The Insolvency Review: India

Insolvency law, policy and procedure

The Insolvency and Bankruptcy Code 2016 (IBC), which came into effect on 28 May 2016, sought to consolidate the insolvency and bankruptcy law in India. Prior to the IBC, insolvency, or winding up of corporates was dealt with under the Companies Act, 2013 (the Companies Act), and for individuals, under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act 1920; the former being applicable to the erstwhile presidency towns such as Kolkatta, Mumbai and Chennai, while the Provincial Insolvency Act 1920 is applicable to the rest of India. The IBC seeks to provide for a framework for insolvency for individuals, corporates as also proprietary and partnership firms. However, while the IBC provisions applicable to corporates are in force, those that of individuals or partnership or proprietary concerns are yet to come in force and, as a result, the Presidency Towns Insolvency Act 1909 and the Provincial Insolvency Act, 1920 continue to apply.

The IBC distinguishes between a corporate insolvency process (CIRP), which can be initiated by a financial creditor (banks and financial institutions in respect of a financial debt), and that which can be initiated by an operational creditor (for supply of goods or services). The application for initiating CIRP of the debtor can be initiated by the financial creditor or the operational creditor by filing an application under the IBC before the National Company Law Tribunal (NCLT) (having jurisdiction over the registered office of the debtor) where there is a default of 10 million rupees or more in the prescribed form along with all prescribed documents (including documents showing debt and default) on payment of the requisite fees, and by nominating an interim resolution professional for the corporate debtor. The NCLT reviews the application, checks if it is complete and admits it if there is a debt and default. A financial creditor may institute CIRP against a debtor not only in the case of default of its own debt but also in the case of default of any other financial debt of any other financial creditor. An operational creditor, however, is entitled to file an application only in the case of default of its own operational debt, but prior to that is required to issue a statutory demand notice on the debtor, which the debtor is required to respond in 10 days by either making payment or issuing a notice of dispute, which must be a pre-existing dispute. The NCLT reviews the application, checks if it is complete and admits it if there is a debt and default provided there is no existence of dispute.

Once the application of the creditor is admitted, the CIRP commences. Upon admission, a statutory protection or moratorium commences, which extends until the completion of the CIRP.2 The moratorium prohibits any suit or proceedings against the debtor, enforcement of security interest, sale or transfer of assets or termination of essential contracts. However, a secured creditor can choose to stand outside the liquidation and enforce its security in accordance with law. The moratorium is absolute, and creditors cannot obtain relief from the prohibitions. Upon the admission of the petition, the creditors of the debtor attempt to resolve the insolvency of the corporate in a time-bound manner and a resolution plan is sought to be made by the committee of creditors (CoC) of the corporate debtor with 66 per cent of the voting share of the financial creditors. Operational creditors are not a part of the CoC, and are generally not permitted to vote in favour or against such resolution plan, and have limited rights to receive notice of CoC meeting and attend such meetings. For framing of the resolution plan in respect of the debt, bids are invited from eligible persons and thereafter approved by the CoC. If this fails, then the matter then proceeds for liquidation by sale of the assets of the debtor.

Priority in distribution is dealt with under Section 53 of the IBC. The proceeds from the sale of assets in liquidation is required to be distributed in the following order of priority (1) the insolvency resolution process costs and liquidation costs in full; (2) workmen's dues for the period of 24 months preceding the liquidation commencement date and the debts due to a secured creditor that has relinquished security rank equally; (3) wages and any unpaid dues owed to employees for the period of 12 months preceding the liquidation commencement date; (4) financial debts owed to unsecured creditors; (5) amounts due to the State of Central Government for the period 24 months prior to the liquidation commencement date; (6) other debts; (7) preference shareholders; and (8) equity shareholders.

The IBC also provides for certain protective provisions against transfer of assets of the company – that is, a 'preferential transaction', where there is a transfer of the property or interest of the corporate debtor for the benefit of a creditor, surety or guarantor in relation to an antecedent or past liability; and such transaction has the effect of giving such person a beneficial position in the distribution of assets in the event of liquidation under Section 53 of the IBC. For any such preferential transaction to be avoidable, it ought to have occurred:

  1. in the case of a transaction with a related party, within a 'look back' period of two years immediately preceding admission of the corporate debtor into insolvency; and
  2. in any other case, within a 'look back' period of one year immediately preceding admission of the corporate debtor into insolvency.

