Bankruptcy and Insolvency Law in India: An Overview

Corporate insolvency laws in India have historically been fragmented and sometimes, contradictory, due to the application of an amalgamation of insolvency laws. In light of these issues, in May 2016, India enacted the Insolvency and Bankruptcy Code ("the Code"), which was aimed at improving India's insolvency laws and adding greater certainty and efficiency to the insolvency process. The Code is an important milestone towards streamlining and facilitating the insolvency and bankruptcy process in India.

Terms like bankruptcy and corporate insolvency refer to distinct situations involving the financial stability and status of individuals and body corporates. A company or a Limited Liability Partnership (LLP) is said to be insolvent if it is unable to pay its debts once they become due and the company defaults on its repayment. On the other hand, bankruptcy is a legal declaration that a court declares, signifying that an individual or partnership firm is unable to pay their debts until they are formally discharged by the court.

The Code provides an effective and equitable remedy and procedure to resolve the financial challenges through establishing a clear distinction between corporate insolvency and personal bankruptcy, by outlining separate and structured procedures for each.

The Insolvency and Bankruptcy Code, 2016

The legislative framework in India for the regulation of the corporate insolvency resolution process for companies and LLPs is the Insolvency and Bankruptcy Code, 2016 (Code). To revive the corporate debtor, the Code allows both creditors and indebted companies to initiate the corporate insolvency resolution process.

The Code has some similarities to the UK's Insolvency Act 1986, for example, the Code empowers any creditor to trigger the corporate insolvency resolution process ("CIRP") by filing an application upon a payment default. The resolution process is time bound and limited to 330 days. Only after this process has been completed can a creditor file for liquidation. Whilst the resolution process if taking place, the powers of the directors of the debtor are suspended and a resolution professional with statutory duties manages the process.

Notably, and in contrast to the UK, the ultimate control over the process is held by a committee of creditors, which comprises of all the financial creditors of the debtor.

Initiating the Corporate Insolvency Resolution Process (CIRP)

The financial creditors, operational creditors, and the corporate debtor may initiate the corporate insolvency resolution process by filing an application before the National Company Law Tribunal (NCLT). As per Section 4 of the Code, the threshold to initiate CIRP is INR 1 lakh. Subsequently, the Ministry of Corporate Affairs (MCA) released a notification for S.O.

Upon receipt of the application, the NCLT provides an opportunity for the corporate debtor to contest it, and the parties may amicably settle the matter before it is admitted. A public announcement is then published immediately, and the IRP invites and verifies claims. Subsequently, the IRP presents a report to the NCLT to form a Committee of Creditors (CoC), which consists of financial and operational creditors. Operational creditors can be part of the CoC only if their debt exceeds 10% of the overall debt of the corporate debtor.

However, only financial creditors have the right to vote, and they exercise voting rights in proportion to the amount of debt owed to them by the corporate debtor. The RP invites expressions of interest based on criteria set by the CoC, issues an information memorandum, and requests for resolution plans from prospective resolution applicants (PRAs).

PRAs submit their Resolution Plans, and the RP conducts due diligence to ensure that the resolution plans do not violate any laws and comply with all mandatory provisions of the Code and its regulations framed thereunder. The CoC shall evaluate the resolution plans as per evaluation matrix and vote on all resolution plans simultaneously. The resolution plan, which receives the highest votes, but not less than requisite votes i.e., 66 percent shall be considered as approved.

Upon approval of the resolution plan by the CoC, the RP shall file an application before the NCLT for approval of the resolution plan. The NCLT shall approve the resolution plan if it conforms to the mandatory contents enumerated in the Code.

The initial deadline for the conclusion of CIRP is 180 days from the Insolvency Commencement Date (ICD). The adjudicating authority may extend the period of CIRP if the resolution process cannot be completed within 180 days. The CIRP must be mandatorily completed within a period of 330 days from the ICD, including any extension of the period of CIRP and time taken in legal proceedings in relation to the resolution process.

Liquidation Process

The IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations) provides a backup strategy under regulation 2B of Liquidation Regulations considering liquidation as a last resort. This regulation states that if the CoC had proposed a compromise or arrangement during the CIRP, the liquidator may submit a proposal within 30 days following the liquidation commencement date to the NCLT.

Furthermore, to revive the corporate debtor, the liquidator must endeavor to sell the corporate debtor as a going concern as per Regulation 32(e) and 32A of the Liquidation Regulations.

Amendments and Challenges

On 12 August 2021, the government exacted the Insolvency and Bankruptcy Code (Amendment) Act 2021 to introduce the pre-packaged insolvency resolution process. This functions largely in the same way that pre-packaged administrations work in the UK, however pre-packaged insolvencies in India are available only for certain types of debtors.

