Resolving IL&FS: IBC vs Schemes of Arrangement

[Aayush Mitruka and Manaswi Agarwal graduated from ILS Law College, Pune and are currently working with law firms in Delhi and Mumbai respectively. They can be reached at [email protected] and [email protected].]

Since August 2018 Infrastructure Leasing and Financial Services Limited (IL&FS) has been in headlines for having missed several debt payments deadlines. The rapid deteriorating financial health of IL&FS begs the question as to what legal framework is available to resolve large complex insolvency cases like that of IL&FS. As of now, India does not have a special resolution regime or comprehensive policy or law on bankruptcy exclusively for financial institutions. However, there are some provisions contained in various statutes which empower the respective regulator or the Central Government to resolve various problems faced by the financial institutions in India. In this regard, it may be worthwhile to mention that in order to address the gap, the Financial Resolution and Deposit Insurance Bill, 2017 (the Bill) was introduced in Lok Sabha in August 2017. The Bill sought to establish a resolution corporation to monitor financial firms, anticipate their risk of failure, take corrective action, and resolve them in case of such failure. However, the Bill faced strong opposition and criticism from various quarters and was withdrawn inter aliadue to certain controversial provisions like the bail-in clause among others.

In the current legal framework there are primarily two routes which can be adopted by IL&FS to nurse itself back to good health – the Insolvency and Bankruptcy Code, 2016 (IBC) route and the schemes of arrangements route under the Companies Act, 2013. Although IL&FS has chosen the schemes route to bring itself back on track, this article aims to discuss these two mechanisms and a comparative analysis of their efficacy as a tool for debt restructuring of a financial institution like IL&FS.


IL&FS is one of India’s leading infrastructure development and finance company and is registered with the Reserve Bank of India (RBI) as a systemically important non-deposit accepting core investment company (SI-ND-CIC). As per the RBI CIC framework, IL&FS invests in and provides loans to its group companies. IL&FS has very complex corporate structure and sits atop a web of 24 direct subsidiaries, 135 indirect subsidiaries, 6 joint ventures and 4 associate companies. Usually, such financial institutions are closely interconnected and once a problem develops in one entity or company, they quickly spread to other sound entities. This is exactly what has happened in the case of IL&FS and its group companies and resolution of such companies is no doubt going to be a very complex task.

The IBC route

The IBC was enacted to address the lacunae in the bankruptcy laws relating to companies, partnerships as well as individuals. However, financial service providers like banks, insurance companies, stock exchanges and non-banking financial companies are excluded from the application of the IBC.[1] While the Central Government has the power under section 227 of the IBC to formulate rules and notify a financial service provider, on an ad-hoc basis, to be referred for resolution of insolvency under the IBC, this recourse has not been invoked for IL&FS thus far. In the absence of such a notification, though IL&FS being a financial service provider cannot resort to the IBC, its subsidiaries which are not financial service providers (like power and infrastructure projects entities/companies) can avail of the mechanism provided under the IBC on an individual basis. Admittedly, the IBC route provides various advantages such as time bound resolution and a calm period among others, this route also poses several challenges and hurdles and some of the important ones have been set out below. 

In the context of financial companies with several subsidiaries it would not be easy to adopt the IBC route because of the complex mesh of relations among the group companies. Given that IBC is still emerging and is in its formative years it is not very clear how group insolvencies are to be dealt with. The fact that the ultimate holding company (i.e. IL&FS) cannot be brought within the purview of IBC will pose a serious hurdle to the resolution process. Secondly, given that this process is largely creditor-driven and the promoters would lose control and management, IBC would naturally not be the ideal choice for IL&FS.

Further, some press reports suggest that IL&FS is only facing a liquidity issue (which is temporary in nature) as opposed to an insolvency situation. In such a situation, recourse to IBC will lead to a panic situation which would be unwarranted and therefore for this reason as well the IBC may not be a desirable route.

