CORPORATE RESTRUCTURING UNDER

INSOLVENCY AND BANKRUPTCY CODE 2016

ABSTRACT

Bankruptcy is a situation when an business entity does not have enough liquidity to pay its creditors
and when total liabilities of a company exceeds total assets whereas Insolvency is a legal status
which reflects bankruptcy. Even prior to 2016 there were certain laws dealing with similar situations
but none of them were providing complete solution. But this act of 2016 endeavours to collectively
deal with most of the problems related to insolvency in India. This research paper strives to point out
the lacunas in this act and also the procedure to deal with Insolvency process. It also tries to find out
how far this act solves the problems or shortcomings of earlier acts. Insolvency law is believed to be
the one of the major economic reform in India. As of 2015, insolvency resolution in India took 4.3
years on an average. This is higher when compared to other countries such as United Kingdom (1
year) and United States of America (1.5 years.)These delays are caused due to time taken to resolve
cases in courts, and confusion due to a lack of clarity about the current bankruptcy framework .This
new law tries to bring India at par with other advanced economies where time needed for Insolvency
Resolution was much lesser as compared to India.

INTRODUCTION

In legal terminology, the situation where the liabilities of a person or firm exceed its assets, is
known as insolvency. In practice, however, insolvency is the situation where an entity cannot raise
enough cash to meet its obligations, or to pay debts as they become due for payment. Properly called
technical insolvency, it may occur even when the value of an entity's total assets exceeds its total
liabilities.1 Insolvency law is often referred as the constitution of commercial laws and forms a key
component in the financial architecture of the country. Particularly for an emerging economy, the
existence of an efficient insolvency regime has vital economic ramifications. Investors draw
confidence from an insolvency system to take risks and make crucial economic decisions. Absence
of a well-functioning insolvency law can impact the availability of cost-effective credit, which is
often crucial to the sustainable development of an emerging economy. 2The functions of a corporate
insolvency regime are as follows:3

1
Insolvency, BusinessDictionary, http://www.businessdictionary.com/definition/insolvency.html.
2
SUMANT BATRA, CORPORATE INSOLVENCY – LAW AND PRACTICE XLIX (2017).
3
Corporate Insolvency Resolution Process under the Bankruptcy Code and its impact on Companies,
THECOMPANIESACT2013.COM, https://www.thecompaniesact2013.com/uploads/1481524464_ibc%20Article%201.pdf.
(i) It identifies the signs of insolvency at the earliest.

(ii) Initiates the insolvency process quickly.

(iii) Creates a collective platform of the stakeholders to enable them to take decisions about the
future of the distressed entity

(iv) Helps reorganization of the viable businesses;

(v) Sends the unviable businesses to liquidation at the earliest to arrest any substantial loss in value.

The journey of Indian insolvency reforms has been slow and incremental. The legal framework for
insolvency remained fragmented and ineffective for decades, even as reforms in the other areas of
economic laws moved rapidly after the liberalisation of the Indian economy in 1991. The key
principles that help in the formation of a sound insolvency law were either missing or fragmented.
The restructuring and liquidation proceedings were cumbersome and marred by lengthy court
processes. Average life of cases recommended for restructuring took between 4 to 8 years and those
recommended for winding up even longer, while it is only 1.7 years in high-income OECD
countries.4

CHAPTER I – THE CORPORATE INSOLVENCY RESOLUTION PROCESS

THE INSOLVENCY RESOLUTION PROCESS

The trigger point for commencement of CIRP is the occurrence of default. The resolution process
can be initiated by an applicant only after the corporate debtor commits a “default” by non-payment
of whole or any part or instalment of the amount of debt that has become due and payable. 5 The
minimum amount of the default of repayment of debt has to be Rs. 1,00,000. The Central
Government also has the power to specify a minimum amount of default higher than this but below a
ceiling of one crore rupees.6

As regards who may apply, the IBC prescribes initiation of the CIRP through an application by any
of the following:

(i) Financial creditor,

(ii) Operational creditor,
(iii) Corporate debtor
4
Study on Insolvency Systems in the Middle-East and North Africa, OECD,
https://www.oecd.org/daf/ca/corporategovernanceprinciples/44375185.pdf.
5
Section 3(12) of the Insolvency and Bankruptcy Code, 2016 [hereinafter ‘IBC, 2016’].
6
Section 4 of the IBC, 2016.

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Thus, it is evident that proceedings can be initiated both by creditor(s) or debtor. Financial creditor,
under the Insolvency Code “means any person to whom a financial debt is owed and includes a
person to whom such debt has been legally assigned or transferred to.”7Operational creditor, under
the Insolvency Code “means a person to whom an operational debt is owed andincludes any person
to whom such debt has been legally assigned or transferred.”8

While the term corporate debtor has not been defined expressly, the meaning of the term can be
ascertained on a perusal of the definitions of “corporate person” and “corporate applicant.”Corporate
applicant, has been defined as including:9

“(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorised to make an application for the
corporate insolvency resolution process under the constitutional document of the corporate debtor;
or

(c) an individual who is in charge of managing the operations and resources of the corporate
debtor; or

(d) a person who has the control and supervision over the financial affairsof the corporate debtor.”

