementioned mortgages.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

The following are the principal types of security that may be created over movable properties.

• Pledge: bailment of goods as security for payment of a debt or performance of a promise. In the case of pledge, there is a delivery of possession to the pledgee; however, the title of goods remains with the pledgor.
• Hypothecation: this is a charge in or upon any movable property, existing or future, without the delivery of possession of the property to the creditor. In this case, both the title and possession of the movable property remains with the debtor.
• Charge: a charge is a right created by the debtor on its movable property in favor of the creditor for extending financial assistance. There are two types of ‘charge’ recognized by Indian law: fixed charge, which is a charge created in the case of property that is ascertainable or quantifiable (present or future); and floating charge, which is a charge created in the case of property that is fluctuating in nature, such as stock-in-trade or raw material.
• Assignment: the debtor who is the owner of a contract may assign the contract in favor of a creditor as security for the financial assistance provided.
• Lien: a lien is a security where the actual or constructive possession of the property is ordinarily retained by the creditor until the payment for the debt is made. There are two forms of lien recognized under the Indian Contract Act 1872: a particular lien and a general lien. A particular lien is where the bailee of goods has a particular lien over the goods, where the bailee has rendered any service involving the exercise of labor or skill in respect of goods bailed. The bailee may retain such goods unless due remuneration is paid for the services rendered (in the absence of a contract to the contrary). A general lien is where, in the absence of a contract to the contrary, bankers, factors, wharfingers, attorneys and policy brokers have a general lien over any goods bailed to them for the security of a general balance of account.
• Escrow: it is also common, especially in project financing, to have an escrow of receivables or cash flows in a particular account, with a right given to the lender to control the outflow.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The following transactions may be annulled or set aside by the National Company Law Tribunals (NCLT) in liquidation and insolvency resolution processes in the Insolvency and Bankruptcy Code 2016 (IBC).

Preferential transactions

• These are transactions where the corporate debtor has transferred any property (or interest thereof) for the benefit of any creditor, surety or guarantor for or on account of any antecedent debt or liabilities owed by the corporate debtor and where such transfer has the effect of putting the creditor, surety or guarantor in a more beneficial position than it would have been in the case of distribution of assets in liquidation.
• Transactions that are in the ordinary course of business of the corporate debtor or the transferee or that create security for new value are not considered preferential.
• Only an insolvency professional can attack such a transaction by filing an application to the NCLT.
• The transaction is considered preferential if undertaken during the two years preceding the insolvency commencement date (if made to a related party) and one year preceding the insolvency commencement date (if made to any other party).
• The NCLT may annul the transaction and pass various orders for such purpose including providing for vesting of property in the debtor or release of security or require the preferred person to pay or return the benefit, direct guarantor to be under new or revived debts.
• In certain cases, protection is available to transferees who acquire property from a person other than the corporate debtor in good faith and for value and to persons who receive benefit from preferential transactions in good faith and for value.

Undervalued transactions

• These are transactions where the debtor gifts or transfers its assets for a consideration significantly less than its value, unless such transaction is in the ordinary course of business of the corporate debtor.
• Insolvency professionals or even a creditor, member or partner of a corporate debtor can make this application to the NCLT.
• The relevant timing for the transaction is, if undertaken during the two years preceding the insolvency commencement date (in the case of a related party) and one year preceding the insolvency commencement date (in the case of any other party).
• The NCLT may annul the transaction and pass various orders for such purpose including providing for vesting of property in the debtor or release of security or requiring payment of the benefit received, or payment of consideration as determined by an expert.

Transactions defrauding creditors

• If an undervalued transaction is deliberately entered into by the debtor for keeping its assets beyond the reach of any person entitled to make a claim against the debtor or to adversely affect the interests of such person in relation to the claim, then it is considered to be a transaction defrauding There is no look-back period prescribed for this.
• The NCLT may pass an order restoring the position as it existed prior to the transaction and protecting the interest of persons who are victims of such a transaction.
• In certain cases, protection is available to transferees who acquire property from a person other than the corporate debtor in good faith and for value and without notice, and to persons who receive benefit from undervalued transactions in good faith and for value and without notice.

