Ushering in a New Corporate Bankruptcy Regime for India

following guest post is contributed by Vinod
of Vinod Kothari & Co.]
The Bankruptcy
Laws Reforms Committee (“BLRC”) headed by Dr. T. K. Viswanathan recently
submitted its final
(“Final Report”) to the Ministry of Finance. Before this, an interim report
(“Interim Report”) was submitted earlier in February 2015. While the Interim
Report merely recommended some amendments to the existing scheme of resolution
of sickness under the Companies Act 2013 and some additional measures, the
Final Report goes on to suggest a comprehensive Insolvency and Bankruptcy Bill,
2015 complete with the institutional framework, eligibility for applying for
resolution, moratorium provisions, interim and final administration of entities
during administration, liquidation, priorities, and the like.

A Flawed Insolvency Regime
recommendation of a comprehensive self-contained bankruptcy code for India is a
huge step towards cleaning up the clutter that bankruptcy and resolution laws
in India are currently in. Presently, there is no comprehensive code for
handling business failures in India – we have been working spasmodically to
enact the Sick Industrial Companies Act, 1985 (“SICA”) way back during the era
of industrial sickness, to grant special rights to banks for recovery of debts
via the Recovery of Debts Due to Banks or Financial Institutions Act, 1993 for
non-judicial recovery of assets, via the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”),
and special measures for repayment of debentures under the Companies Act. In
the meantime, the basic framework for bankruptcy of companies under winding up
provisions under the Companies Act, 1956 has remained unchanged over last
nearly six decades, and the framework for personal insolvency has remained
unchanged over nearly an entire century!
Not only is the
present scene a mosaic of many pieces, but even worse the pieces do not fit with
each other at all. Winding up is a holistic remedy – looking at the business as
a whole, taking a view whether the business can be revived, and if the business
cannot be revived, then taking the business down the liquidation path, distributing
its assets on a fair and equitable basis. On the contrary, enforcement of
security interests by creditors is based on a “might is right” principle – a
creditor is obviously concerned with its own dues rather than the interests of
other stakeholders in the business – other lenders, creditors, workers, and
others whose livelihood depends on the business.
SICA, framed on
the recommendations of the Tiwari Committee, was based on Chapter 11 of the US
Bankruptcy Code, and was aimed at reviving a business if the business was still
viable. In practice, the moratorium provisions of SICA were widely used to
prolong defaults without attracting any creditor action. While revival might
have been the central theme of SICA, it became a safe harbour for defaulters, thus
creating the landscape for the SARFAESI Act. The SARFAESI Act, purporting to
base itself on Article 9 of the Uniform Commercial Code (“UCC”) in the US was
based entirely on creditor-driven enforcement of security interests. Amendments
introduced by the SARFAESI Act into SICA made SICA virtually irrelevant if the
creditors had enforced security interests or sold their assets to an asset
reconstruction company (“ARC”). This measure, apparently a reaction to the
tactics used by defaulters to use SICA as the shied to ward off creditor
action, served to be a complete contrast to any possibility of revival, because
nothing would be left in a unit to revive if its core assets had been
repossessed by lenders already.
business, clearly a by-product of the SARFAESI Act and in a broader sense a
unique business model to India, is also based on the “might is right”
principle, where the ARC aggregates loans by various lenders to increase its
In short, the
equitability principle in which insolvency laws are rooted all over the world
is rarely seen on the Indian scene as of now.
This is for the
legal framework; but the way the failure of big business in India is currently
managed is by of informal framework –the Corporate Debt Restructuring (“CDR”),
Joint Lenders Forum (“JLF”) and the Strategic Debt Restructuring (“SDR”), all
of which are based on guidelines issued by the Reserve Bank of India (“RBI”).
It is these frameworks currently handling much of Rs 2,67,000 crore
non-performing loans in the Indian financial system. SARFAESI has mostly been
successful in evicting homeowners from their residential houses for defaulting on
their installments; as for big business, most of it continues to chug on under
the CDR arrangements, with bankers trying to save their revenue statements
converting loans into equity.
