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Legal framework
What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
The insolvency and restructuring regime is now regulated by the recently enacted Insolvency and Bankruptcy Code 2016. It had previously been governed by the Companies Act 2013 and the Sick Industrial Companies (Special Provisions) Act 1985 for companies and the Presidency Towns Insolvency Act 1909 and the Provincial Insolvency Act 1920 for individuals. As yet, no provisions of the code relating to individual insolvency have been notified. The code governs insolvency, restructuring and liquidation proceedings for all classes of legal person, but not for financial entities (eg, banks, non-banking financial companies and mutual funds which render financial services and offer financial products).
On an international spectrum, is your jurisdiction more creditor or debtor friendly?
With the notification of the Insolvency and Bankruptcy Code, the insolvency regime in India is seeking to create balance in favour of lenders, whereby, during the corporate insolvency resolution process, creditors and the resolution professional appointed by the creditors are in charge of the corporate entity’s affairs. The board of the corporate debtor will be suspended and all key decisions during the insolvency resolution process will be taken only with the approval of the financial creditors. The process is time bound and the corporate debtor will be liquidated once the time has lapsed. The law is intended to give financial creditors control over the defaulting debtor’s affairs.
Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?
The insolvency of financial entities (eg, banks, insurers and pension funds) has been kept out of the Insolvency and Bankruptcy Code’s purview. The insolvency regime in relation to banking companies operating in India is governed by the Banking Regulation Act 1949. The government has also set up a committee to draft the Code on Resolution of Financial Firms. It has released a draft bill – the Financial Resolution and Deposit Insurance Bill 2016 – and is seeking comments from the public. Among other things, the draft bill proposes to:
Further, in March 2011 the Ministry of Finance created the Financial Sector Legislative Reforms Commission to review and rework legislation governing India’s financial system. Accordingly, the commission submitted its report to the ministry on March 22 2013, analysing the regulatory regime and providing a draft Financial Code to consolidate India’s existing financial laws. Thus, specific insolvency regimes for financial institutions, insurance and pensions, among others, are likely to evolve in the coming years.
Are any reforms to the legal framework envisaged?
The insolvency and bankruptcy regime was recently revamped with the enactment of the Insolvency and Bankruptcy Code.
In line with the government’s objective, the code not only consolidates the regime governing the insolvency and liquidation of different classes of legal person, but also amends various other existing laws (eg, the Companies Act 2013, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 and the Sick Industrial Companies (Special Provisions) Act 1985) which previously overlapped, to remove conflict, close loopholes and achieve effective resolution of stressed assets in a timely manner.
Further, the Banking Regulation (Amendment) Ordinance 2017 was recently issued with a view to resolving the problem of surmounting bad debts and non-performing assets in India’s banking system. The ordinance empowers the Reserve Bank of India to intervene and issue directions to banks for resolution of stressed assets. The Reserve Bank of India is empowered to:
This is expected to further expedite the government’s efforts to facilitate swifter resolution of stressed assets with a view to salvaging the viable assets or freeing up valuable assets stuck in stressed companies where revival is unlikely.
Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
During the corporate insolvency resolution process, if it is found that any business of the corporate debtor has been conducted with the intent of defrauding its creditors or for any other fraudulent purpose, persons who were knowingly party to such business may be obliged by the National Company Law Tribunal to make such contributions to the assets of the corporate debtor as it deems fit.
Further, if it is ascertained during the insolvency resolution process or liquidation process that, before the commencement of insolvency, a director of the corporate debtor knew or ought to have known that there was no reasonable prospect that the debtor could avoid insolvency and failed to undertake due diligence to minimise potential loss to creditors, such director may be obliged by the tribunal to make such contributions to the assets of the corporate debtor as the tribunal deems fit.
Certain provisions under the Insolvency and Bankruptcy Code also prescribe penalties for erring officers, directors and company members for offences including:
What defences are available to a liable director or parent company?
Defences include that there was no intent to defraud creditors or defeat the law, and that the director, in the discharge of his or her duties, exercised diligence that was reasonably expected of a person carrying out the functions of a director.
What due diligence should be conducted to limit liability?