Section 43(2) of the IBC stipulates that transactions in the ordinary course of the business or financial affairs of the corporate debtor or the transferee that result in the creation of new value for the corporate debtor are exempted even if such transactions fall within the aforesaid look back period. However, the Supreme Court, in the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and others (the Jaypee Infratech case),3 has held that the term 'or' in the said sub-section should be read as 'and'. Further, the court held that the term 'ordinary course of business' was one that was an 'undistinguished common flow of business done' and did not arise out of 'any special or particular situation'.

The IBC has been evolving and post the enactment a number of amendments have also been made, some of which have been introduced through ordinances. A significant one has been the relaxation of the applicability of Section 29A of the IBC as regards submission of a resolution plan in the case of micro, small and medium-sized enterprises (MSME). Section 29A of IBC was introduced with the intention to restrain untrustworthy promoters from buying back assets at a subsidised price. Further, with effect from 1 December 2019, personal guarantors of corporate debtors are also governed under the IBC.4

A number of amendments have recently been made to the IBC and regulations issued thereunder, taking into account the financial and other constraints that have resulted on account of the covid-19 pandemic and the consequent lockdown imposed by the government, including: increasing the threshold limit for initiating CIRP against a corporate debtor from 100,000 rupees to 10 million rupees, made to mainly prevent triggering of insolvency against MSMEs whose businesses have been affected; announcement of a special insolvency resolution framework for MSMEs; suspension of CIRP proceedings for a period of one year; exclusion of covid-19-related debt from the definition of default under the IBC; and exclusion of the period of lockdown for computation of time limits for the purpose of the law of limitation.

i RBI Circular of 7 June 2019

As per the October–December 2019 newsletter of the Insolvency and Bankruptcy Board of India (IBBI), 22 per cent of the cases that had been admitted for CIRP were recommended for liquidation against only 5 per cent of the cases being closed through a resolution plan. Hence, the trend at present appears to be veering towards liquidation rather than a restructuring of the loans through a resolution plan. The average timeline for case resolution is over 350 days.

However, a number of efforts have been made to encourage resolution rather than liquidation, including the issuance of directions by the Reserve Bank of India (RBI) on 7 June 2019 being the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, providing a framework for early recognition of stress, reporting and time-bound resolution of stressed assets. These directions are applicable to scheduled commercial banks, all India term financial institutions, small finance banks and certain non-banking financial companies. The broad contours of the circular are early recognition of stress, complete discretion to lenders to decide on a resolution plan outside of the IBC, signing of a binding inter-creditor agreement (ICA) to finalise and implement the resolution plan and an accelerated provision if the time-bound resolution fails. In terms of the guidelines, in the event a borrower defaults to a lender, all lenders are required to undertake a review of the borrower within 30 days of such default, and are required to sign an ICA within this review period. Banks are permitted a 180-day period from the date of execution of the ICA to implement a resolution plan. During this period, there is a standstill period, and the lenders cannot initiate legal proceedings against the borrower for enforcement of the debt. The framework requires approval of 75 per cent of the value of outstanding, or 60 per cent of lenders by number of the lenders to approve the resolution plan, which is binding upon all lenders. The resolution plan needs to provide for payment of not less than liquidation value to the dissenting lenders. If no resolution plan is made during 180-day period, then the matter can proceed to the NCLT.

The RBI, on 6 August 2020, issued a circular – the Resolution Framework for Covid-19 Related Stress – that creates a limited time window for certain categories of borrowers affected by covid-19 pandemic-related business disruption to be allowed resolution plans in the nature of restructuring while permitting the borrower accounts to retain their status as 'standard'. This effectively is a carve-out from the Circular of 7 June 2019. This dispensation is intended to facilitate revival of real sectors and avoid impairment of the recovery process as well as the consequent risk on the financial stability in general. Pursuant to the circular, an expert committee, under Shri K V Kamath was set up to make recommendations on the required financial parameters with sector specific benchmark ranges with parameters for eligible borrowers. The committee submitted its recommendations to the RBI on 4 September 2020, stating that power, construction, iron and steel, roads, real estate, wholesale trading, textiles, consumer durables, aviation, logistics, hotels, restaurants and tourism and mining were among the sectors that needed restructuring, and selected financial parameters including aspects related to leverage, liquidity and debt serviceability for any such restructuring.