While all these
sporadic and uncoordinated forays of law making continued, committees and
working groups over decades have been talking about reforming bankruptcy laws
in India. The trail goes back at least as early as 1964 when the 26th Report of the
Law Commission
recommended reform of personal insolvency laws and suggested
a new Insolvency Bill to consolidate the extant two separate insolvency laws.
Obviously, this report has not been acted upon to date. The Tiwari Committee’s
report, based on whose recommendations SICA was drafted and finally enacted has
been referred to above.
In 1999, the
Government appointed V B Eradi Committee specifically from the viewpoint of
corporate bankruptcy. The Committee revealed some startling facts – that the
average time taken in winding up matters was 11 years pan-India, and in the
Eastern Region, it took on an average 25 years to resolve a bankruptcy. The
idea of the National Company Law Tribunal (“NCLT”) was born, inclusively, out
of the recommendations of the Eradi Committee. Accordingly, the Companies Act
was amended in 2002 – it is a sad reflection on Indian law-making that the
provisions pertaining to shifting of winding up to the NCLT, enacted by the
Parliament in 2002, have not been enforced for over 13 years, and if the BLRC
recommendations are indeed accepted, the law made in 2002 will die, still born,
though having lived in incubator for 13 long years.
In 2001, the N L
Mitra Committee report
recommended a comprehensive bankruptcy code –nothing
was done to implement any of the Mitra Committee recommendations until the
Companies Act, 2013 was enacted, based largely on the recommendations of the J
J Irani Committee, which adopted the Mitra Committee recommendation for
changing the basis of insolvency from “inability to pay” to “failure to pay”.
Of course, the provisions of the Companies Act, 2013 on corporate insolvency
are yet to be enforced, as the NCLT is yet to be constituted.
Major recommendations of the BLRC
– Scope of applicability
– The law is to cover insolvencies of “corporate persons” (covering
companies, limited liability partnerships (“LLPs”), and all other entities
having limited liability), as also individuals, firms etc.
– While the law is admittedly a code for insolvent companies, it covers liquidation
of solvent companies as well, and thereby, serves as a complete code on
liquidation of companies.
– Institutional framework
– Insolvency and Bankruptcy Board of India: the primary functions of the
Board will include registration of insolvency professionals, insolvency
institutions, information utilities, provide guidelines on the conduct of
bankruptcy resolution, etc.
– Adjudicating Authority (“AA”): the AA is the primary quasi-judicial
body presiding over the entire process of bankruptcy. 
– In case of corporate persons, the NCLT will be the AA.
– In case of other persons, the Debt Recovery Tribunal (“DRT”) will be
the AA.
– Insolvency professionals: may be practically read as administrators
(pre liquidation stage) and liquidators (post liquidation order) – who have
role to play in both insolvency, liquidation and resolution. The following are
the insolvency professionals:
– Interim resolution professional – immediately on admission of an
insolvency resolution process.
– Final resolution professional 
on appointment by the Committee of Creditors.
– Liquidator – on commencement of liquidation proceedings. Typically, the
final resolution professional will act as liquidator, unless replaced by the
– Resolution applicant: the entity that prepares a resolution plan.
– Information utilities: the information utilities will be storing
financial information – this may be seen as electronic filing of defaults,
security interests. There will obviously be an overlap with present filing of defaults
with someone like CIBIL, security interests with the Companies Act, etc., which
may be eventually resolved.
– Manner of filing for bankruptcy in case of corporate persons
– The “corporate insolvency resolution process” may be initiated on:
– application by a financial creditor, meaning a creditor for financial
facility (which is a broadly worded expression including financial lease and
hire purchase transactions, which are treated as financial transactions under
applicable accounting standards);
– application by an operational creditor, meaning a creditor other than a
financial creditor;
– application by the corporate debtor himself, that is, company itself.
– In case of financial creditors, the basis of filing is the fact of a
default to any financial creditor.