A corporate person on the other hand means “company as defined in clause (20) of section 2 of the
Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of
section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with
limited liability under any law for the time being in force but shall not include any financial service
provider.”10

A perusal of the provisions shows that nothing in the code prohibits a corporate debtor in respect of
which a winding up order has been passed under the Companies Act, 2013 from filing insolvency
proceedings, or a corporate applicant or creditors of a corporate debtor in respect of a corporate
debtor in respect of which a liquidation order has been made under IBC from filing proceedings. 11 In
comparison, under the US Bankruptcy Code, there is no requirement of “insolvency” for a debtor
company to file for bankruptcy.12 The only requirement is that the application has to be made in
“good faith” and with the intention of reorganisation or to effect a liquidation or sale of the company,
7
Section 5(7) of the IBC, 2016.
8
Section 5(20) of the IBC, 2016.
9
Section 5(5) of IBC, 2016.
10
Section 3(7) of the IBC, 2016.
11
SUMANT BATRA, CORPORATE INSOLVENCY – LAW AND PRACTICE 203 (2017).
12
Id., at 204; Title 11 of the US Bankruptcy Code.

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which can be resisted by the creditors. Thus, in Sgl Carbon Corpn., re,13the Court dismissed the
company’s Chapter 11 case because of bad faith demonstrated by a lack of “reorganisation purpose”.
A large company may also be pushed into proceedings involuntarily if three creditors holding
unsecured noncontingent, undisputed claims aggregating more than $12300 file an involuntary
petition against the company and if the company is generally not paying its debts as they become
due.

The entire process may be summarised in the following steps:14

1. An Application for initiation of CIRP can be by any of the applicants mentioned above u/s 7/9/10
of the IBC.

2. Operational creditor needs to give demand notice of 10 days to corporate debtor before
approaching the NCLT. If corporate debtor fails to repay dues to operational creditor or fails to show
any existing dispute or arbitration, then the operational creditor can approach NCLT.15

3. Corporate insolvency process shall be completed within 180 days of admission of application by
NCLT. Upon admission of application by NCLT, Creditors’ claims will be frozen for 180 days,
during which time NCLT will hear proposals for revival and decide on the future course of action.
And thereupon, no coercive proceedings can be launched against the corporate debtor in any other
forum or under any other law, until approval of resolution plan or until initiation of liquidation
process.16

4. NCLT appoints an interim Insolvency Professional (IP) upon confirmation by the Insolvency and
Bankruptcy Board (hereinafter, “the Board”) within 14 days of acceptance of application. 17Interim IP
holds office for 30 days only. Interim IP takes control of the debtor’s assets and company’s
operations, collect financial information of the debtor from information utilities.

5. NCLT causes public announcement to be made of the initiation of corporateinsolvency process

and calls for submission of claims by any other creditors.

6. After receiving claims pursuant to public announcement, interim IP constitutes the creditors’
committee. All financial creditors shall be part of creditors’ committee and if any financial creditor is
related party of corporate debtor, then such financial creditor will not have any right of

13
200 F. 3d 154 (3rd Cir. 1999).
14
Supra note 4.
15
Section 8(2) and 9(1) of the IBC, 2016.
16
Sections 13 and 14 of the IBC, 2016.
17
Section 16(1) of the IBC, 2016.

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representation, participation or voting. Operational creditors should be part of Creditors’ Committee
(without voting right) if their aggregate dues are not less than 10% of the debt.

7. Creditors’ committee shall meet first within seven days of its constitution and decide by 75% of
votes either to replace or confirm interim IP as Resolution Professional.18

Thereupon, Resolution Professional is appointed by the NCLT upon confirmation by the Board. The
creditors’ committee, with a majority of 75% votes, can change Resolution Professional any time.

8. The creditors’ committee has to then take decisions regarding insolvency resolution by a 75%
majority voting.

9. Resolution Professional shall prepare information memorandum for the purpose of enabling
resolution applicant to prepare resolution plan.19 A resolution applicant means any person who
submits resolution plan to the resolution professional. And upon receipt of resolution plans,
Resolution Professional shall place it before the creditors’ committee for its approval.

10. Once a resolution is passed, the creditors’ committee has to decide on the restructuring process
that could either be a revised repayment plan for the company, or liquidation of the assets of the
company. If no decision is made during the resolution process, the debtor’s assets will be liquidated
to repay the debt.20

11. The resolution plan will be sent to NCLT for final approval, and implemented once approved.21

PRE-REQUISITES FOR THE INITIATION OF CIRP

By Financial Creditor –

Application to NCLT:

 Either by himself or jointly with other financial creditors when a default has occurred;22
 Form and Manner – Form 1; and copy of the Application has to be sent to the Registered
Office of Corporate Debtor via registered or speed post. 23 Where applicant is an assignee or

18
Section 21 of the IBC, 2016.
19
Section 25(2)(g) of the IBC, 2016.
20
Section 30 of the IBC, 2016.
21
Section 31 of the IBC, 2016.
22
Section 7(1) of the IBC, 2016.
23
Rule 4(3) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 [hereinafter ‘A3
Rules, 2016’].

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 transferee of financial contract, application with concerned agreement. 24 In application by
joint financial creditors, they may nominate one to act on their behalf.25
 Details to be furnished with the application26 –
(a) record of the default recorded with the information utility or such other
record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution
professional; and
(c) any other information as may be specified by the Board.