Extortionate credit transactions

• These are transactions that require the corporate debtor to make exorbitant payments in respect of any credit provided or are unconscionable under the principles of law relating to contracts. An exception is available to debt extended by any financial services provider that is in compliance with the law applicable in relation to such debt.
• Only an insolvency professional can make this application to the NCLT.
• The look-back period is two years preceding the insolvency commencement date.
• The NCLT may annul the transaction and pass orders restoring the position or setting aside the debt or modify the terms of the transaction or require the counterparty to repay the amount received or require relinquishment of the security interest created under the transaction.

Fraudulent trading

• Liability, in this case, arises if the business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose.
• Only an insolvency professional can make an application to the NCLT. No look-back period is prescribed.
• The NCLT may pass an order directing that any persons who were knowingly parties to the fraudulent trading be liable to make such contributions to the assets of the corporate debtor as the NCLT deems fit. Further directions may be issued to give effect to the contribution order such as providing for liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to them.

Wrongful trading

• Liability, in this case, arises if, before the insolvency commencement date, a director or partner knew or ought to have known that there was no reasonable prospect of avoiding the insolvency commencement and yet did not exercise due diligence in minimizing the potential loss to the creditors.
• Only a resolution professional can make an application to the NCLT. No look-back period is prescribed.
• The NCLT may pass an order directing directors or partners to make such contributions to the assets of the corporate debtor as the NCLT deems fit. Further directions may be issued to give effect to the contribution order such as providing for liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to them.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

There are no restrictions on related parties or non-arm’s length creditors (including shareholders) in making claims against corporations in insolvency or reorganization proceedings. However, related parties who are financial creditors do not have any right of representation, participation or voting in creditors’ committees in a resolution process under the IBC. There is no such restriction in case of a reorganization under the Companies Act.

However, claims by related parties or non-arm’s length creditors may be defeated in the case of resolution or liquidation under the IBC if they fall within the category of avoidance transactions. For instance, an undervalued transaction can be set aside in insolvency proceedings. There are no such restrictions in the case of a reorganization under the Companies Act.

No separate treatment is provided for payment to related parties or shareholders in the case of insolvency or reorganization proceedings.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

As at the time of writing, there is no provision in the IBC or otherwise under the Indian legal regime that outlines any circumstances where lenders could be held liable for the insolvency of a debtor.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Under Indian law, each company has a separate legal existence and only in very rare circumstances the courts will pierce the corporate veil (eg, for fraud). A parent or an affiliated corporation is not responsible for the liabilities of its subsidiaries or affiliates (typically these form part of the ‘excluded assets’ for the parent company) unless they have given guarantees or security for the debts of subsidiaries or affiliates.

Presently, the Insolvency and Bankruptcy Code 2016 (IBC) does not contain any provision to enable combining proceedings against entities that are of the same group (ie, a parent or affiliated corporation). However, in a few Instances, applications filed to consolidate the insolvency proceedings initiated against group companies has been allowed by the National Company Law Tribunals (NCLT) on account of common businesses and group interlinkage.

The IBC does not expressly state the provision for the consolidation of assets in cases of group insolvency, but the NCLT and National Company Law Appellate Tribunal have used their inherent powers to consolidate insolvencies of various group companies, and this has also been exercised by the tribunal in various instances.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

Insolvency proceedings of the parent and its subsidiaries are separate and are not combined. Furthermore, the assets of the subsidiary are excluded assets with respect to the parent under the IBC and are not pooled for distribution purposes. Similarly, the liabilities of the subsidiary are also not considered with respect to the insolvency proceedings of the parent. An exception to this is where the parent has given a guarantee for subsidiaries’ liabilities.

