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 a framework for insolvency for individuals, corporates and 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.2 However, pursuant to the Notification dated 15 November 2019 issued by the Ministry of Corporate Affairs, certain provisions relating to individuals insofar as they are personal guarantors have come into force, and notification has also been upheld by the Supreme Court of India.3 Hence proceedings can be instituted against personal guarantors even though the provisions concerning individuals have not yet come into force. At the time of writing, a creditor is entitled to proceed against personal guarantors of corporate debtors even if the resolution plan has been approved by the National Company Law Tribunal (NCLT), which has jurisdiction under the IBC.

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 the CIRP of a debtor can be initiated by the financial creditor or the operational creditor by filing an application under the IBC before the 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 also nominate 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 a 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 event of default of its own operational debt, but prior to that is required to issue a statutory demand notice on the debtor, to 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.4 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 the transaction has the effect of giving the person a beneficial position in the distribution of assets in the event of liquidation under Section 53 of the IBC. For any 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),5 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. A number of amendments were made to the IBC and regulations issued thereunder, taking into account the financial and other constraints that resulted on account of the covid-19 pandemic and the consequent lockdown imposed by the government, including: (1) 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; (2) announcement of a special insolvency resolution framework for MSMEs; (3) suspension of CIRP proceedings under Sections 7, 9 and 10 in respect of any default arising during the six months commencing on 25 March 2020, which was extended twice for two periods of three months and expired on 24 March 2021; and (4) exclusion of the period of lockdown for computation of time limits for the purpose of the law of limitation. The central government recently promulgated the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2021 to allow pre-packaged insolvency process for MSMEs, which essentially permits a company to prepare a resolution plan with its creditors before initiating insolvency proceedings. The Ordinance amends the Code for MSMEs and allows the central government to notify these pre-packaged defaults of not more than 10 million rupees.

i RBI Circular of 7 June 2019

As per the January–March 2021 newsletter of the Insolvency and Bankruptcy Board of India (IBBI), since the provisions pertaining to CIRP came into force, a total of 4376 CIRPs have been filed. Of these 2653 have been closed, 617 on account of filing of appeal or review or where the same was settled, 411 were withdrawn, 1,277 have ended in orders for liquidation and 348 have ended in approval of resolution plans. Hence, the trend at present appears to be veering towards liquidation rather than a restructuring of the loans through a resolution plan. In terms of the Code, the CIRP should be completed within 180 days or within the extended period of 90 days6 and mandatorily within 330 days including any extension and time taken in legal proceedings.7 In short, the resolution procedure should be completed in 330 days failing which the NCLT will initiate liquidation procedure under Chapter III. The object of the Code is, however, to ensure a company's revival and continuation by protecting it from its management, and as far as is feasible, to save it from liquidation, thereby maximising its value. A number of efforts have also separately 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 intercreditor 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 Stress8 – which created 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 was a carve-out from the Circular of 7 June 2019, and the dispensation was 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. On 5 May 2021, on account of the resurgence of the covid-19 pandemic in India in April–May 2021, with the objective of alleviating the potential stress to individual borrowers and small businesses, the RBI announced a further set of measures for borrowers who had not availed themselves of the earlier restructuring facilities with loan exposure amounting to 250 million rupees, and these borrowers were allowed to get their loans restructured amid the second covid 19 wave. The restructuring proposed under the scheme can be invoked or utilised up to 30 September 2021, and the moratorium can be extended for up to two years. For those who had availed themselves of restructuring earlier and the resolution allowed a moratorium of less than two years, financial entities based on their discretion and borrowers' standing can modify the plan to extend the period of moratorium, or extend the residual tenor, or both, by two years.9

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 bringing forward of debt, conversion of debt into other instruments, among other things, 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 specifically not covered under the IBC, but the Code seeks to address cross-border insolvency by enabling the central government to enter into agreements or reciprocal arrangements with other countries for enforcing provisions of the Code.10 It has also provided that the NCLT can, upon an application by the resolution professional or liquidator or bankruptcy trustee, issue a letter of request to a court or an authority competent to deal with the request, requesting evidence or action in connection with proceedings under the Code in these countries.11 In 2018, the Insolvency Law Committee proposed a framework for cross-border insolvency and recommended amendments in the IBC and has recommended that India adopt the UNCITRAL Model law on Cross-Border Insolvency with certain modifications. 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.12 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.13