The Insolvency and Bankruptcy Code is new and necessary precautions would be better highlighted in some of the instances of fiduciary delinquencies (on the part of directors and other officers of the company) once it is tested by the courts.
Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
The main forms of security for different classes of asset include:
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In case of liquidation of a company, the following waterfall is followed for the distribution of proceeds arising out of the sale of assets:
Can this ranking be amended in any way?
This ranking is prescribed by the Insolvency and Bankruptcy Code and cannot be amended. The liquidator who is responsible for distribution of liquidation proceeds is bound by the waterfall. However, any party may contractually agree to relinquish its claims or offer the proceeds payable to it to some other creditor. Nonetheless, the liquidator is not a party to or bound by any such arrangement.
What is the status of foreign creditors in filing claims?
Foreign creditors are recognised under the Insolvency and Bankruptcy Code like any other creditor and can file claims as financial or operational creditors (financial creditors have extended credit for the time value of money, whereas operational creditors have extended credit in exchange for goods and services) with the insolvency resolution professional and liquidator, depending on the nature of their exposure. Such foreign creditors have the same rights as the financial and operational creditor in a corporate insolvency resolution process or liquidation process.
Are any special remedies available to unsecured creditors?
Unsecured financial creditors, much like secured financial creditors, are allowed a seat in the committee of creditors. According to the Insolvency and Bankruptcy Code, the seat comes with the responsibility of managing the affairs of the company along with the insolvency resolution professional during the insolvency resolution process. The corporate insolvency resolution plan must be approved by a 75% vote by the financial creditors, where unsecured financial creditors are treated equally with secured financial creditors and their voting rights depend on their exposure in the total dues.
In addition, operational creditors must be paid within 30 days of the approval of the resolution plan up to the amount of liquidation value payable to them.
Further, dissenting unsecured creditors must be paid before other creditors supporting the plan.
By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?
According to the Recovery of Debts Due to Banks and Financial Institutions Act 1993, creditors may initiate civil proceedings for a money claim against a bank or non-banking financial company before the debt recovery tribunal. Additionally, secured creditors (ie, banks and financial institutions operating in India) can also enforce security created in their favour without the intervention of the court in terms of the process of sale of assets prescribed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.
Is trade credit insurance commonly purchased in your jurisdiction?
Liquidation procedures
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
Under the Insolvency and Bankruptcy Code, liquidation procedures cannot be initiated by creditors as a first resort on payment default. Instead, the code prescribes that a financial or operational creditor can initiate the corporate insolvency resolution process in case of failure by the corporate debtor to pay at least Rs100,000. In addition, the corporate debtor can initiate the corporate insolvency resolution process. However, in case of failure to work out a resolution plan under the corporate insolvency resolution process prescribed under the code, the corporate debtor must be liquidated.
The corporate debtor can also initiate voluntary liquidation proceedings with the approval of the board of directors, shareholders and creditors. Any corporate entity may initiate a voluntary liquidation proceeding if:
Voluntary liquidation is largely an out-of-court process. Only once the affairs of the corporate person have been completely wound up and its assets fully liquidated can the liquidator apply to the National Company Law Tribunal for its dissolution along with a final report. Pursuant to this application, the tribunal must pass an order for dissolution and the entity will be dissolved from the date of the order.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
The procedure for the liquidation of a company (along with limited liability partnerships and other limited liability entities) on account of insolvency (compulsory liquidation) and on account of application made for voluntary liquidation is enshrined under the Insolvency and Bankruptcy Code (leaving winding-up for other grounds under the Companies Act 2013).
Compulsory liquidation following corporate insolvency resolution process A financial or operational creditor or a corporate debtor may apply to the National Company Law Tribunal for the initiation of the insolvency resolution process following the default by the corporate debtor to pay dues of at least Rs100,000.
The code prescribes a timeframe of 180 days for the insolvency resolution process, which begins from the date that the application is admitted by the tribunal (and may be extended a further 90 days). During this time, no suits, proceedings, recovery or enforcement action can be commenced or continued against the corporate debtor. The committee of creditors shall consider and approve resolution plans which are placed before it for evaluation and viability determination.
In the event of a liquidation trigger, the following may occur:
Voluntary liquidation A company may initiate the voluntary liquidation process with the approval of a majority of the directors of the board, followed by the approval of the majority of its shareholders and creditors.