In this case, a claim can be made on the parent (undergoing insolvency proceedings) by the creditors of the subsidiary. In addition, in several instances, the NCLT has allowed consolidation of insolvency proceedings initiated against parent companies and their subsidiaries.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

A foreign judgment must satisfy the requirements of the Indian Code of Civil Procedure 1908 (CPC) to be recognized in India. A foreign order, on the other hand, being of an interim nature, is not enforceable. A foreign judgment is conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim under the same title, except where:

• it has not been pronounced by a court of competent jurisdiction;
• it has not been given on the merits of the case;
• it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognizethe law of India in cases in which such law is applicable;
• the proceedings in which the judgment was obtained are opposed to natural justice;
• it has been obtained by fraud; and
• it sustains a claim founded on a breach of any law in force in India.

Furthermore, a money decree passed by a superior court of any reciprocating country (ie, countries notified by the government, where Indian decrees are also recognized) can be executed in India as if it has been passed by an Indian court, subject to meeting requirements or recognition set out above. Where the foreign decree is from a non-reciprocating country, then such party has the option of filing a fresh suit in the Indian court of competent jurisdiction based on that foreign decree or the underlying cause of action, or both.

In this case, as mentioned above, the foreign decree will be considered conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim under the same title, provided the conditions of recognition set out above are met.

India is currently neither a signatory to any treaty on international insolvency nor on recognition or enforcement of foreign judgments or decrees.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

The UNCITRAL Model Law on Cross-Border Insolvency 1997 has not yet been adopted in India. However, the Insolvency Law Committee (set up by the Ministry of Corporate Affairs to make recommendations to the Indian government on the Model Law) submitted its second report on 16 October 2018 regarding the adoption of the Model Law with certain modifications to adapt it to Indian conditions.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

Neither the Insolvency and Bankruptcy Code 2016 (IBC) nor the Companies Act 2013 discriminate between foreign and domestic creditors, whether in liquidations or reorganizations. However, the foreign exchange regulations would continue to apply for any payments made or assets distributed, or securities issued to any foreign creditor or shareholder in liquidation or reorganization.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

As at the date of writing, there is no provision in the IBC or otherwise under the Indian legal regime that permits such transfer of assets.

COMI

56. What test is used in your jurisdiction to determine the COMI (centerof main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The introduction of a chapter on cross-border insolvency in the IBC is presently under consideration. Currently, if the debtor is incorporated in India its insolvency can be commenced in India, and if the debtor is not incorporated in India its insolvency cannot be commenced in India.

The Second Insolvency Law Committee Report (released in October 2018) recognizes that the Model Law provides a rebuttable presumption that the location of the registered office of the corporate debtor is its center of main interests (COMI) ‘in the absence of proof to the contrary’. The Committee has recommended that there should be a proactive enquiry by the NCLT to determine the COMI and has recommended a look-back period of three months while enforcing the COMI presumption.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognizeforeign proceedings or to cooperate with foreign courts and, if so, on what grounds?

For cross-border insolvencies and restructuring, the current framework, which is yet to be enforced, envisages the following:

• the Indian government may enter into bilateral agreements with any foreign government for enforcing the provisions of the IBC and may also notify that the application of the IBC in relation to assets or property of a debtor situated in any foreign country with which India has entered into reciprocal arrangements will be subject to such conditions as may be specified; and
• the NCLT may issue a letter of request to a court of a country with which India has entered into reciprocal arrangements upon being satisfied that evidence or action is required in relation to assets or property of a debtor situated in such country.

Furthermore, the introduction of a chapter on cross-border insolvency in the IBC is presently under consideration.

In addition, there are provisions in the CPC that allow a high court in India to issue a commission for examination of witnesses (residing in its jurisdiction) or for discovery or production of documents where a letter of request is issued by a foreign court to a high court of India. Hence, it may be possible for a liquidator in foreign proceedings to obtain a letter from the foreign court to a court in India for the purpose of examination of witnesses residing in India or for discovery or production of documents in India.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

As at the date of writing, the provisions pertaining to cross-border insolvency are not in force.

