India

The most commonly used insolvency procedures are the following procedures prescribed under the IBC:

• the Corporate Insolvency Resolution Process (CIRP); and
• the corporate liquidation process.

An insolvent company also has the option of concluding its affairs through:

• winding up under the Companies Act, 2013 (CA 2013); or
• voluntary liquidation under the IBC.

However, we do not delve into these in detail as they do not strictly encompass an “insolvency and restructuring” mechanism.

Corporate Insolvency Resolution Process under IBC

The CIRP under the IBC follows a “creditor-in-possession” model in which the creditors assume control of the company under the aegis of the resolution professional (RP). During this process, a “committee of creditors” (CoC) is formed, which assesses and approves strategies to resolve financial distress, preserve business operations, and restructure the corporate debtor (CD) by inviting, assessing and approving bid(s) or “resolution plan(s)” from “resolution applicants” interested in taking over management and control of the CD, and its operations and assets. The CIRP can be initiated by financial creditors, operational creditors or by the CD itself.

Once the CoC approves a resolution plan, it is presented for approval to the National Company Law Tribunal (NCLT) and, once approved, it is subsequently binding on all stakeholders (including the government and any objectors or dissenters). If no resolution plan is approved within the prescribed time limit, the NCLT commences liquidation proceedings against the CD.

As discussed below in Question 2, the IBC also contains a tailored insolvency resolution procedure for micro, small or medium enterprises (MSMEs), known as the Pre-Packaged Insolvency Resolution Process (PPIRP), as well as fast-track resolution procedures catered towards small companies and start-up companies.

Corporate liquidation procedure under IBC

The IBC also provides for processes for liquidation of the CD in case it fails to meet its financial obligations. The CD can undergo liquidation under the IBC either voluntarily or in case of a failure of the CIRP. Under liquidation, with the sanction of the NCLT, an RP assumes the role of the liquidator and proceeds to conduct the liquidation process. The liquidator sells the assets of the CD and distributes the proceeds to the stakeholders as per a waterfall mechanism prescribed under § 53 of the IBC. Once all claims are settled, the liquidator makes an application for dissolution of the company before the NCLT.

The IBC provides the framework for restructuring which, in respect of companies, is referred to as the CIRP. When the CIRP of a company (known as the CD) is initiated, a moratorium under § 14 of the IBC is simultaneously imposed.

The moratorium has effect from the date the CD is admitted into CIRP, until the completion of the CIRP. The moratorium protects CDs from other creditors by prohibiting initiation or continuation of proceedings against the CD; encumbrance or alienation of assets and rights of the CD; action to foreclose any security interest of the CD; recovery of any property which is in the CD’s occupation; and suspension or termination of essential goods and services of the CD.

Importantly, the Supreme Court in China Development Bank v. Doha Bank, 2024 INSC 1029 has clarified that while the moratorium places an embargo on recovery of dues from the CD, it does not extinguish the claims of creditors.

However, certain proceedings, such as proceedings under criminal law, proceedings under the Constitution of India and proceedings against the guarantors of the CD are excluded from the ambit of the protection provided by the moratorium.

The IBC also contains the PPIRP, exclusively for MSMEs. The PPIRP is a debtor-friendly process as, in contrast to CIRP, it envisages a “debtor-in-possession” model. In PPIRP, instead of appointing an RP to manage the assets, the CD itself monitors its operations and manages its assets. However, similar to a CIRP, the protection of a moratorium is also available to CDs under PPIRP under § 54E of the IBC.

A pre-insolvency debtor-in-possession restructuring regime is provided for under the CA 2013, which may be utilised for debt restructuring. The CA 2013 permits companies to enter into a “scheme of arrangement” or “compromise” with creditors and/or shareholders, which allows debtors an option of restructuring and potentially avoiding insolvency under the IBC.

3.1 What are the conditions to entry?

Under § 230 of the CA 2013, a company or its creditors may approach the Adjudicating Authority, i.e., the NCLT, seeking sanction for a compromise or arrangement with its creditors. For a corporate debt restructuring scheme to be approved, it must fulfil applicable procedural requirements and receive the consent of at least 75% of the creditors (by value) with whom the arrangement is proposed.