How are liquidation procedures formally approved?
Compulsory liquidation must be approved by the National Company Law Tribunal on occurrence of any of the liquidation triggers. Under compulsory liquidation, the consent of the company, its shareholders or directors is immaterial.
Voluntary liquidation requires the process to be initiated by the corporate debtor itself, through its directors or partners, and it must be approved by both its shareholders (in the case of a company) and creditors.
What effects do liquidation procedures have on existing contracts?
For the purposes of liquidation, the liquidator forms an estate of the assets and holds the liquidation estate as a fiduciary for the benefit of all creditors. The liquidation estate assets include contractual rights.
What is the typical timeframe for completion of liquidation procedures?
The compulsory liquidation process is typically completed within two years of the date of initiation.
However, voluntary liquidation can be completed in a shorter period. The regulations under the Insolvency and Bankruptcy Code set out that in the event that the liquidation process is not completed within 12 months, the liquidator shall hold a meeting of the contributories within 15 days of expiry of the 12-month period and at the end of every succeeding 12-month period thereafter until the dissolution of the corporate person. The liquidator will also present an annual status report indicating the progress of liquidation at each meeting.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
The resolution professional appointed for conducting the corporate insolvency resolution process usually acts as the liquidator for the purpose of the liquidation process, unless the National Company Law Tribunal replaces the resolution professional with a different insolvency professional.
The liquidator is empowered to:
What is the extent of the court’s involvement in liquidation procedures?
After the National Company Law Tribunal passes an order for liquidation and appoints a liquidator, it periodically supervises the liquidation process. The law mandates that a preliminary report be submitted to the tribunal within 75 days of the commencement of liquidation, detailing the capital structure of the corporate debtor and the estimates of assets and liabilities based on the corporate debtor’s books. Following the preliminary report, the liquidator must submit quarterly progress reports to the tribunal indicating progress in liquidation, details of stakeholders and details of property that remains to be sold or realised. Thereafter, the sale and distribution of assets to the claimants are also conducted under the tribunal’s supervision.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
Creditors have more involvement in the corporate insolvency resolution process where the affairs of the corporate debtor are managed under the supervision of the creditors. However, once the corporate debtor is ordered to be liquidated, the liquidator takes control over the debtor’s assets, liquidates them and distributes the sale proceeds as per the claims received under the supervision of the National Company Law Tribunal. The lenders must submit their claims to the liquidator; however, the liquidation process is conducted under the supervision and control of the tribunal.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
If the resolution plan under the corporate insolvency resolution process fails, the National Company Law Tribunal will order the debtor’s liquidation and appoint a liquidator to take control of the debtor’s assets. On appointment of the liquidator, all powers of the board of directors, key managerial personnel, shareholders and partners of the corporate debtor shall cease to have effect and be vested in the liquidator. Further, personnel are required to extend all assistance and cooperation to the liquidator as may be required in managing the corporate debtor’s affairs.
Restructuring procedures
What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?
Under the Insolvency and Bankruptcy Code, the corporate insolvency resolution process involving restructuring of the corporate debtor’s debts can be initiated by the debtor or its financial or operational creditors. On occurrence of default, a fine of at least RS100,000 is applied. The financial creditor, operational creditor or corporate debtor may approach the National Company Law Tribunal with an application for the initiation of the insolvency resolution process. The procedure for the applicants varies as follows:
The code also stipulates that certain persons cannot apply to initiate the insolvency resolution process, including:
In addition to the statutory framework prescribed under the code, restructuring debts can be undertaken under the Corporate Debt Restructuring Scheme and the Joint Lenders’ Forum, which are contractual frameworks created under the auspices of the Reserve Bank of India. Under this framework, corporate entities with aggregate outstanding exposure of Rs1 million or more are eligible for restructuring. Reference to the corporate debt restructuring scheme can be made by:
Under the Joint Lenders’ Forum framework, before a loan account turns into a non-performing asset, banks must identify incipient stress in the account by creating three sub-categories under the special mention account (SMA) category:
As soon as an account is reported by the lenders as SMA-2, a committee must be formed – to be called the Joint Lenders’ Forum – if the aggregate exposure (fund based and non-fund based taken together) of lenders in that account is Rs1 billion or more. Lenders also have the option of forming a forum even when the aggregate exposure in an account is less than Rs1 billion or when the account is reported as SMA-0 or SMA-1. While forum formation and subsequent corrective action are mandatory in accounts with an aggregate exposure of Rs1 billion and above, in other cases lenders must monitor the asset quality closely and take corrective action for effective resolution as appropriate.