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. 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 voluntary liquidation).14

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 also a judicial member, and in their duties are assisted by the 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; and 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,15 significantly impacts the insolvency process. Section 66 casts on the directors the duty to act in the best interests of the creditors of the company, and where the directors fail to do so, they are liable to contribute to the assets. 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 and banks. 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. On 15 November 2019, the central government issued the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 201916 to include financial service providers under the IBC. However, only the regulatory authority of such an entity – that is, the RBI – can file proceedings against it. Pursuant to these Rules, CIRP was initiated against Dewan Housing Financing Limited, which is the first financial service provider to undergo CIRP.

It has been held that even government companies would fall within the meaning of 'corporate persons' under the IBC, 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 was constituted, which 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.17

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,18 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,19 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, since their names had not been reflected in the planning permissions of the housing projects, they 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 that hold the assets, and the assets cannot be touched because they belong to a different entity, albeit an entity either promoted or controlled by the same or substantially the same promoters.

Insolvency metrics

In India, GDP growth recovered to 1.6 per cent in the fourth quarter of fiscal year 2020 (fiscal year 2020 ended on 31 March 2021), narrowing contraction in the whole fiscal year from the 8 per cent estimated in April to a revised 7.3 per cent. Then a second wave of the pandemic induced many state governments to impose strict containment measures. New covid-19 cases daily peaked at more than 400,000 in early May, then fell to a little over 40,000 in early July. Early indicators show economic activity resuming quickly after containment measures eased. The growth projection for fiscal year 2021, downgraded from 11 per cent in Asian Development Outlook (ADO) 2021 to 10 per cent, reflects large base effects. The projection for fiscal year 2022, by which time much of India's population is expected to be vaccinated, was upgraded from 7 per cent to 7.5 per cent as economic activity is normalising.20 International rating agencies such as Moody's Investors Service has revised India's real GDP growth projection for calendar year 2021 to 9.6 per cent from 13.9 per cent. For calendar year 2022, GDP growth is projected at 7 per cent. In February 2021, India's unemployment rate was 6.9 per cent, down from 7.8 per cent in February 2020, indicating that the unemployment rate in the country had returned to pre-covid levels.21

The RBI had 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 would accrue and 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.22

Some 48.13 per cent of the CIRPs that were closed yielded orders for liquidation, and 13.12 per cent ended up with a resolution plan. However, 74.37 per cent of the CIRPs ending in liquidation (946 out of 1,272 for which data are available) were earlier with BIFR or defunct, or both. The economic value in most of these corporate debtors had already eroded almost completely before they were admitted into CIRP. These corporate debtors had assets, on average, valued at less than 5 per cent of the outstanding debt amount. As at March 2021, a total of 411 CIRPs had been withdrawn under Section 12A of the IBC. As at December 2020, 319 CIRPs had yielded resolution plans as presented in the last newsletter. During January–March 2021, 29 CIRPs yielded resolution plans with varying degrees of realisation. During the quarter, realisation by financial creditors under resolution plans in comparison to liquidation value is 131.07 per cent. As at March 2021, realisation by financial creditors under resolution plans in comparison to liquidation value was 179.88 per cent, while the realisation by them in comparison to their claims was 39.26 per cent. It is important to note that out of the 348 corporate debtors rescued under the processes under the IBC, 120 were in either BIFR or defunct. As at December 2020, a total of 1,128 CIRPs had yielded orders for liquidation. During the quarter January–March 2021, 149 CIRPs ended in orders for liquidation, taking the total CIRPs ending in liquidation to 1,277, excluding 10 cases where liquidation orders have been set aside by NCLT, NCLAT, the High Court or the Supreme Court. Of these, the final report has been submitted in 240 cases. There were 1,037 ongoing liquidation processes as at 31 March 2021.