ii Cross-border insolvency

Under the present regime, liquidation of companies falls under the IBC. Reorganisation or schemes of arrangement or compromise fall under the Companies Act, which applies in a non-insolvency or non-liquidation scenario. Schemes of arrangement may be entered into 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 may provide for restructuring of debt, reduction or preponement of debt, conversion of debt into other instruments, among others, and in respect of a company and its shareholders can provide for issuance of additional shares, reorganisation of capital, merger, demergers, among others. A scheme could involve compromise or arrangement with both creditors and shareholders. Applications will have to be filed with the NCLT having jurisdiction where the registered office of the company is situated. Where such a scheme of arrangement of compromise provides for a merger or amalgamation, including with offshore companies, then such schemes of compromise or arrangement will be given effect to by the courts. The procedural aspects of such merger or amalgamation are dealt with under the Companies (Compromises, Arrangements and Amalgamation) Rules 2016. The central government has issued the Foreign Exchange Management (Cross Border) Regulations 2018 and merger transactions in compliance with the said regulations are deemed to have been approved by RBI, and no separate approval is required. In other cases, merger transactions will require prior RBI approval. However, it is not clear as to whether an ancillary application will have to be made by the foreign company along with the plenary proceedings. The general view is that no such separate ancillary application is required.

Cross-border insolvency proceedings are presently not covered under the IBC. In 2018, the Insolvency Law Committee proposed a framework for cross-border insolvency and recommended amendments in the IBC. This recommends recognition of foreign proceedings and provides relief based on this recognition. The draft provisions highlight two types of foreign proceedings – foreign main proceedings and foreign non-main proceedings. Such a distinction is created to determine the level of control that jurisdiction has over the insolvency resolution process, and the type and extent of relief that the NCLT can grant in relation to the foreign proceedings. Where the debtor has its centre of main interest (COMI) in a foreign country, such foreign proceedings will be recognised as the main proceedings, which will result in certain automatic relief – such as allowing foreign representatives greater powers in handling the debtor's estate – and where the proceedings are non-main or ancillary proceedings, relief will be as per the discretion of the court.

Since, at present, there is no cross-border insolvency framework, the NCLT is dealing with this on a case-by-case basis. The NCLT, in a recent order, permitted the inclusion of Videocon's foreign businesses in the CIRP proceedings filed in India.5 Again, recently, in the insolvency proceedings of Jet Airways (India) Private Limited, the NCLAT took on record insolvency proceedings filed against Jet Airways before the NOORD–Holland District Court, and asked the creditors of Jet Airways to file an affidavit on whether they were willing to cooperate with the Dutch administrator, pay the fees and accord foreign lenders the same status as the Indian creditors, who otherwise are also eligible to file their claims before the resolution professional coordinating the insolvency proceedings. Pursuant to the NCLT's directions, the Dutch court administrator and the resolution professionals (RPs) agreed upon a Cross Border Insolvency Protocol wherein India was recognised as the COMI and the Dutch proceedings were recognised as the non-main insolvency proceedings. Through this Protocol, the RP and the Dutch court administrator agreed on terms and conditions on which they would cooperate in the ongoing insolvency process. The NCLT, in response, allowed the Dutch court administrator the right to attend the CoC meetings but to only observe and not vote, in order to prevent an overlap of powers. The NCLT also issued consequent directions to the resolution professional in respect of the offshore proceedings.6

Hence, one can see that the courts are taking a proactive step despite there being no legislative framework in this regard. However, the timeline for completion of such proceedings, which has cross-border implications, may be difficult to predict and much may depend on the facts and circumstances of each case.

iii Issues in cross-border insolvency

Identification of the debtor's COMI is one of major issues when dealing with jurisdictional issues in conducting plenary insolvency proceedings. The concept of COMI is left open to the interpretation of the adjudicating authority in conduct. In the absence of a clear guidelines as to what would constitute COMI, or the jurisdiction with which the debtor has the closest nexus, there are bound to be jurisdictional conflicts. The parameters that may be taken into account for an adjudicating authority to exercise territorial jurisdiction could be the location of the registered office or corporate headquarters of the debtor, the place where the books of accounts of the debtor are maintained, the place where the principal assets of the debtor are located, the place where the major operations of the debtor are conducted, where the maximum employees are posted, the law that applies to the most disputes, where principal bank accounts are located, administration of the company's business by third parties, exercise of management and supervision.