In the insolvency proceedings of Jet Airways (India) Ltd, the National Company Law Appellate Tribunal allowed a resolution professional of Jet Airways to work with its Dutch insolvency administrator through a cross-border insolvency protocol.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

Under the IBC, only companies that are incorporated in India can be resolved or liquidated. Hence foreign companies that are not incorporated in India (but are only doing business in India) are not covered within the IBC.

Similarly, under the Companies Act, only companies incorporated in India can be wound up by the courts. However, a branch of the foreign company operating in India can be wound up by the courts as an unregistered company, if it has been established that the company has ceased to function or conduct its business in India or has already been dissolved.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN INDIA

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Being recent legislation, the Insolvency and Bankruptcy Code 2016 (IBC) is continuously evolving through legislative changes and judicial interpretations. As the law continues to evolve, it is also consistently confronted with new challenges and trends. Some of the emerging trends and hot topics pertain to group insolvency, personal insolvency, cross-border insolvency, insolvency of financial companies and pre-packs.

• Group insolvency: the Videoconcase was a novel case where permission to consolidate insolvency proceedings was granted, setting a precedent for group insolvency. In January 2019, the Insolvency and Bankruptcy Board of India (IBBI) took a corroborative step to establish a regulatory mechanism that could facilitate the insolvency proceedings of a corporate group. The IBBI set up a working group to put in place a framework on group insolvency that could lead to value maximization of group entities while avoiding multiple proceedings, avoiding information asymmetry and reducing overall costs. Since the Videocon case, consolidation of insolvency proceedings against a corporate group has taken place in few other cases. The law in this regard continues to evolve.
• Cross-border insolvency: although India does not have a comprehensive mechanism for cross-border insolvency in place yet, the Ministry of Corporate Affairs has set up the Insolvency Law Committee to assist the government in adopting the UNCITRAL Model Law on Cross-Border Insolvency 1997. The lacunae in the IBC and the need to have in place a globally recognizedregulatory framework regarding cross-border insolvency was brought to the fore in the Jet Airways case, where insolvency proceedings had been initiated against the airline in the Netherlands and India. The harmonization regarding cross-border insolvency becomes additionally important to ensure that the assets of investors, whether located in India or other jurisdictions, are collated, protected and resolved.
• Personal insolvency: while the provisions of personal insolvency have not been notified, the government has notified the rules for initiation of insolvency proceedings against personal guarantors of the corporate debtors. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations 2019 now define a guarantor as a debtor who is a personal guarantor to a corporate debtor in respect of whom a guarantee has been invoked by the creditor and remains unpaid in full or part. By a notification in 2019, the IBBI brought personal guarantors to corporate debtors under the ambit of the IBC. Various issues relating to the interpretation of provisions of the IBC dealing with personal insolvency are currently under consideration by the bankruptcy tribunals and Supreme Court.
• Insolvency of financial companies: the government has notified certain provisions for insolvency or liquidation of certain categories of financial service providers under the IBC. The government, in consultation with the financial services regulators, may notify financial service providers or categories of financial service providers for the purpose of insolvency and liquidation proceedings. As at the date of writing, the government has notified non-banking finance companies with an asset size of more than 5 billion rupees for this purpose, with the Reserve Bank of India (RBI) as the appropriate regulator. Following this, currently non-banking finance companies are undergoing insolvency resolution proceedings under the IBC.
• Pre-packs: the prepackaged insolvency process has been notified only for micro, small and medium-sized enterprises (MSMEs). This process has seen limited success on account of its design and complexity. The general consensus is that the regime should be simplified and extended to other corporate entities (in addition to MSMEs).

* The information in this chapter was accurate as at September 2023.

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