As at December 2020, 104 liquidation processes were closed by dissolution, going concern sale, compromise or arrangement. During January–March 2021, 34 more liquidation processes were closed, taking the total number of closures by dissolution, sale as a going concern, compromise or arrangement to 138. At the end of March 2021, 128 liquidations closed by dissolution, six by going concern sale and four by compromise or arrangement.

In respect of the resolution of 12 large accounts initiated by banks,23 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,24 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 Arun Kumar Jagatramka v. Jindal Steel and Power Ltd & Anr,25 the issue for determination was whether a person ineligible under Section 29A of the IBC to submit a resolution plan was also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act. The NCLAT had, by its judgment dated 24 October 2019, held such a person was barred from proposing a scheme of compromise or arrangement. Jindal Steel and Power Limited, which proposed a scheme for Gujarat NRE Coke Limited, contended that Section 230 of the Companies Act did not place any embargo on any person for submitting a scheme and to do so would amount to judicial reframing of legislation by the NCLAT.

For this purpose, the Supreme Court went into the observations of the Insolvency Law Committee in its Report of February 2020. It pointed out that given the incompatibility of schemes of arrangement and the liquidation process, the Committee had recommended that recourse to Section 230 of the Companies Act for effecting schemes of arrangement or compromise should not be available during liquidation of the corporate debtor under the Code, though an appropriate process to allow the liquidator to effect a compromise or settlement with specific creditors should be devised under the Code. Due to the ambiguity in the application of the two frameworks, it became imperative that a clarification be issued in this regard, and hence the introduction of the proviso to Regulation 2B was made, which was a step in this direction and clarified the position with respect to the applicability of the disqualifications set out in Section 29A of the IBC to Section 230 of the Act of 201326 in tandem with the legislative intent. The Supreme Court held that the prohibition placed under Section 29A of the IBC must attach itself to a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013 when the company is undergoing liquidation under the auspices of the IBC.

In Phoenix Arc Private Limited v. Spade Financial Services Ltd and others,27 two of the financial creditors (Phoenix Arc and Yes Bank) filed an application for removal of two creditors (AAA Landmark Private Limited (AAA) and Spade Financial Services Private Limited (Spade)) from the CoC in the CIRP of AKME Projects Limited on the ground that they were related parties. The NCLT by its order dated 19 July 2019 took the view that the two financial creditors were in fact not even financial creditors and the transaction was not a financial debt since the transactions between them were collusive in nature, and hence they were ineligible to participate in the CoC and accordingly did not go into the issue as to whether they were related parties or not. In appeal, the NCLAT took the view that AAA and Spade were related parties of the corporate debtor, which was appealed against by the said creditors. An observation was also made by the NCLAT that 'admittedly appellants are the financial creditors of the corporate debtor AKME Projects Limited', which Phoenix ARC sought to appeal against to the Supreme Court on the ground that there was never any admission on the part of Phoenix that AAA and Spade were financial creditors. The Supreme Court went into the purpose of the IBC and in particular the provisions for identification and voiding of 'avoidable transactions' and observed that for the success of an insolvency regime, the real nature of the transactions had to be unearthed to prevent any person from taking undue benefit of the provisions of the IBC to the detriment of the rights of legitimate creditors. The Court observed that the objects and purposes of the IBC were best served when the CIRP was driven by external creditors, to ensure that the CoC was not sabotaged by related parties of the corporate debtor. This is the intent behind the first proviso to Section 21(2), which disqualified a financial creditor or the authorised representative of the financial creditor under subsection (6), subsection (6A) or subsection (5) of Section 24, if it was a related party of the corporate debtor, from having any right of representation, participation or voting in a meeting of the committee of creditors. The Supreme Court held that the transactions between Spade and AAA on one hand, and the corporate debtor on the other hand (which gave rise to their alleged financial debts were collusive in nature and it was evident that there existed a deeply entangled relationship between Spade, AAA and the corporate debtor, when the alleged financial debt arose and held that the pervasive influence of Mr Anil Nanda (the promoter/director of the corporate debtor) over these entities was clear, and allowing them in the CoC) would definitely affect the other independent financial creditors and disallowed Spade and AAA from being a part of the CoC. It may be noted that this judgement is also relevant on the issue of interpretation of the first proviso of Section 21(2) of the IBC, wherein the Court held that the disqualification under this would attach to a financial creditor not only in praesenti, but also where financial creditors were related to the corporate debtor at the time of acquiring the debt.