3.2 Can creditor claims be compromised “within a class”?

Creditor claims can be compromised within a specific class. The CA 2013, § 230(1), allows a compromise or arrangement to be proposed between a company and its creditors “or any class of them”. The necessary consent is to be obtained from a majority of persons representing three-fourths in value of the creditors within that class. If the proposed arrangement impacts the rights and interests of any other class of creditors, a similar threshold of consent would be required from that class as well.

3.3 Is there a “cross-class cramdown”?

The CA 2013 does not recognise cross-class cramdown in pre-insolvency restructuring. As per § 230(6) of the CA 2013, the scheme must be approved by each “class of creditors”. Therefore, where the rights or interests of more than one class of creditors are affected by a proposed scheme of arrangement, approval of each of those classes of creditors would be required.

3.4 Can shareholder claims be compromised?

The CA 2013, § 230, enables a company to propose a compromise or arrangement with its shareholders as well. The scheme may provide for modification of claims of shareholders, including their equity or preference rights or obligations, and may involve reduction of share capital, issuance of new shares, or cancellation of existing shares.

3.5 Can secured creditors’ claims be compromised? Are deficiency claims treated differently?

An arrangement or compromise, if approved, may be reached between a company and its secured creditors being one of the “classes” of creditors of that company. The arrangement or compromise may include all amounts outstanding towards the creditors, whether or not arising out of deficiency claims, provided they are reflected in the books of accounts of the company.

3.6 Can creditors propose competing plans?

A scheme of compromise or arrangement may be proposed by the company, its creditors, or its members. Creditors do not have the option of proposing a competing scheme within the same NCLT process, where the right is limited to accepting or rejecting the proposed scheme. However, creditors do have the option of proposing a different scheme of compromise or arrangement, which could be separately presented to the NCLT for approval.

3.7 What level of court or other third-party supervision is there of the process(es)?

The compromise and arrangement scheme process mainly proceeds under the aegis of the NCLT, which acts in a supervisory capacity to ensure compliance with the statutory framework. The NCLT’s role is limited and it does not sit in appeal over the merits of the scheme, as held by the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries, (1997) 1 SCC 579.

In this process, sectoral regulators such as the Registrar of Companies, Ministry of Corporate Affairs, Income Tax Department, etc. are required to more closely scrutinise the compromise and arrangement scheme. In our practical experience, these regulators conduct a thorough review of the scheme and satisfying their objections/representations is imperative to obtain a final sanction for the scheme.

The IBC contains the provisions to undo the effect of any transaction, prior to the CIRP, undertaken with the objective of defrauding the creditors of the CD. These provisions are for the avoidance of preferential, undervalued, fraudulent and extortionate transactions, collectively known as PUFE transactions.

4.1 What is the applicable law that provides for clawback and/or antecedent transaction claims?

Under the IBC, avoidable transactions comprise three categories:

• preferential transactions (§ 43);
• undervalued transactions (§ 45); and
• extortionate credit transactions (§ 50).

4.2 What are the relevant “look-back” periods for claims?

4.3 Who can pursue the claims?

As per §§ 43(1), 47(1) and 50(1) of the IBC, only the RP or the liquidator can pursue the proceedings for avoidance of preferential transactions, undervalued transactions and extortionate credit transaction.

In Sahara India v. Nandkishor, 2022 SCC OnLine NCLAT 280, the National Company Law Appellate Tribunal (NCLAT) dealt with the question of whether the NCLT can classify any transaction as preferential on its own without the RP applying for the same. The NCLAT took note of § 43(1) of the IBC and observed that it is the responsibility of the RP or liquidator to determine if a CD has given preference in a transaction and that the NCLT on its own accord cannot classify a transaction as preferential.

4.4 What remedies are available and how do they operate in practice?

In respect of undervalued transactions, the NCLT may:

• reverse to the CD the transfer of any property;
• discharge any security interest created by the CD;
• require individuals who benefitted from the transaction to pay amounts to the liquidator or RP; or
• require payment of consideration.