Sections 234 and 235 of the IBC enable the central government to enter into an agreement with a foreign government for enforcing the provisions of the IBC for the IBC to apply to assets or property of the debtor, including a personal guarantor of a corporate debtor located outside India with which reciprocal arrangements have been made, subject to such conditions as may be specified. However, to date, no such agreement has been made. In such a case, Section 235 enables the RP, liquidator or bankruptcy trustee to apply for evidence or action be taken in relation to such foreign assets.

iv Commencement of insolvency proceedings

Plenary proceedings may be commenced by a financier or operator of the debtor or even by the debtor itself (where it seeks for voluntary liquidation).7

v Control of insolvency proceedings

Plenary insolvency proceedings are controlled by the NCLT. The IBC process follows the inquisitorial system where the court plays an active role in investigating the facts of the case. The IBC bench comprises both a technical member and a judicial member, and in its process is assisted by insolvency RPs who are registered and licensed with the IBBI. Once a petition has been filed before the NCLT, the role of the NCLT is to identify whether the debtor has committed a default in repayment of the undisputed debt, and where there is a default the petition is admitted, or else it is dismissed. Once a petition is admitted, the moratorium commences. In terms of Section 17 of the IBC, upon admission of the petition, the powers of the board of directors are suspended and the control over the day-to-day working passes on to the interim RP. As a result, the board of directors of the corporate debtor does not have the freedom to choose what evidence to present before the NCLT and it is the interim RP that has complete control over the evidence and conduct of the case.

Section 66 of the IBC provides that if, during the CIRP or liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors or for any fraudulent purpose, the NCLT may on the application of the RP pass an order that persons who were knowingly parties (including a director or a partner of the corporate debtor) to the carrying on of the business in such manner be liable to make such contributions to the assets of the corporate debtor as it may deem fit if before the insolvency commencement date, where such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP in respect of such corporate debtor, such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Hence, decisions taken by a director or a partner, in particular during the twilight period,8 significantly impact the insolvency process. Section 66 casts on the directors' duty to act in the best interests of the creditors of the company, and where directors fail to do so, they are liable to contribute to the assets in terms of the said section. As a general rule, directors have a duty to act in the best interests of the shareholders of a company; however, Section 66 shifts the duty to that of the creditors during the twilight period.

vi Exclusions under the Insolvency Code

The IBC applies to all companies, partnerships, individuals, personal guarantors to corporate debtors and proprietorship firms, but excludes from the definition of 'corporate persons' financial service providers such as insurance companies, non-banking financial companies, banks, etc. The IBC also applies to any company set up under any special enactment unless there is inconsistency under the said enactment with the IBC and even to body corporates incorporated under any law in force as notified by the central government. In November 2019, the government sought to include specific financial service providers under the IBC, and notified non-banking financial companies with an asset size of above 5,000 million rupees as a financial service provider under the IBC. However, only the regulatory authority of such an entity – that is, the RBI – can file proceedings against it. Furthermore, while it had been held that even government companies would fall within the meaning of 'corporate persons' under the IBC,9 they would be covered only in instances where such a company is not performing any sovereign functions.

vii Group insolvency

The IBC presently does not provide for initiation of CIRP of corporate debtors within the same group. However, a working group recommended a comprehensive framework to be implemented in a phased manner, recommending introduction of procedural coordination of domestic companies in groups with cross-border group insolvency and substantive consolidation to be considered at a later stage, depending on the experience of implementing the earlier phases of the framework, and the need felt at the relevant time. It recommended that 'corporate group' include definitions of holding, subsidiary and associate companies under the Companies Act, or even where companies are so intrinsically linked so as to form part of a 'group' in commercial understanding, though not covered under the definitions. The recommendations provide for procedural coordination, joint application, information sharing, single RP for group insolvency, among others. In addition to procedural issues, substantive consolidation mechanisms are also recommended, targeted at consolidating the assets and liabilities of different group companies so that they are treated as part of a single insolvency.10

Despite the fact that there is presently no provision under the IBC for group insolvency, the NCLT has taken proactive steps and has passed orders taking into consideration corporate debtors and their interconnections with other group companies.