After Application Is Admitted:

 Proof of claim - Shall submit the same to Interim Resolution Professional in electronic form
in Form C of the Schedule.27 Existence of debt can be proved through records or other
documents like contract of service, invoice demanding payment, adjudication of Court or
financial statements.28

By Operational Creditor –

Notice:

 Occurrence of a default;
 Form of Notice - Deliver demand notice of unpaid operational debt (Form 3) or copy of an
invoice demanding payment of the amount involved in the default (Form 4) to the corporate
debtor,29 and a copy of the same has to be filed with information utility (if any);30
 Delivery - can be by registered post by hand, registered post or speed post, by e-mail to
Whole time Director or designated partner or key managerial personnel of Corporate
Debtor;31

24
Rule 4(2) of the A3 Rules, 2016.
25
Rule 4(4) of the A3 Rules, 2016.
26
Section 7(3) of the IBC, 2016.
27
Regulation 8(1), of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016 [hereinafter ‘CIRP Regulations, 2016’].
28
Regulation 8(2) of the CIRP Regulations, 2016.
29
Section 8(1) of the IBC, 2016.
30
Rule 5(3) of the A3 Rules, 2016.
31
Regulation 5(2) of the CIRP Regulations, 2016.

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  Within 10 days of receipt of notice, the corporate debtor shall bring to the notice of the
operational creditor: (i) the existence of a dispute or commencement of arbitration
proceedings before receipt of said notice; or (ii) repayment of operational debt.32

Application to NCLT:

 Form - In Form 5; and copy of the Application has to be sent to the Registered Office of
Corporate Debtor via registered or speed post.33
 Details to be furnished with the application34 –
(a) a copy of the invoice demanding payment or demand notice delivered by the
operational creditor to the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate debtor
relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions maintaining accounts
of the operational creditor confirming that there is no payment of an unpaid operational
debt by the corporate debtor; and
(d) such other information as may be specified.
 Operational creditor may propose a Resolution Professional to act as Interim Resolution
Professional.

After Application Is Admitted:

 Proof of claim – Shall submit the same to Interim Resolution Professional in person, by post
or electronic means in Form B of the Schedule. 35 Existence of debt can be proved through
records or other documents like contract of service, invoice demanding payment, adjudication
of Court or financial statements.36

CHAPTER II – MORATORIUM PERIOD AND RESTRUCTURING

According to the Merriam Webster dictionary, Moratorium means a legally authorised period of
delay in the performance of a legal obligation or the payment of a debt. 37Modern forms of corporate
rehabilitation impose a freeze on right of creditors to proceed against the debtor. The essential

32
Section 8(2) of the IBC, 2016.
33
Rule 6(2) of the A3 Rules, 2016.
34
Section 9(3) of the IBC, 2016.
35
Regulation 7(1) of the CIRP Regulations, 2016.
36
Regulation 7(2) of the CIRP Regulations, 2016.
37
Moratorium, MERRIAM-WEBSTER, https://www.merriam-webster.com/dictionary/moratorium.

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objectives of an effective insolvency law are to protect the value of the insolvency estate against
diminution by the actions of the various parties to insolvency proceedings and facilitate
administration of those proceedings in a fair and orderly manner. The parties from which the estate
needs greatest protection are the debtor and its creditors. 38It is an accepted view that insolvency
proceedings require the interests of all the creditors to be protected against individual action by one
of them and thus, a stay of action by all creditors ensures that sanctity of collective proceedings is
preserved. Thus, the disturbance of creditor rights is temporary. The rights are merely delayed and
are reinstated if the rescue is successful so that the creditors, it is said, lose nothing.39

According to the World Bank, “A stay of actions by secured creditors also should be imposed in
liquidation proceedings to enable higher recovery of assets by sale of the entire business or its
productive units, and in reorganization proceedings where the collateral is needed for the
reorganization. The stay should be of limited, specified duration, strike a proper balance between
creditor protection and insolvency proceeding objectives, and provide for relief from the stay by
application to the court based on clearly established grounds when the insolvency proceeding
objectives or the protection of the secured creditor’s interests in its collateral are not achieved.
Exceptions to the general rule on a stay of enforcement actions should be limited and clearly
defined.”40

The Bankruptcy Law Reforms Committee has incorporated some of the World Bank
recommendations in its report and the same assists in constructing the legislative intent behind the
provision. It observed, “The motivation behind the moratorium is that it is value maximising for the
entity to continue operations even as viability is being assessed during the IRP. There should be no
additional stress on the business after the public announcement of the IRP. The order for the
moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or
expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity.
One of the goals of having an insolvency law is to ensure the suspension of debt collection actions by
the creditors, and provide time for the debtors and creditors to re-negotiate their contract. This
requires a moratorium period in which there is no collection or other action by creditors against
debtors.”41
38
UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation, UNCITRAL (Jan.,
2014), http://www.uncitral.org/pdf/english/texts/insolven/1997-Model-Law-Insol-2013-Guide-Enactment-e.pdf.
39
Philip R. Wood, Principles of International Insolvency, II INTERNATIONAL INSOLVENCY REVIEW(2013).
40
Principles for Effective Insolvency and Creditor/Debtor Regimes, WORLD BANK (2016),
http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor-Debtor-Regimes-2016.pdf.
41
Report of the Bankruptcy Law Reforms Committee, IBBI.GOV.IN (Nov. 2015),
http://ibbi.gov.in/BLRCReportVol1_04112015.pdf.