What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?
The corporate insolvency resolution process under the Insolvency and Bankruptcy Code is the sole statutory restructuring prescription in India. The process is initiated by a creditor or the company filing an application with the National Company Law Tribunal following the occurrence of default in relation to a financial or operational debt. Once the tribunal admits the application, the code prescribes a timeframe of 180 days (extendable by 90 days) for the insolvency resolution process. This process period is a statutory moratorium, during which no alienation of assets or initiation of proceedings or any enforcement action may be initiated against the company. According to the code, a resolution professional will be appointed by the tribunal who will take over the management of the company’s affairs. The powers of the board of directors will be suspended and exercised by the resolution professional. All decisions are taken by the resolution professional, as per the instructions of the super-majority lenders (having 75% of financial debt). The resolution professional will create a committee of creditors, comprising all financial creditors. During the insolvency resolution process, the resolution professional will present a comprehensive resolution plan to the committee, formulated in line with the conditions stipulated in the code. The committee may approve the resolution plan with a vote of not less than 75% of the financial creditors’ voting share. The resolution professional will submit the plan, as approved by the committee, to the tribunal. In the event that the committee cannot agree on a workable resolution plan within the 180-day period, the tribunal will reject it or the company will contravene any of the plan’s provisions and the tribunal will pass an order requiring the company’s liquidation.
The Reserve Bank of India has prescribed various non-statutory and contractual restructuring mechanisms for the resolution of debts by banks and non-banking financial companies, which are binding only on banks and financial institutions which voluntarily choose to become part of the framework or are regulated by the Reserve Bank of India. The mechanisms include:
How are restructuring plans formally approved?
Please see above.
What effects do restructuring procedures have on existing contracts?
There is no provision in the Insolvency and Bankruptcy Code which provides for a variation to third-party contracts which would result in an adverse implication. Contracts in the ordinary course of business are allowed. However, no transferring, encumbering, alienating or disposing of any of its assets or legal right or beneficial interest by the corporate debtor is allowed during the moratorium period.
The code also specifically provides that the supply of essential goods or services to the corporate debtor shall not be terminated, suspended or interrupted during the moratorium period.
What is the typical timeframe for completion of restructuring procedures?
The resolution plan under the Insolvency and Bankruptcy Code must be finalised within 180 days, which can be extended by 90 days. However, no time has been prescribed for implementation.
What is the extent of the court’s involvement in restructuring procedures?
The corporate insolvency resolution process under the Insolvency and Bankruptcy Code is conducted under the supervision of the National Company Law Tribunal. The resolution plan can be implemented only with the tribunal’s approval, which then binds all of the debtor’s stakeholders.
What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?
A general moratorium is declared on commencement of the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, during which time the following actions cannot be taken against the corporate debtor:
However, the code prescribes for a creditor-in-possession model during the corporate insolvency resolution process. With the imposition of moratorium, when the board is suspended and all key decisions (including running the corporate debtor’s affairs, raising any interim finance, changing management and finalising the resolution plan) are left to the committee of financial creditors, which takes such decisions by a 75% majority vote. The insolvency resolution professional in charge of the company’s day-to-day affairs must also operate as per the committee’s instructions.
Under what conditions may dissenting creditors be crammed down?
As the committee of creditors performs its functions and takes decisions through a 75% super-majority vote, if any financial creditor fails to fall in line, the decision of the super-majority shall be binding on the dissenting creditors. However, in case of such dissent, the resolution plan shall provide that payment be made before any recoveries are made by the financial creditors which voted in favour of the resolution plan. Strictly speaking, there is no cram-down provision under Indian law.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in restructuring procedures?