In respect of extortionate transactions, the NCLT may:

• restore the CD’s position as it was prior to such transaction;
• set aside any debt created due to the transaction;
• modify the terms of the transaction;
• require any party to the transaction to repay any amount received by them; or
• require any security interest created as part of the transaction to be relinquished.

The Supreme Court of India in Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, has reiterated the aforesaid powers of the NCLT.

4.5 What defences are available?

As per § 43(3) of the IBC, for a CD to take the defence that a transaction is not “preferential”, it will need to establish that: (1) the transfer was made as part of the ordinary course of business of the CD or the transferee (i.e., transactions that are part of the regular flow of business, unremarkable, and arising from no special circumstances); or (2) the transfer creates a security interest in a property acquired by the CD and secures new value.

The Supreme Court in Jaypee Infratech (supra) has held that the word “or” in § 43(3) of the IBC should be interpreted as “Corporate Debtor and transferee”, meaning that both parties (i.e., the CD and the transferee) must engage in the transaction within their ordinary course of business or financial affairs for it to be exempt from being treated as preferential.

The phrase “ordinary course of business” was discussed by the NCLAT in GVR Consulting Services (P) Ltd. v. Pooja Bahry, 2023 SCC OnLine NCLAT 220. The NCLAT relied upon the UNCITRAL Legislative Guide on Insolvency Law and observed that the phrase “ordinary course of business” is used to identify what constitutes regular business activities. Examples of such routine payments include rent, utilities (like electricity and telephone), and payments for trade supplies.

4.6 Is there a general right of action in respect of transactions defrauding creditors or Actio Pauliana claims?

The IBC provides protection against fraudulent transactions executed before the commencement of the CIRP. The fraudulent transactions are classified as:

• transactions defrauding creditors (§ 49); and
• fraudulent trading or wrongful trading (§ 66).

4.7 Who can pursue the claims?

As per § 45(1) of the IBC, the RP/liquidator can pursue the proceedings for avoidance of undervalued transactions (which include within its scope transactions defrauding creditors under § 49). However, in case they fail to do so, § 47(1) of the IBC provides that a creditor or member or partner of the CD can pursue the proceedings.

As per § 66 of the IBC, the RP/liquidator can pursue the proceedings for avoidance of fraudulent trading or wrongful trading.

4.8 What remedies are available and how do they operate in practice?

As per § 49(1)(i) of the IBC, the NCLT by its order can restore the position of the CD as it existed before such transaction as if the transaction had not been entered into; and protect the interests of persons who are victims of such transactions.

As per § 66(1) of IBC, if it is found that any person has carried on the business of the CD with the intent to defraud creditors, then such person can be directed to make contributions to the assets of the CD.

As per § 66(2) of the IBC, directors of the CD are subject to personal liability if they fail to take reasonable steps to minimise the potential loss to the creditors when there is no possibility of avoiding the commencement of the CIRP. Such directors or partners may be liable to make contributions to the assets of the CD on the orders of the NCLT.

The NCLAT in Thomas George v. K. Easwara Pillai, CA(AT)(CH)(Ins) 293/2021 has held that the IBC does not provide any specific look-back period for fraudulent transactions. Therefore, the RP can examine any time before the insolvency commencement date to identify whether a fraudulent transaction occurred involving the CD.

4.9 What defences are available?

As per the proviso to § 49 of the IBC, the transactions are protected if they involve property acquired in good faith, for value, and without knowledge of the relevant circumstances from someone other than the CD, including any rights derived from such property.

In Jaypee Infratech (supra), the Supreme Court clarified that for the purposes of § 49 of the IBC, the NCLT may look at the intent to examine if an undervalued transaction was entered into to defraud the creditors. Additionally, persons who received a benefit from such a transaction in good faith, for value and without knowledge of the circumstances, cannot be required to return the benefit unless they were a party to the transaction.

The IBC does not specifically list the duties or liabilities of directors and managers of an insolvent company. For a CD undergoing a CIRP, they can be inferred from various provisions of the IBC, such as §§ 66, 69, 70, and 77A.

5.1 What are the duties of directors and managers?

As per § 17(1)(b) of the IBC, directors of the CD are suspended and give their powers to the resolution professional (RP). However, § 19(1) requires the suspended directors to provide assistance and cooperation to the IRP in the management of the affairs of the CD. 