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The Supreme Court has observed that the intent behind the moratorium was “to provide the debtors
a breathing spell in which he is to seek to reorganize his business,” in other words, during the
moratorium period, no claim for recovery of debt (existing or new) can be pursued. Evidently, the
“calm period” is essentially provided so that the debtors can negotiate with the creditors to forego a
part of the debt or to restructure the payment schedule of the debt. During this “calm period”, no
judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or
termination of essential contracts can take place against the corporate debtor.42

The provisions in respect of moratorium are contained in Sections 13 and 14 of the IBC. Section 13
provides for passing of an order of moratorium by the NCLT after an application for commencement
of CIRP is admitted. It reads as follows:

“(1) The Adjudicating Authority, after admission of the application under section 7 or section 9 or
section 10, shall, by an order—

(a) declare a moratorium for the purposes referred to in section 14;

(b) cause a public announcement of the initiation of corporate insolvency resolution process and call
for the submission of claims under section 15; and

(c) appoint an interim resolution professional in the manner as laid down in section 16.

(2) The public announcement referred to in clause (b) of sub-section (1) shall be made immediately
after the appointment of the interim resolution professional.”43

Meanwhile, further details of the moratorium are provided under Section 14 of the IBC, which in
turn, reads as follows:

“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the
Adjudicating Authority shall by order declare moratorium for prohibiting all of the following,
namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate
debtor including execution of any judgment, decree or order in any court of law, tribunal,
arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or
any legal right or beneficial interest therein;

42
Innoventive Industries Ltd v. ICICI Bank Ltd, Civil Appeal Nos. 8337-8338 of 2017.
43
Section 13 of the IBC, 2016.

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(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor
in respect of its property including any action under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the
possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be
terminated or suspended or interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the
Central Government in consultation with any financial sector regulator.

(4) The order of moratorium shall have effect from the date of such order till the completion of the
corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the
Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an
order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect
from the date of such approval or liquidation order, as the case may be.”44

The position in India is however, different from other jurisdictions like the US and UK. In both of
these countries, moratorium is declared by the court on the date when the application is made and is
not conditioned on the acceptance of the application. This provisional protection enables the troubled
company to avoid drastic action by creditors and other interested parties in the period where the
application for administration has been presented but not yet granted by the court, or when an
administrator has been appointed but the appointment has to take effect due to relevant
requirements.45This remedy is not something that is unique in India. The Arbitration and Conciliation
Act also provides for provisional measures by the Court before the commencement of arbitral
proceedings.46Furthermore, Rule 11 of the NCLT Rules provides for the inherent powers of the
NCLT, in the following words: “Nothing in these rules shall be deemed to limit or otherwise affect
the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of
justice or to prevent abuse of the process of the Tribunal.”47Also, the Application to Adjudicating
Authority Rules, 2016 provides that application for commencement of insolvency proceedings shall

44
Section 14 of the IBC, 2016.
45
BATRA, supra note 13, at 245.
46
Section 9 of the Arbitration and Conciliation Act, 1996.
47
Rule 11 of the National Company Law Tribunal Rules, 2016.

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be filed in accordance with NCLT Rules. 48 In line with decisions of the Courts, the interim measures
could also be conditional, on a case to case basis.

Furthermore, since the purpose of the moratorium is, amongst other things, to suspend all pending or
fresh proceedings against the Corporate Debtor and to bar any encumbrance, sale, or alienation of its
assets, accordingly,once the application is admitted and a moratorium is declared, the financial
position of the Corporate Debtor must be transparent and crystallized. This suspension of
proceedings is essential as it stabilizes the assets of the Corporate Debtor thereby giving the creditors
clarity regarding the financial health of the Corporate Debtor and providing them a with a drawing
board to formulate a resolution plan. 49 There has emerged a divergence of opinion between the
Courts and the NCLT in this regard. While the Courts have broadly interpreted the same and held
that moratorium declared is in respect of proceedings against the guarantors of the corporate debtor.
Recently, the Allahabad HC held that proceedings against the guarantor of a Corporate Debtor before
a Debt Recovery Tribunal must be stayed in light of on-going proceedings against the Corporate
Debtor before the NCLT.50 In contrast, the NCLT has interpreted the terms of the IBC strictly and
held on numerous occasions that declaration of a moratorium does not stay proceedings against the
guarantors of the corporate debtor in other fora. In Alpha & Omega Diagnostics (India) Ltd. v Asset
Reconstruction Company of India Ltd. & Ors.,51 the NCLAT was faced with the question of whether
properties not owned by the Corporate Debtor would come within the scope of moratoriums under
the Code. The NCLT had earlier used principles of statutory interpretation to hold that the term “its”
under Section 14(1)(c) of the Code refers to the property of the Corporate Debtor. Accordingly, the
property not owned by the Corporate Debtor would not fall within the ambits of the moratorium
under the Code and the same was upheld by the NCLAT.This position has been adopted in similar
cases by the NCLAT.52

CHAPTER III – RESOLUTION PLAN AND ITS EFFECT ON RESTRUCTURING

Acentral element of corporate insolvency resolution process is the resolution plan, also commonly
referred to as the reorganisation or restructuring plan in few jurisdictions. A restructuring plan is the
tailpiece of the reorganisation proceedings, dealing with the pay out of a dividend in full and final
48
Rule 10(1) of the A3 Rules, 2016.
49
Guarantors and the Moratorium under the Bankruptcy Code: An On-going Battle, NISHITH DESAI ASSOCIATES (Sep.
15, 2017), http://www.nishithdesai.com/information/news-storage/news-details/article/guarantors-and-the-moratorium-
under-the-bankruptcy-code-an-on-going-battle.html.
50
Sanjeev Shriya v. State Bank of India and Ors., Civil Writ Petition No. 30285 of 2017.
51
Company Appeal (AT) (Insolvency) No. 116 of 2017.
52
Schweitzer Systemtek India Pvt. Ltd. v. Pheonix ARC Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 129
of 2017.