The board of directors is suspended during the moratorium period and an insolvency resolution professional appointed by the lenders is in charge of the corporate debtor’s day-to-day affairs. In addition, all key decisions must be taken by the committee of financial creditors instead of shareholders during the corporate insolvency resolution process. However, the executive management of the debtor can continue to assist the creditors and the insolvency resolution professional.
Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?
These are discussed in the above sections on debt restructuring schemes.
Transaction avoidance
Setting aside transactions
What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?
Certain transactions may be set aside by the National Company Law Tribunal if such transfers are established to be in the nature of fraudulent preferences or undervalued. Depending on the nature of the transferee and whether a related party is involved, the transactions may be avoided for a period of one year for unrelated parties and two years for related parties for the period preceding the insolvency commencement date. The resolution professional monitoring a corporate insolvency resolution process or the liquidator administering a liquidation process may challenge eligible transactions. However, transactions in good faith and valuable consideration are not affected and no order shall be passed by the tribunal in respect of such transactions.
Operating during insolvency
Under what circumstances can a company continue to conduct business during an insolvency procedure?
On initiation of the insolvency resolution process, a moratorium is declared, the board of directors is suspended and management of the corporate debtor is handed over to the resolution professional for 180 days. However, the corporate debtor can continue to conduct its business in ordinary course during this period, except for payment obligations which it may be able to avoid temporarily on account of a stay against commencement or continuation of legal proceedings against the corporate debtor.
Stakeholder and court involvement
To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?
The resolution plan is formulated by 75% of the financial creditors (which must keep in mind the interests of operational creditors that do not get to vote on the resolution plan or any proceedings meetings of the financial creditors). However, directors and shareholders are not involved in company management during the corporate insolvency resolution process.
Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?
The Insolvency and Bankruptcy Code empowers an interim resolution professional (whose tenure is a maximum of 30 days from the commencement of insolvency, but which ceases immediately on appointment of a final resolution professional following the formation of a committee of creditors) to avail of interim finance subject to twice the amount of assets cover being available for the existing debt.
Following the formation of the committee of creditors, any interim finance can be raised with the consent of 75% of the financial creditors comprising the committee.
Employees
Effect of insolvency on employees
How does a company’s insolvency affect employees and the company’s legal obligations to employees?
Employee dues are covered under operational debt. Ordinarily, in terms of the resolution plan, the operational creditors must be paid within 30 days of the finalisation of the resolution plan to the extent of the liquidation value available to the operational creditors. Any balance dues can be restructured under the plan. However, usually operational dues (including employee dues) are a priority payment in a going concern. In case of liquidation, the claims of employees will be the same as the liquidation waterfall.
Cross-border insolvency
Recognition of foreign proceedings
Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?
In India, the method of enforcement of decrees (including such decrees which have been passed by foreign courts) is governed by the Code of Civil Procedure 1908, which is the applicable procedural law for civil cases.
A decision taken by an executive body or a quasi-judicial body shall not be treated as a foreign judgment and cannot be executed by the Indian courts. Therefore, orders passed by a foreign tribunal during insolvency proceedings before a foreign tribunal are not enforceable by courts in India.
However, the Insolvency and Bankruptcy Code stipulates a two-pronged solution regarding cross-border insolvency:
India has not yet adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. In case of bilateral agreements suggested by the code, it will be a difficult and lengthy process to negotiate an agreement with each country.
Winding up foreign companies
What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?
The Insolvency and Bankruptcy Code is at a nascent stage. However, a branch of a foreign company may be wound up, in accordance with the provisions of the Companies Act 2013, if it is established that it is unable to pay its debts or if the company has already been dissolved or ceased to conduct business or is conducting business only to wind up its affairs.
Centre of main interests
How is the centre of main interests determined in your jurisdiction?
Since India has not adopted a mechanism like the UNICTRAL Model Law to date, there is no recognition of the principles of ‘foreign main proceeding’, ‘foreign non-main proceeding’ or ‘centre of main interest’.
What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?
It is expected that India will adopt a mechanism like the UNCITRAL Model Law on Cross-Border Insolvency to manage cross-border insolvency issues and to work towards global integration in the field of insolvency to achieve the desired results in line with the Insolvency and Bankruptcy Code and other recent measures introduced by the government and the Reserve Bank of India.
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