In the case of SBI v. Videocon,11 15 different resolution applications were filed against its 15 different group companies. The NCLT, Mumbai Bench, granted substantive consolidation of 13 companies of the Videocon Group on the basis that the group worked as a single economic unit. These companies had voluntarily formed an obligor/co-obligor structure under their financing documents in terms of which the corporate debtors were 'jointly and severally' liable in respect of the obligations and their assets and business functions were held by the NCLT on account of the same as 'intricately intertwined'. It was also held by the NCLT that consolidation would lead to a better asset-liability framework for a bidder, paving way for better resolution plans. Hence, factors such as common control, common directors, common assets, interloping of debts, common financial creditors, etc., are factors that will be taken into account by the NCLT in consolidating multiple applications against group entities of a corporate debtors. In the case of Edelweiss ARC v. Sachet Infrastructure,12 the land in question of nine corporate debtors had been consolidated for the purpose of construction of the housing projects. The NCLAT directed procedural consolidation of insolvency proceedings against five companies working as a consortium to develop the housing project and even mandated a single RP to guide the simultaneous CIRPs and complete it in one go with a consolidated resolution plan for total development. However, in respect of four of the corporate debtors, their names had not been reflected in the planning permissions of the housing projects and hence were not included in the consolidation.

This is akin to the principle of lifting of the corporate veil and particularly helpful where a corporate debtor in a CIRP does not have assets for insolvency resolution in a meaningful way, but there exist holding companies or associate or subsidiary companies of the same group who hold the assets, and whose assets cannot be touched because they belong to a different entity, albeit such entity is either promoted or controlled by the same or substantially the same promoters.

Insolvency metrics

It has been stated that the Indian economy has been at its slowest since early 2003.13 In its annual flagship Asian Development Outlook (ADO) series published on 18 June 2020, the Asian Development Bank projected that India's economic growth rate would slip to 4 per cent in the current fiscal on account of the global health emergency created by the covid-19 pandemic, then grow by 5 per cent the following year as economic activity normalises gradually.14 International rating agencies such as Moody's Investors Service, Fitch Rating and S&P Global Ratings have all predicted a 4 to 5 per cent contraction in India's economic growth rate from April 2020 to March 2021 fiscal. CRISIL has said this would be the country's fourth recession since Independence, first since liberalisation, and perhaps the worst to date. The unemployment rate in March 2020 was at 8 per cent. From March 2020 to June 2020, employment was at an all-time low, with companies cutting down on their labour force and the large migrant labour force returning to their villages. The present indication is that the labour force seem to be returning back to look for jobs. Many industries are also arranging for migrant labourers to return, including arranging travel back to the cities as the economy has opened up gradually.15 There is a collapse across all sectors, with the exception of agriculture, and the overall GDP has fallen by 23.9 per cent in the April 2020 to June 2020 quarter16 and this has been the worst contraction faced by the Indian economy.

The RBI has permitted banks and financial institutions to grant a loan moratorium in respect of any loan repayment until 31 August 2020. However, interest for this period will accrue and will be chargeable in payments post 31 August 2020. While the moratorium has not been extended, banks are being encouraged to do a one-time restructuring of individual loans without classifying them as bad loans.17

At the beginning of the quarter ending March 2020, proceedings for approximately 1,966 CIRPs have been filed; 387 petitions out of these have been admitted; and 121 of these have ended in liquidation, taking the total overall CIRPs yielding liquidation to 914 (excluding six cases where liquidation order has been set aside by NCLT or the Supreme Court). Out of the total CIRP proceedings of 3,774 admitted as of March 2020, the largest sector is the manufacturing industry, which has 1,527 insolvency petitions admitted and, in respect of 396 of these, liquidation has already commenced.