This drastically changes the basis of the current provisions of “sickness”
under the Companies Act, which is based on default to a majority in value of
the creditors. In addition, the only fact on which the application for
insolvency will be admitted is the fact of a default, established from the
records of the information utility.
– In case of operational creditors, if there is no dispute about a debt
(there is a process for dispute too), then, if the claim is not paid within 10
days, the creditor may initiate insolvency process. This largely creates a
level-playing field between secured and unsecured creditors.
– The law puts a very tight timeline of just 180 days for completing the resolution process.
– Moratorium
– One of the most important features of a bankruptcy law is the grant of
moratorium during which creditor action will remain stayed, while the
bankruptcy court takes a view on the possibility of rehabilitation. In the
chapter on Sick Companies under the Companies Act 2013, there is no provision
for automatic moratorium – it merely empowers the NCLT to grant a moratorium up
to 120 days.
– The Code [clause 13] talks about a mandatory moratorium – thereby, it
serves almost like the automatic moratorium under global bankruptcy laws. The
moratorium will continue throughout the completion of the resolution process –
which is 180 days as mentioned above. However, if in the meantime, the
creditors’ committee resolves to approve liquidation of the entity, then the moratorium
will cease to have effect.
– Explicitly, the moratorium before liquidation applies to enforcement of
security interests under SARFAESI Act as well [clause 14 (1) (c)].
– A moratorium also applies when an order for liquidation has been passed
by the AA. [clause 33 (6)]
– Interim administration, Committee of Creditors and final
administration: these provisions are similar to the existing process of winding
up of companies, except for much tighter timelines.
Steps in corporate insolvency resolution process
Timelines (in days)
Filing of
insolvency application
AA shall
communicate admission or rejection of insolvency application
Moratorium and
advertisement of admission of insolvency resolution process
appointing an IRP, AA shall declare a moratorium
AA shall
appoint an interim resolution professional (IRP)
+ 2
Tenure of an
IRP shall cease to exist
+ 2 + 14
of Committee of Creditors
+ 2 + 14
Appointment of
final resolution professional 
+ 2 + 14
Preparation of
resolution plan by resolution applicant
Submission of
resolution plan duly approved by the committee of creditors to the AA
If resolution
plan approved – the moratorium shall cease to have effect
+ 180
If resolution
plan rejected – Initiation of liquidation – this is the culmination of the
resolution process, if the entity is not getting revived, but heading for
+ 180
The corporate
insolvency resolution process shall be completed
+ 180
The process
can be extended
+ 180 +90
Steps in corporate liquidation process
– Initiation of the liquidation process, based on either the
recommendations of the resolution plan, or failure to submit the plan within
the maximum time period permitted, or based on a vote of the Creditors’
Committee – clause 33
– Appointment of liquidator 
clause 34
– Formation of liquidation trust – clause 36. This provision is indeed
very significant as it defines the reach of the so-called “liquidation estate”.
That is to say, to the extent assets of the corporate debtor form part of the
liquidation trust, the assets will be distributed by the liquidator in the
manner of priorities laid in the law, and individual claimants or those
claiming to have any special rights on such assets will have to form part of
the liquidation process. 
– Important inclusions in the liquidation trust are:
– All assets and interests as evidenced in the balance sheet of the
corporate debtor: this issue will continue to cause confusion as it relies on
accounting principles which are quite often not aligned with legal title. For
example, under IFRS, several securitisation transactions or sale of financial
assets do not go off the balance sheets. This may put to question the “true
sale” character of several securitisation transactions.
– Important exclusions are:
– Third party assets, including
– Trust assets, that is, assets whereof the corporate debtor is merely a
– Bailment assets – thereby, leased assets will be excluded from
liquidation trust but it may be argued that in case of financial leases, as the
assets are on the balance sheet, at least the right to use will be an asset,
unless the right to use gets terminated by virtue of the bankruptcy event.