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settlement of all claims and the final structure of the business after the reorganisation is complete in
accordance with the terms laid down in it. It may be made binding by law or by a court order to the
various parties involved.53A restructuring proceeding culminates into a successful approval of the
reorganisation plan only when creditors are convinced that liquidation of the debtor is not in their
interest. Preparation of a plan for restructuring and their approval or rejection by the creditors
depends on various factors. In laws that provide for appointment of insolvency practitioners as
office-holders in insolvency proceedings, insolvency practitioner drives the process for preparation
and approval of plan.54

Under the IBC, the duties of a resolution professional are laid down as follows:

“(1) It shall be the duty of the resolution professional to preserve and protect the assets of the
corporate debtor, including the continued business operations of the corporate debtor.

(2) For the purposes of sub-section (1), the resolution professional shall undertake the following
actions, namely:

…(h) invite prospective lenders, investors, and any other persons to put forward resolution plans.”55

Thus, under the IBC, the approach is similar to the one in other jurisdictions with the only difference
being that the Resolution Professional (“RP”) does not prepare the plan. His/her duty is only to
receive any plan from any party, examine it to see whether it meets the standards under the IBC and
present it to the creditors committee along with any other plan. The fact that any person can submit a
resolution plan is evident from the definition of “resolution plan” under the IBC. It has been defined
as follows, “means a plan proposed by any person for insolvency resolution of the corporate debtor
as a going concern in accordance with Part II.”56

An information memorandum is a document prepared by the RP to which all Resolution Plans have
to conform to. In relation to restructuring, the RP must contain the following information:

“(a) assets and liabilities, as on the insolvency commencement date, classified into appropriate
categories for easy identification, with estimated values assigned to each category;

(b) the latest annual financial statements;

53
Supra note 40.
54
BATRA, supra note 13, at 414.
55
Section 25 of the IBC, 2016.
56
Section 5(26) of the IBC, 2016.

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(c) audited financial statements of the corporate debtor for the last two financial years and
provisional financial statements for the current financial year made up to a date not earlier than
fourteen days from the date of the application;

(d) a list of creditors containing the names of creditors, the amounts claimed by them, the amount of
their claims admitted and the security interest, if any, in respect of such claims;

(e) particulars of a debt due from or to the corporate debtor with respect to related parties;

(f) details of guarantees that have been given in relation to the debts of the corporate debtor by other
persons, specifying which of the guarantors is a related party;

(g) the names and addresses of the members or partners holding at least one per cent stake in the
corporate debtor along with the size of stake;

(h) details of all material litigation and an ongoing investigation or proceeding initiated by
Government and statutory authorities;

(i) the number of workers and employees and liabilities of the corporate debtor towards them;

(j) the liquidation value;

(k) the liquidation value due to operational creditors; and

(l) other information, which the resolution professional deems relevant to the committee.”57

Time-frames–The CIRP Regulations, 2016, provide that a resolution applicant shall endeavour to
submit a resolution plan prepared in accordance with IBC and CIRP Regulations to the RP, 30 days
before expiry of the maximum period permitted for the completion of the CIRP.58Before supplying
the information memorandum, the RP has to enter into a confidentiality agreement with it so as to
enable it in formulation of a proper plan and not run the risk of leak of vital information of a
company.

According to the CIRP Regulations, the Resolution Plan may provide for the following:

“(a) transfer of all or part of the assets of the corporate debtor to one or more persons;

(b) sale of all or part of the assets whether subject to any security interest or not;

(c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of
the corporate debtor with one or more persons;
57
Reg. 36(2) of CIRP Regulations, 2016.
58
Reg. 38(1) of the CIRP Regulations, 2016.

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(d) satisfaction or modification of any security interest;

(e) curing or waiving of any breach of the terms of any debt due from the corporate debtor;

(f) reduction in the amount payable to the creditors;

(g) extension of a maturity date or a change in interest rate or other terms of a debt due from the
corporate debtor;

(h) amendment of the constitutional documents of the corporate debtor;

(i) issuance of securities of the corporate debtor, for cash, property, securities, or in exchange for
claims or interests, or other appropriate purpose; and

(j) obtaining necessary approvals from the Central and State Governments and other authorities.”59

In case a resolution plan envisages substantial acquisition of shares, then the necessary compliances
with the SEBI Takeover Code norms and SAST Regulation which are applicable will have to be
adhered to. Any additional equity to be issued either to existing shareholders on Right basis or
preferential allotment to any Strategic Investor etc. or any proposed capital reduction the same has to
be compliant with the relevant provisions of Companies Act, as may be applicable. The above is in
contrast with the provisions as contained under SICA which empowered the BIFR to grant
exemption from complying with the SEBI Takeover norms and also the provisions of Companies Act
w.r.t. preferential allotment of shares or reduction of capital without complying with the applicable
provisions of the Companies Act 2013. Further, if the proposal envisages merger or consolidation, it
has to be ensured that such merger within the ambit of provisions of the Competition Act. For
instance, in case of a mergers where the combined Indian assets is worth over Rs.2000 crore or total
Indian turnover is more than Rs.5000 crore prior approval of the Competition Commission of India
(CCI) is required. Further, if the target Company has assets in excess of Rs.350 crore and turnover
exceeding Rs.1000 crore then too prior approval/permission from CCI is mandated. As such, the
resolution applicant has to be mindful of the above provisions of the law while preparing a
Resolution Plan.60

CASE ANALYSIS

59
Reg. 37(1) of the CIRP Regulations, 2016.
60
Nilesh Sharma, A Valid Resolution Plan – The Ideal Mix, MONDAQ (Aug. 23, 2017),
http://www.mondaq.com/india/x/622884/Insolvency+Bankruptcy/A+Valid+Resolution+Plan+The+Ideal+Mix.