In respect of the resolution of 12 large accounts initiated by banks,18 as directed by the RBI, which collectively had an outstanding claim of approximately 3.45 trillion rupees as against a liquidation value of approximately 732.2 billion rupees, the resolution plan in respect of eight accounts has been approved and orders for liquidation have been passed in respect of two of the said accounts. Thus, CIRPs in respect of two corporate debtors and liquidation in respect of two corporate debtors are ongoing and are at different stages of the process. While each and every industry has come under the IBC, in terms of the asset size, industries such as power, steel and infrastructure can be said to have been specifically affected. Some of the reasons could be delay in execution of projects, regulatory issues, government approach to the industry in question and stopping of evergreening of loans,19 among others.

Plenary insolvency proceedings

Some of the recent judgments under the IBC (other than those detailed elsewhere in this chapter) are as discussed below.

In CoC of Essar Steel India Limited v. Satish Kumar Gupta & Ors,20 the Supreme Court reinforced the position that the CoC was the key decision maker in the matter of rehabilitation of corporate debtors and that the commercial wisdom of the CoC in accepting a resolution plan by a majority must drive decisions including the distribution of proceeds under a resolution plan. The Supreme Court held that it was permissible to treat different classes of creditors differently, provided such differential treatment was equitable and based on reasonable grounds. The Court also held that once a resolution plan was approved by the CoC, it was binding on all stakeholders, including the guarantors. Essar Steel India Limited, a steel manufacturer, is a part of the Essar Group of companies, with one of its manufacturing plant located at Hazira, Gujarat. Its expansion plan at Hazira failed due to delay in environmental approvals and non-availability of natural gas, which was necessary for the plant to work at maximum efficiency. By 2017, Essar Steel owed almost 430,000 million rupees to its lenders and approximately 110,000 million rupees to its suppliers and vendors.21 In June 2017, two of its lenders, the State Bank of India (SBI) and Standard Chartered Bank filed proceedings under the IBC, for a resolution plan to be made, inviting bidders for the takeover of Essar Steel. Initially, ArcelorMittal, the world's largest steel manufacturer and Numetal, a joint venture between Rewant Ruia (son of co-founder of Essar, Ravi Ruia) and VTB Bank, Russia placed bids, which were rejected under Section 29A of the IBC, which, inter alia, restricts parties who have unpaid amounts to the corporate debtor and are related parties from making a bid. The CoC accepted the bid of the H1 bidder, and on 16 December 2019, financial creditors to Essar Steel, led by SBI, recovered nearly 92 per cent of their 490,000 million rupee claims after a consortium between Luxembourg-based ArcelorMittal and Japan's Nippon Steel & Sumitomo Metal Corporation Ltd agreed to take over the company. That brought closure to one of the largest insolvencies under India's new bankruptcy law.22

In the Jaypee Infratech case,23 the Supreme Court carefully analysed Section 43 of the IBC in the context of mortgage transactions by Jaypee in favour of the lenders of Jayaprakash Associates Limited (JAL) its holding company and thus a related party. In this case, Jaypee, a real estate developer, had mortgaged its properties as collateral securities for the loans and advances of the lenders of JAL. The NCLT held these as avoidance transactions (preferential, undervalued and fraudulent), which was set aside by the NCLAT. In appeal, the Supreme Court stated that there were certain key requirements to ascertain whether the transactions can be said to be preferential transactions and hence liable to be set aside, namely, whether such transfer was for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liability. Such transfer had the effect of putting them in a more beneficial position than in the event of distribution of assets in accordance with Section 53 of the IBC. Such preference was given during the lookback period, and did not fall within any of the exclusions provided by Section 43(3) of the IBC.

Applying this criteria to the impugned transactions, the Supreme Court held that the transfers for the benefit of JAL had the effect of putting JAL in a better position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the IBC, and thus Jaypee has given a preference in the manner laid down in the IBC during the 'look back' period. The Supreme Court held that while Section 43(3)(a) of the IBC exempted transfers made in ordinary course of business of the corporate debtor, on the given set of facts, the transactions did not fall within the ordinary course of business of Jaypee as it was not providing mortgages to secure the loans obtained by its holding company and that too at the cost of its own financial health.24 This case throws up issues in respect of grant of third-party security. The Court also laid down a checklist to be followed by a RP in order to identify and avoid preferential transactions under Section 43 of the IBC.