– Transactions where there is no transfer of title but merely a right to
– Assets placed as collateral with financial debtors, that are subject to
netting under multilateral or clearing contracts – thereby giving protection to
such derivatives as are settled by multi-lateral clearing. The provision seems
to have been picked from international jurisdictions, but multilateral clearing
is not currently in vogue in India.
– Assets of subsidiaries – while shares held in the subsidiary form part
of the liquidation trust, the assets do not.
– Collection of creditors claims within 21 days of the commencement of
liquidation, and verification of claims – clause 38-41. Clause 42 also includes
elaborate provisions about voidable transfers and undue preferences,
incorporating several safe harbours for bona fide transactions against
“clawback” rights of a bankruptcy court. Under existing law, the court simply
has powers to preserve bona fide transactions – the Bill gives several such
transactions which are protected from any clawback. In addition to this, there
are usual provisions for undervalued transactions, fraudulent transfers, etc.
There is seemingly a new provision pertaining to avoidance of “extortionate
credit” contracts, entered into within 2 years before the commencement of
insolvency process [clause 50-52].
– Realisation of debt by secured creditors [clause 53]: This very important
section incorporates the classic principle understood over the decades in India
– that a secured creditor may either relinquish security interest and force his
claim on the overall liquidation trust assets, or may opt to realise security
interest outside the winding up process. Clause 53 (4) permits the secured
creditor to realise security interest according to such law as may be
applicable – thereby preserving the process of self-help realisation under the
SARFAESI Act. However, there will be reference to the liquidator for the
purpose of the liquidator identifying the asset. This section, however, brings
a very important balance in the process of repossession outside the liquidation
process under SARFAESI Act, by requiring the secured creditor to return the
excess realised by him to the liquidator. Thereby, the liquidator also becomes
an interested party in the process of sale of secured assets under SARFAESI
Act, throwing greater burden on the creditors in being more transparent in the
conduct of the sale.
– Distribution of assets by the liquidator [clause 54]. Most
interestingly, clause 54 starts with a non-obstante
clause, giving this section supremacy over conflicting provisions of a vast
number of Central and State laws. There have been several rulings of the
courts, including the apex court, on conflict of laws pertaining to claims of
the state creditors over assets of companies in winding up. Hopefully, this
section, being a dedicated section pertaining to distribution of assets on
liquidation, will operate as a special law, and will resolve the cacophony
currently existing in the matter. In fact, state dues come at number 5 in the
rung. One disturbing point is the provision in clause 54 (2) which seeks to
disregard contractual arrangements between claimants of a single class.
Usually, in capital market transactions, there are several classes of
preference created among creditors – for example, super senior, senior,
subordinated, etc. Clause 54 (2) may be interpreted to disregard these
priorities as “contractual arrangements”.
– Application for dissolution [clause 54 (4)].
– Order for dissolution [clause 54 (5)].
Fast track resolution
As a notable
feature of the Bill, the Bill proposes a fast track resolution process,
intended to be completed within 90 days, as opposed to the 180 days’ time for a
normal process. The fast track process will be applicable for corporate debtors
of a particular class, or having assets or income up to such level as may be
notified by the Central Government. Essentially the process seems to be
targeting small companies.
Voluntary liquidation
It would have
been a pity if the process of liquidation under the Code was to be reserved
only for defaulting companies, since voluntary winding up of healthy companies
in India currently takes enormously long time and, surprisingly, all attention
has been to the speed of incorporating companies, not winding them up. Thus, a
healthy company, based on a declaration of solvency, may pass a special
resolution to liquidate itself. At least 2/3rds of the creditors in value must
also support the members’ resolution. The rest of the liquidation mechanics
under the Bill will apply to a voluntary winding up as well.

NCLT to mind its timelines
One of the
highlight points of the Code is timely completion of the liquidation process.
Since most delays take place due to protracted time before the Benches, clause
64 will keep the benches of NCLT and NCLAT serious about timely disposal of
matters. Theses sections enact that where the NCLT or NCLAT does not dispose of
the matter within the time limits, the president of the forum shall record the
reasons for not doing so.
– Vinod Kothari

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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