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Recently, the Hyderabad-bench of the NCLT accepted the first Resolution Plan proposed under the
first petition under the IBC, albeit with some modifications.61

Facts –

The company,Synergies-Dooray Automotive Limited (“SDAL”), which manufactures alloy wheels

for cars, submitted its application to NCLT on January 23. This is the first case filed at any of the
NCLT benches, under the new insolvency code. The resolution plan was submitted by the company
on July 21, and accepted by the tribunal on August 2 - within the prescribed period of 180 days. 62Ms.
MamtaBinani was appointed as the Resolution Professional and is the applicant in the present dispute
and had filed an application against all the parties to the Corporate Insolvency Resolution Process
(i.e., corporate debtor and creditors). The present case arose for the approval of the resolution by the
National Company Law Tribunal (“NCLT”), as it was approved by a meeting of the Committee of
Creditors on 24 June 2017.63

Held –

The NCLT analysed the Resolution Plan which included the following –

(1) Amalgamation of SDAL and SCL;

(2) Payment of Insolvency Process costs above other debts;
(3) Payment to financial creditors along with interest over a period of 3 years;
(4) Payment of statutory dues;
(5) Payment to operational creditors;
(6) Resolution Applicant (SCL) is the lessee of SDAL and will continue to use and operate the
facilities of SDAL;
(7) Lesser cash outage, as Resolution Applicant (SCL) is one of the major financial creditors of
SDAL (since SCL has a 9.18% share of debts owed to the CoC, SCL is a major secured
lender); and
(8) Continued employment of SDAL’s workmen.

61
Varun Marwah, First Resolution Plan under the Insolvency Code accepted by the NCLT, BAR & BENCH (Aug. 3,
2017), https://barandbench.com/first-resolution-plan/.
62
NCLT approves first insolvency resolution plan under Insolvency & Bankruptcy Code, MONEYCONTROL.COM (Aug. 16,
2017), http://www.moneycontrol.com/news/trends/legal-trends/nclt-approves-first-insolvency-resolution-plan-under-
insolvency-bankruptcy-code-2361065.html.
63
Jayshree P. Upadhyay, NCLT okays first insolvency resolution scheme under IBC, LIVEMINT (Aug. 16, 2017),
http://www.livemint.com/Industry/qHRj0OlhehKDXFXFlckkoJ/NCLT-okays-first-insolvency-resolution-scheme-
underIBC.html.

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The NCLT reiterated the benefits of the multiple strategic and financial synergies of the Resolution
Plan, as the amalgamation of SDAL and SCL would benefit their aluminium alloy wheel
manufacturing business. The Resolution Applicant’s (SCL) previous record of optimizing synergies
and repaying the debtors has been seen in previous cases and the NCLT elucidated that more than
1500 families were dependant on this business, giving a reason for continuation of the business via
amalgamation with the Resolution Applicant (SCL). Hence, the NCLT approved the Plan, as it met
every legal and moral requirement.64

CHAPTER IV – SOME CONCERNS UNDER THE CODE

The Chairperson of the Insolvency and Bankruptcy Board of India (“IBBI”), Mr. M S Sahoo had
said that mergers and acquisitions might increase under the code. 65Inspite of these statements, there
are still some concerns which need to be addressed. They are as follows:66

(1) The problem of hostile promoters/management cannot be wished away

The admission of the corporate insolvency resolution process by the National Company Law
Tribunal (NCLT) signals the commencement of the asset sale process under the Bankruptcy Code.
At this point, the insolvency resolution professional (IRP) is appointed and essentially takes over the
reins of the corporate borrower, superseding existing management. The IRP is a nominee of the
creditors, so this process of putting the creditor in control may result in management losing interest
in the sale process or turning “hostile”, leading to severe inconsistencies in the flow of information
on the corporate debtor and the true extent of its assets and liabilities. This may impede the price
discovery process as well as potentially discourage bidders from offering acquisition proposals.

There is ambiguity on whether a sale under the Bankruptcy Code will trump the requirements under
the Companies Act. For instance, where the acquisition involves several corporate
actions/shareholder approvals e.g., issuance of new shares to an acquirer, so that it can inject new
funds into the defaulting company to revive it and get majority ownership—there are question marks

64
Enakshi Jha, An Analysis of the First Insolvency Resolution Scheme under the Insolvency and Bankruptcy Code, INDIAN
CORPORATE LAW BLOG (Aug. 19, 2017), https://indiacorplaw.in/2017/08/analysis-first-insolvency-resolution-scheme-
insolvency-bankruptcy-code.html.
65
Veena Mani, M&As to increase under insolvency code, says IBBI chief M S Sahoo, SMARTINVESTOR.IN (Jul. 17, 2017),
http://smartinvestor.business-standard.com/market/story-471034-storydet
MAs_to_increase_under_insolvency_code_says_IBBI_chief_M_S_Sahoo.htm#.WaQ98ygjHIU.
66
Kartick Maheshwari, Mergers and acquisitions under Bankruptcy Code: some concerns, LIVEMINT (Apr. 5, 2017),
http://www.livemint.com/Opinion/XhU7eXX6xGATjdpRSUyRIN/Mergers-and-acquisitions-under-Bankruptcy-Code-
some-concern.html; Mergers and Acquisitions under Bankruptcy Code: Some concerns, SUNCAP INSOLVENCY AND
PROFESSIONALS PVT. LTD. (Apr. 6, 2017), http://suncapira.co.in/mergers-and-acquisitions-under-bankruptcy-code-some-
concerns/.