Further, according to § 70 of the IBC, the directors or officers of the CD may be punished with imprisonment for a term between three and five years and/or with a fine between INR 1 lakh and INR 1 crore if they (amongst other things):

• do not disclose any information required by the IRP;
• do not deliver any property required to be delivered by the IRP; or
• do not deliver any books or papers required to be delivered by the IRP.

5.2 What claims can be brought against directors and managers arising from breaches of those duties?

While the directors or officers are ordinarily not personally liable for the CD’s obligations, civil sanctions may be imposed under § 66 of the IBC in relation to “fraudulent” or “wrongful” trading, as described above, Question 4.8.

5.3 Who can pursue the claims?

The claims discussed above in Question 5.2 are usually brought by the RP. However, other aggrieved parties, such as minority shareholders, creditors, or other stakeholders, may also initiate action against misconduct by the officers of the CD before the NCLT, provided they can establish their locus standi.

5.4 Do directors have, at any time, a strict obligation to file for insolvency and, if so, when does that arise?

According to the IBC, the directors are not mandated to commence insolvency proceedings at any stage. However, if the CD has committed a default, a corporate applicant (i.e., the CD or a person authorised or competent to act on its behalf) may file an application for initiation of a CIRP against itself under § 10 of the IBC.

5.5 Can directors and managers be found liable for the increase in sums owed to creditors after a company becomes insolvent?

No provision in the IBC imposes liability on the directors or managers for the quantum of dues or increased dues of the CD.

5.6 In what other circumstances can directors and managers be found liable directly to creditors of the company?

Directors and managers may be personally liable in cases where they have provided personal guarantees as security for the debt availed by the CD. However, personal liability of directors and managers in such situations would form the subject matter of a different legal proceeding to be initiated by the concerned creditor. This is because:

• there are different sets of provisions governing personal and corporate insolvency; and
• as a matter of Indian law, creditors are free to initiate legal proceedings against the CD, or its guarantors, or both, in the order they deem fit.

The Supreme Court of India in K. Paramasivam v. Karur Vysya Bank Ltd., 2022 SCC OnLine SC 1163 reiterated that a creditor may initiate a CIRP under the IBC against a guarantor without first suing the principal borrower.

Information utilities are entities registered under § 210 of the IBC that collect and disseminate financial data regarding companies to assist in restructuring processes. The data maintained by the information utilities can be accessed by the parties by specifically availing the services of an information utility.

6.1 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

Regulation 36 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IBBI (CIRP) Regulations”) provides for the requirement of a submission of information memorandum. Thus, for the purpose of an information memorandum, an office holder, like an RP, has the authority to access comprehensive information about the CD’s assets, financial matters, and records.

6.2 How is that information obtained in practice?

As per § 214(f) of the IBC, the information utilities are mandated to provide such information to any person specifically availing the services of an information utility and thus acting as a “user” under Regulation 2(1) of the IBBI (Information Utilities) Regulations, 2017. Further, the RP may obtain information through the books and records maintained by the CD and records maintained with the Registrar of Companies. In terms of § 19 of IBC, the RP may also seek information directly from the CD and its management. Lastly, it may seek information from the creditors who file claims in the insolvency proceeding of the debtor.

6.3 Can the court assist in obtaining that information and how does that work in practice?

The IBC provides for remedies for RPs in case the personnel of the CD do not extend assistance or cooperation as required of them under § 19 of the IBC. Punishment with imprisonment is prescribed by § 70 of the IBC, in case such personnel fail to provide the information required by the RP.

In Shailesh Chawla v. Vinod Kumar Mahajan, CA (AT) (Ins) 571/2020, the NCLAT held that the NCLT may issue directions to the personnel of the CD to cooperate with the RP in the collection of information. If the personnel of the CD fail to cooperate with the RP, the NCLT may make a recommendation to the IBBI to commence proceedings under § 70 read with § 236 of the IBC for misconduct.

The IBC does not contain any formal procedure for the recognition of office holders or insolvency professionals from other jurisdictions in matters of cross-border insolvency. Under §§ 234 and 235, the IBC provides for reciprocal arrangements with foreign countries for the applicability of the IBC in foreign jurisdictions, and sending a letter of request to a foreign country for securing assets of an Indian CD located outside India.