In SBI v. M/s. Accord Life Spec Private Limited,25 the Supreme Court, relying on its previous judgment passed in the case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Others26 held that a resolution plan may not necessarily provide for a value equal to or greater than the liquidation value and while the liquidation value can act as a benchmark to see whether the resolution plan provides a better value to the creditors than what they would have got if the company was liquidated, the law did not bar acceptance of a resolution plan that did not match the liquidation value and that it was open to the creditors to accept such a resolution plan, especially in cases where the creditors look for long-term benefits in keeping the entity as a going concern with a short-term compromise.

Ancillary insolvency proceedings

In Venugopal Dhoot v. SBI & Others,27 the moratorium under the IBC was sought to be extended to offshore entities of the said group, being foreign oil and gas assets, on the grounds that all such assets and properties belonged to the corporate debtor, being SPVs set up only for the purpose of owning the offshore oil and gas assets. The NCLT, applying the principles laid down by it in its previous order of 8 August 2019 of common control, common directors, common assets, common liabilities, interdependence, interlacing of finance, pooling of resources, intricate link of subsidiaries, interloping of debts, singleness of economics of units and common financial creditors, held that all the parameters had been met and hence the properties of the said offshore entities would be said to be the properties of the corporate debtor under the CIRP and hence the moratorium would apply. This order is the first instance where overseas incorporated subsidiaries have been brought under the ambit of local insolvency laws.

In M/s Sanghvi Movers Lt v. M/s Albanna Engineering (India) Pvt Ltd,28 the NCLT, Kochi Bench, on the factors of common control, management and 100 per cent shareholding held by the parent, held that the assets of the parent company were not different and distinct from the assets of the Indian subsidiary and decided to consider this to be a case involving group insolvency and considered the assets of both the parent and subsidiary together for the purposes of CIRP with the parent company responsible for making good the cash loss to the corporate debtor to settle the creditors' claims arising out of CIRP.

Hence, it can be seen that the NCLT has sought to exercise jurisdiction over foreign registered companies on the principles of group insolvency. However, we are not aware of the filing of any ancillary insolvency proceedings in such foreign jurisdictions.


The IBC has improved resolution processes in India compared to earlier measures, and takes a shorter time than the earlier proceedings of three to four years. However, on account of the pandemic, provisions under the IBC with regard to defaults arising after 25 March 2020 have been suspended for a period of six months and may be extended to one year.29 Furthermore, until 31 December 2020, banks have been encouraged to restructure debts with borrowers and such restructuring will not have an impact on the classification of the account of the borrower. The Kamath Committee has also issued recommendations on the parameters for financial restructuring, which have been accepted by the RBI. Hence, the trend will be for restructuring rather than an insolvency or liquidation in the near future.


1 Margaret D'Souza is a partner at Acclivus Law Partners.

2 Section 14 of the IBC.

3 Judgment dated 26 February 2020.

4 Notification dated 15 November 2019 issued by the Ministry of Corporate Affairs.

5 Order dated 8 August 2019.

6 Order dated 21 August 2019.

7 Supra.

8 The lookback period.

9 See the judgment of the Supreme Court in Hindustan Construction Company Limited v. Union of India, dated 27 November 2019.

10 Report of the Working Group submitted to the IBBI on 23 September 2019.

11 Order dated 8 August 2019.

12 Order dated 20 September 2019.

16 News broadcast on 31 August 2020.

18 In 2017, the RBI had referred 12 large NPA accounts or bad loans with exposure of more than 5,000 crores rupees each for resolution under the IBC.

19 To date, a number of companies have taken fresh loans for repayment of the existing loans.

20 Judgment dated 15 November 2019.

23 Supra.

25 Judgment dated 20 February 2020.

26 Judgment dated 22 January 2020.

27 Order dated 12 February 2020.

28 Order dated 20 April 2020.

29 IBC (Second Amendment) Bill 2020.

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