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whether the NCLT’s approval for such action suffices, or whether the requirement of a special
resolution of shareholders under the Companies Act still applies. The special resolution may not be
forthcoming in situations where existing promoters are not sufficiently incentivized, and will require
acquirers to explore other means of taking control of defaulting corporate entities.

(2) Freeze on M&A during the moratorium period

In the period after the NCLT admits and kick-starts the insolvency resolution process, the corporate
debtor will be precluded from selling its businesses/related assets until the expiry of a moratorium
period of 180 days (extendable by a further period of 90 days), or until a sale process is approved by
the NCLT. Such a forced time gap could result in deterioration in the value of the assets of the
borrower and in some cases, business of the corporate debtor. One way of avoiding such a “melting
ice-cube” situation would have been to permit “pre-pack” arrangements, which allow the sale of at
least a part of a company’s business or assets to an identified purchaser at a price negotiated prior to
(or simultaneously with) the commencement of the bankruptcy process by the NCLT. Such “pre-
pack” arrangements have been popular in international jurisdictions, but are not allowed under the
Bankruptcy Code.

(3) No stamp duty relaxation

There is no exception for payment of stamp duty and other statutory costs in relation to acquisition of
assets under the Bankruptcy Code. Acquirers will, therefore, need to appropriately factor this cost
into their financial model, and where possible, modify their transaction structure for efficiency.

(4) Questions over continuity of business

Any acquisition of assets by a buyer under the Bankruptcy Code—even though sanctioned by the
NCLT—may not result in automatic transfer of government consents, licenses, customer and third-
party contracts. Accordingly, a steel plant acquired via this process will not follow suit with the iron
ore mining lease attached to it (or for that matter, a captive coal mine attached to a power plant, or
the spectrum associated with a telecom asset); with the buyer needing to separately negotiate the
transfer of the relevant government concession/license to itself. This is bound to create deal
uncertainty in situations where highly regulated businesses are subjected to insolvency proceedings
e.g., likelihood of the government approval coming through, increase in fees/premium payable to the
government; and buyers would be well advised to plan for regulatory intervention well in advance of
submitting any acquisition offer.

(5) Creditor decision making, problem of plenty

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For a sale of a business under the Bankruptcy Code, 75% of the creditors’ committee must approve
such a plan. This is a high threshold, especially compared to the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, which requires approval
only of 60% of secured creditors; and the Bankruptcy Code does not distinguish between a secured
creditor and an unsecured creditor on voting rights in the committee. Such parity of status could
result in delay/multiple voices on the table, and incentivise the secured creditors to only seek the best
possible deal for themselves—outside of the Bankruptcy Code process, and to the exclusion of the
unsecured creditors. As such, unless buyers are confident of coordination and consensus among
creditors, they may be wary of investing time and effort in such situations.

(6) No timeline for disposal of appeals

While section 12 provides a period of 180 days for the corporate resolution insolvency process there
are no timelines prescribed within which the NCLT is required to approve or reject a resolution plan.
Similarly, there are no timelines prescribed for disposal of appeals. Therefore, the ultimate resolution
could still be a long-drawn process.67

(7) High cost of Bankruptcy Resolution Process

The IBC adopts the UK bankruptcy regime. Studies conducted in the UK on their bankruptcy regime
reveal that while adoption of the IRP model resulted in higher realizations, they also correspondingly
increased costs of bankruptcy and may not materially improve creditor recoveries.68

(8) Synchronization of Current Restructuring Schemes with the Code

In terms of the applicable RBI regulations, the restructuring schemes such as JLF, SDR and S4A and
sale of distressed assets do not require the involvement of the foreign lenders as they are not RBI
regulated, hence not part of those processes. This would be an unsatisfactory situation vis-à-vis the
foreign lender as these restructuring processes may not resolve the issues of the foreign debt. Under
IBC, if the conditionsare met, the offshore creditor can bring everyone to the table, and undermine
anyongoing onshore process. The RBI needs to suitably align these restructuring schemes with the
Code.69

CONCLUSIONS

67
Insolvency and Bankruptcy Code, 2016, HSA Advocates, http://www.hsalegal.com/wp-
content/uploads/2017/04/Insolvency-and-Bankruptcy-Code-2016_066217.pdf.
68
Id.
69
Id.