It would be useful to point out that some of the lenders of a subsidiary power company of IL&FS have instituted insolvency proceedings against such subsidiary company.[2] While the fate of the application is yet to be decided by the National Company Law Tribunal (NCLT), one interesting question which would arise here is whether an insolvency application can be admitted during the pendency of proceedings under the provisions of schemes of arrangements under the Companies Act, 2013. In view of the non-obstante clause under section 238 of the IBC and the decision of the Bombay High Court in the case of PSL Limitedv. Jotun India Private Limited,[3] the balance may tilt towards the IBC proceedings. However, such an interpretation is bound to throw open a pandora’s box. This case could potentially be the first to deal with such a question and it remains to be seen what view is ultimately taken.

The schemes of arrangement route

Sections 230 to 232 of the Companies Act, 2013 provides for schemes of arrangements and compromises between a company and its creditors and shareholders. Historically these provisions are rarely employed in India as a tool for debt restructuring and are mostly used for the purposes of corporate restructuring (viz. mergers, demergers, amalgamations, etc.). Companies like Essar Oil Limited and BPL Limited are the few exceptions which have used the schemes of arrangements route for debt restructuring in the past. Unlike in the UK and Singapore, the schemes of arrangements mechanism did not find many takers in India primarily due to the onerous procedural requirements, long delays and hold out by creditors[4]. However, this route is seemingly more attractive than the IBC for a company like IL&FS for reasons discussed below. 

The wide scope and the liberty to customize the revival plan in accordance with the needs of the company is the obvious reason which prompts the company to choose this route. The courts have defined the terms “arrangements” and “compromises” very broadly to entail transactions including corporate restructuring and credit restructuring. Another benefit of walking down this road is that the promoters do not have to surrender their control over the company during the implementation of the scheme. Thirdly, a condition precedent to trigger the IBC is that the corporate debtor must have committed a ‘default’, while such a condition is not required under section 230 of the Companies Act, 2013. This would allow IL&FS to include healthy companies also as a part of the scheme, if need be. 

However, unlike Section 14 of the IBC, the Companies Act, 2013 does not provide for a moratorium during the pendency of a scheme Petition before the NCLT or during the implementation of a sanctioned scheme. Interestingly though, under the provisions of the Companies Act of 1956, the High Court / NCLT had the power to issue a moratorium.[5] It is unknown if the omission is deliberate or just a case of omissus casus. As of today, the law is far from clear and the approach of the NCLT unknown. Notably, a moratorium can be provisioned for in the scheme itself which would be ultimately binding upon the creditors subject to the sanction of the NCLT.

Moreover, unlike IBC, this route does not provide for a time bound resolution. Thirdly the “cram down” is applicable to only a class of creditors and not to all the creditors of the company as provided under the IBC. Finally, it is unclear as to what would happen if during the pendency of the scheme for approval by the NCLT a creditor initiates a proceeding under the IBC. As mentioned earlier, in view of the non-obstante clause contained in section 238 of IBC, chances are that the IBC proceedings will be given a go ahead.

Concluding remarks

IL&FS along with 40 of its subsidiaries have filed a petition before the NCLT for “certain reliefs in connection with filing of a scheme of arrangement under section 230 of the Companies Act”. However, it is just the beginning and it is going to be a long journey before the company can arrive at any resolution as the scheme will require the prescribed approval of the creditors and shareholders of the companies and the sanction of the NCLT. Going forward, we expect this case to throw up a new set of challenges and nuanced questions of law. While the larger ramifications of this case will be known in due course, significantly, IL&FS has been successful in triggering fresh discussions on an urgent need for a comprehensive bankruptcy law for financial service providers.

Aayush Mitruka & Manaswi Agarwal

[1] Section 2 of the Insolvency and Bankruptcy Code, 2016.

[2] “In a first, IL&FS group’s Tamil Nadu thermal power unit taken to NCLT”, Business Standard (21 September 2018).

[3] CA No. 572 of 2017 in C.P. No. 434 of 2015.

[4] Varottil, Umakanth, The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects (March 30, 2017). NUS Law Working Paper No. 2017/005.

[5] Section 391(6) of the Companies Act, 1956.

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