7.1 Is the UNCITRAL Model Law on Cross-Border Insolvency adopted?

The UNCITRAL Model Law has not been adopted in India formally. The Ministry of Corporate Affairs has released a comprehensive report, titled “Report of Insolvency Law Committee on Cross-Border Insolvency”, proposing a comprehensive framework for cross-border insolvency on the basis of the UNCITRAL Model Law. However, the proposed framework has not yet been implemented in India.

7.2 Is it possible to recognise office holders from other jurisdictions?

The current framework of the IBC does not contain any mechanism for directly recognising foreign office holders or administrators/insolvency professionals. However, courts and tribunals in India have demonstrated a willingness to recognise foreign insolvency professionals and office holders:

• In Toshiaki Aiba v. Vipan Kumar Sharma, 2022 SCC OnLine Del 120, the Delhi High Court recognised the ongoing bankruptcy proceedings in Japan and allowed administration and sale of properties in India based on the orders passed by the Supreme Court of Japan.
• In Jet Airways (India) Ltd. v. State Bank of India, CA(AT)(Ins) 707/2019, the NCLAT recognised a Dutch bankruptcy trustee as an equivalent to an RP under the IBC.
• In Mahmood Hussain Khan v. Madam Canisia Ceizar, AIR Online 2023 Tel 181, the Telangana High Court recognised the sale of Indian properties under Swiss insolvency proceedings as legitimate and permissible.

Although no such agreement is in force as of the date of writing, India may enter into a bilateral reciprocal agreement in terms of § 234 of the IBC, which may contain a procedure for the recognition of office holders and insolvency professionals of that country.

7.3 What is the process and what are the conditions for recognition?

Indian law currently does not provide for any framework for recognising foreign insolvency proceedings and foreign office holders.

7.4 What information can be obtained by office holders in respect of a debtor’s property, information and affairs?

As noted above, currently, there does not exist any specified framework for foreign office holders to seek information regarding a CD in proceedings under the IBC. Any permission to this effect can be specifically sought through the Indian courts, which may allow the foreign office holder to seek information, on the merits of the application.

7.5 What steps can a foreign office holder take to recover assets belonging to the debtor?

As discussed above, currently there exists no framework for a foreign office holder to directly recover assets belonging to an Indian debtor.

7.6 Is a foreign office holder able to bring clawback claims or fraudulent transaction claims?

The IBC does not allow for any clawback or fraudulent transaction claims to be brought by any person other than the RP appointed by the NCLT for the CD.

The licensing, regulation, and professional conduct of the insolvency officer holders/insolvency professionals (IPs) are governed by the provisions of the IBC and the rules and regulations framed by the Indian insolvency regulator, the IBBI.

8.1 Can a foreign office holder take appointments?

Since only individuals registered with the IBBI and enrolled with an insolvency professional agency can act as IPs in India, the eligibility is restricted to Indian residents at present.

8.2 What are the conditions for becoming an office holder?

As per § 206 of the IBC, only individuals enrolled as members of an insolvency professional agency and registered with the IBBI can act as IPs.

As per Regulation 4 of the IBBI (Insolvency Professionals) Regulations, 2016, an individual is eligible to become an IP in India if they:

• are a person resident in India;
• are not a minor;
• are solvent;
• are of sound mind;
• have the qualification and experience as specified by the IBBI under Regulation 5 of the IBBI (Insolvency Professionals) Regulations, 2016;
• have not been convicted of an offence involving imprisonment of more than six months, or for moral turpitude (and five years have not elapsed from the expiry of the sentence); and
• are a fit and proper person.

8.3 What are the main rules of professional conduct?

The First Schedule of the IBBI (Insolvency Professionals) Regulations, 2016 lays out the Code of Conduct for IPs. Some key features include:

• IPs must maintain honesty, impartiality, and independence.
• IPs must disclose any extant relationships with any of the stakeholders in a CIRP.
• IPs must not conceal any material information or knowingly make any misleading statement.
• IPs must ensure confidentiality of information relating to the CIRP.