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It is evident that the entry of the Insolvency and Bankruptcy Code, 2016 is a step in the right
direction by the government. Currently, one of the biggest issues holding the economy back is that of
Non-Performing Assets (NPAs) and bad loans. Accordingly, lenders are wary of fresh lending and
due to the vast multiplicity of laws and fora, the restructuring exercises undertaken towards debt
resolution are onerous and long-drawn. The IBC, by mandating the completion of the resolution
process within 180 days (with maximum of 270 days), and also including provisions for fast-track
resolution of certain entities, has removed one of the difficulties of the resolution process. Generally
speaking, corporate restructuring, which is one of the most resorted to practices in debt resolution,
has been aided greatly by the IBC. However, there are certain teething issues that still remain to be
addressed. One of the greatest drawbacks of the IBC is the absence of operational creditors from the
Committee of Creditors to be constituted under the Code. Furthermore, pre-pack arrangements,
which are relatively common among other jurisdictions, are notably absent in India and have in fact,
been prohibited under the IBC. Thus, it would suffice to say that the IBC is definitely a step in the
right direction as it does speed up the entire process of M&A as part of the Corporate Insolvency
Resolution Process because it lays down the contents of an information memorandum and a
resolution plan and mandates the safeguarding of the assets through the declaration of a moratorium,
which also ensures equal treatment of all creditors and claimants on the properties, etc. of the
corporate debtor. However, there still remain a few issues which need to be resolved expeditiously so
as to enable the Tribunals to resolve the bad loans and NPA issues smoothly and in accordance with
equity.

BIBLIOGRAPHY

This project report would not have achieved its objectives without the following authorities:

 ACTS/RULES/REGULATIONS
1) Insolvency and Bankruptcy (Applicationto Adjudicating Authority) Rules, 2016.
2) Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016.
3) The Arbitration and Conciliation Act, 1996
4) The Insolvency and Bankruptcy Code, 2016.

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 BOOKS
1) SUMANT BATRA, CORPORATE INSOLVENCY – LAW AND PRACTICE (2017).

 CASES
1) Alpha & Omega Diagnostics (India) Ltd. v Asset Reconstruction Company of India Ltd. &
Ors., Company Appeal (AT) (Insolvency) No. 116 of 2017.
2) Innoventive Industries Ltd v. ICICI Bank Ltd, Civil Appeal Nos. 8337-8338 of 2017.
3) Sanjeev Shriya v. State Bank of India and Ors., Civil Writ Petition No. 30285 of 2017.
4) Schweitzer Systemtek India Pvt. Ltd. v. Pheonix ARC Pvt. Ltd. & Ors., Company Appeal
(AT) (Insolvency) No. 129 of 2017.
5) Sgl Carbon Corpn., re, 200 F. 3d 154 (3rd Cir. 1999).

 WEBPAGES
1) http://smartinvestor.business-standard.com/market/story-471034-storydet
MAs_to_increase_under_insolvency_code_says_IBBI_chief_M_S_Sahoo.htm#.WaQ98ygjH
IU.
2) http://suncapira.co.in/mergers-and-acquisitions-under-bankruptcy-code-some-concerns/.
3) http://www.businessdictionary.com/definition/insolvency.html.
4) http://www.ey.com/Publication/vwLUAssets/ey-interpreting-the-insolvency-and-bankruptcy-
code/$FILE/ey-interpreting-the-insolvency-and-bankruptcy-code.pdf.
5) http://www.hsalegal.com/wp-content/uploads/2017/04/Insolvency-and-Bankruptcy-Code-
2016_066217.pdf.
6) http://www.livemint.com/Industry/qHRj0OlhehKDXFXFlckkoJ/NCLT-okays-first-
insolvency-resolution-scheme-underIBC.html.
7) http://www.livemint.com/Opinion/XhU7eXX6xGATjdpRSUyRIN/Mergers-and-acquisitions-
under-Bankruptcy-Code-some-concern.html;
8) http://www.mondaq.com/india/x/622884/Insolvency+Bankruptcy/A+Valid+Resolution+Plan
+The+Ideal+Mix.
9) http://www.moneycontrol.com/news/trends/legal-trends/nclt-approves-first-insolvency-
resolution-plan-under-insolvency-bankruptcy-code-2361065.html.
10) http://www.nishithdesai.com/information/news-storage/news-details/article/guarantors-and-
the-moratorium-under-the-bankruptcy-code-an-on-going-battle.html.
11) https://barandbench.com/first-resolution-plan/.

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12) https://indiacorplaw.in/2017/08/analysis-first-insolvency-resolution-scheme-insolvency-
bankruptcy-code.html.
13) https://www.merriam-webster.com/dictionary/moratorium.
14) https://www.oecd.org/daf/ca/corporategovernanceprinciples/44375185.pdf.
15) https://www.thecompaniesact2013.com/uploads/1481524464_ibc%20Article%201.pdf.

 ARTICLES/ RESEARCH PAPERS

1) Philip R. Wood, Principles of International Insolvency, II INTERNATIONAL INSOLVENCY
REVIEW (2013).

 MISCELLANEOUS DOCUMENTS

1) Principles for Effective Insolvency and Creditor/Debtor Regimes, WORLD BANK (2016),
http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor-
Debtor-Regimes-2016.pdf.
2) Report of the Bankruptcy Law Reforms Committee, IBBI.GOV.IN (Nov. 2015),
http://ibbi.gov.in/BLRCReportVol1_04112015.pdf.
3) UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and
Interpretation, UNCITRAL (Jan., 2014),
http://www.uncitral.org/pdf/english/texts/insolven/1997-Model-Law-Insol-2013-Guide-
Enactment-e.pdf.
4) World Bank Principles for Effective Insolvency and Creditor Rights Systems,
www.worldbank.org/gild.

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