In Venus Recruiters v. Union of India & Others,28 the issue before the Delhi High Court was whether the NCLT has jurisdiction to adjudicate applications filed under Section 43 of the IBC for the avoidance of preferential transaction after the approval of the resolution plan. The Court held that when the NCLT approves the resolution plan in accordance with Section 31 of the IBC, the RP has to forward all the records relating to CIRP, and the resolution plan, to the board to be recorded on its database, and the role of RP comes to an end. The RP cannot continue to act beyond the approval of the resolution plan. It held that: (1) Sections 43 and 44 of the IBC, read with Regulation 35A of the CIRP Regulations, prescribes a timeline within which the RP should examine the objectionable transactions and apply to the NCLT for appropriate relief within the timeline prescribed; and (2) if the avoidance application concerning preferential and other transactions survive beyond the conclusion of CIRP, this would be against the scheme of the IBC. It was held that after the conclusion of CIRP, the NCLT did not have jurisdiction to hear and decide the avoidance application filed under">Section 25(2)(j) of the IBC given that the purpose of avoidance application was to benefit the creditors and there would be no benefit to the creditors if the avoidance application was heard and decided after the approval of the resolution plan.

Ancillary insolvency proceedings

In Venugopal Dhoot v. SBI & Others,29 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,30 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 case 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 the earlier measures, and they take a shorter time than the earlier proceedings of three to four years. The field of insolvency in India has of late seen constant change in order to adapt the ever moving scenario globally and also take into account the pandemic. The Economic Survey 2020–2021 has pointed out that recovery of non-performing assets by banks has been highest under the IBC, and in fact the survey said IBC recoveries were more than the combined recoveries each year under Lok Adalat, Debt Recovery Tribunal and the SARFAESI Act during 2016–17 to 2019–20. The statistics of resolution under the IBC reveal that 308 corporate debtors, which owed more than 4.99 trillion rupees to lenders, had gone through the resolution process as at December 2020. The realisable value of the assets of these corporate debtors was 1.03 trillion rupees. Creditors were able to recover 1.99 trillion rupees, which was more than 193 per cent of the realisable value of these corporate debtors. Financial creditors recovered more than 43 per cent as compared to their claims for all the years since the inception of IBC.31


1 Margaret D'Souza is a founder partner of Acclivus Law Partners and is based in Mumbai.

2 Section 243 of the Code that repeals these enactments has not yet been brought into force. Hence, at present there is a dichotomy of proceedings against a personal guarantor given that there may be proceedings instituted under the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 as an individual and also under the Code in his or her capacity as personal guarantor.

3 See judgment dated 21 May 2021 of the Supreme Court in Lalit Kumar Jain v. Union of India & Others.

4 Section 14 of the IBC.

5 Judgment dated 26 February 2020.

6 Section 12 of the IBC.

7 Insolvency and Bankruptcy Code (Amendment) Act, 2019 (Amendment Act), w.e.f. 16 August 2019.

10 Section 234 of the Code.

11 Section 235 of the Code.

12 Order dated 8 August 2019.

13 Order dated 8 August 2019.

14 Supra.

15 The lookback period.

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

18 Order dated 8 August 2019.

19 Order dated 20 September 2019.

23 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.

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

25 Decided by the Supreme Court on 15 March, 2021 in Civil Appeal No. 9664 of 2019 and other appeals.

26 This stipulates that a person that is not eligible under the IBC to submit a resolution plan for insolvency resolution of the corporate debtor shall not be a party in any manner to the compromise or arrangement.

27 Decided by the Supreme Court on 1 February 2021 in Civil Appeal No. 2842 of 2020 and Civil Appeal No. 3063 of 2020, arising from the judgment of the NCLAT dated 27 January 2020.

28 Decision dated 26 November 2020 in W P (C) 8705/2019 and Company Appeal No. 36026/2019.

29 Order dated 12 February 2020.

30 Order dated 20 April 2020.

The Law Reviews content