According to a report from IBBI, the average time taken for a resolution process is still around 679 days, despite the time limits prescribed in the Act. This is said to be in part due to judicial intervention as the Supreme Court has held the 330-day timeline to be "advisory," as opposed to mandatory. Furthermore, litigation by multiple stakeholders with competing interests delays resolution and ultimately erodes the value of corporate debtors and in turn, recovery to creditors.

However it is not all doom and gloom. According to the same report, "FY23-24 has witnessed an unprecedented surge in the approval of resolution plans under the IBC."

269 resolution plans were approved in 2024, in contrast with 189 in 2023.

Alternative Restructuring Mechanisms

Companies can explore various alternative mechanisms to avoid formal insolvency proceedings. These include:

1. Pre-insolvency Restructuring: Companies can take measures to address operational inefficiencies and financial challenges before they escalate and result in insolvency proceedings under the Code by implementing pre-insolvency restructuring. This approach aims to avert negative consequences and stigma associated with insolvency by stabilizing the company’s financial and operational structures. The process begins with a thorough assessment of the company’s financial health, focussing on cash flow management, debt levels, operational efficiency, and asset utilisation. Key restructuring actions often involve negotiating with their creditors to modify the terms and conditions of the loan, which is done outside of court proceedings to expedite the decision-making process and maintain friendly business relationships.
2. Scheme of Compromise or Arrangement under the Companies Act, 2013: Schemes of arrangement or compromise under Chapter XV and Sections 230 to 240 of the Companies Act, 2013, provide an alternative framework for corporate restructuring. This application should be accompanied with full disclosure of all material facts pertaining to the draft scheme and its consequences which is submitted to the Tribunal. Approval of the scheme requires a majority representing 3/4th in value of the total debt owed to creditors or class of creditors, or of the members or class of members. If the Tribunal finds the scheme fair and equitable, it may sanction the scheme, making it binding on all involved parties.
3. One-Time Settlement (OTS): A One-Time Settlement is a mechanism where a borrower and lender agree to resolve outstanding dues through a single payment or a structured repayment plan. This process typically involves negotiating a reduced amount that the borrower will pay to settle the debt, requesting for a waiver of interest or repayment of a lesser amount.
4. Strategic Debt Restructuring: The Reserve Bank of India (RBI) has issued guidelines (RBI/2014-15/627, DBR.BP.BC.No.101/21.04.132/2014-15) that allow creditors to convert their debt into equity shares, thereby acquiring more than 51% of the shareholding. This provision also empowers the creditors to change the management of the company, giving them a more active role in the restructuring and recovery process.

Bankruptcy for Individuals and Partnership Firms

Individuals and partnership firms often face the risk of bankruptcy due to various financial and economic challenges. Effective risk management and meticulous financial planning are necessary to overcome these challenges. To maintain financial stability and stay out of bankruptcy, these firms can adopt a pragmatic approach by identifying the causes of their financial challenges and then strategize accordingly by reducing expenditure and increasing savings and investments.

Currently, the Provincial Insolvency Act, 1920 and the Presidency Towns Insolvency Act, 1909 govern the bankruptcy process for both individuals and partnership firms. On August 29, 2017, a press release from the Ministry of Finance, Government of India emphasized that these ancient legislations still govern individuals and partnership firms who are into bankruptcy. The press release states that Section 243 of the Code, which provides for the repeal of these enactments, has not been notified as of now.

Additionally, the provisions related to insolvency resolution and bankruptcy for individuals and partnerships contained in Part III of the Code are yet to be notified by the Central Government of India. Specifically, the Presidency Towns Insolvency Act, 1909 applies to the jurisdictions of Bombay, Madras, and Calcutta only, with the bankruptcy case handled by the High Court (single bench).

The Code has introduced a detailed and a comprehensive approach under Part III, to include a fresh start process, insolvency resolution process, and bankruptcy process for individuals and partnership firms. However, the Part III of the Code has only been notified concerning the personal guarantors to corporate debtor.

Decision Making: Disagreements or clashes between partners have the potential to delay decision-making, which could have a detrimental impact on the financials of the firm.

The Code has undergone numerous amendments to guarantee a timebound and equitable resolution procedure for corporate insolvency along with rules and regulations framed thereunder.

It is advisable to seek professional advice and strategic solutions when dealing with corporate insolvency and bankruptcy. Our experienced professionals offer customized, efficient, and effective services to handle resolution and liquidation processes. Trust InCorp to provide comprehensive restructuring services that will assist in stabilizing your financial health and support long-term growth, making us the dependable partner you need during times of financial distress.

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