Comprehensive Subject Guides

1 . WHAT IS INSOLVENCY AND RESTRUCTURING, AND WHY ARE THESE CONCEPTS CRITICAL IN THE INDIAN CORPORATE LANDSCAPE?

Insolvency refers to a financial condition where an individual, business, or entity is unable to meet its debt obligations as they become due. This can occur due to poor financial management, declining revenues, market disruptions, or external economic factors.

Restructuring, on the other hand, is a process undertaken by financially distressed entities to reorganize their debts, operations, or business structures to restore viability and avoid liquidation. It includes debt rescheduling, asset sales, mergers, and other strategic decisions aimed at financial recovery.

Importance of Insolvency and Restructuring in India

In India, insolvency and restructuring have gained significant importance due to economic growth, corporate expansion, and financial sector reforms. Some key reasons why these concepts are critical include:

Economic Stability

A structured insolvency resolution process ensures that businesses in distress do not cause systemic instability in the financial markets.

Creditor Confidence

A well-functioning insolvency framework provides clarity and assurance to creditors, investors, and financial institutions, promoting business investments.

Business Continuity

Through restructuring mechanisms, companies can rehabilitate and continue operations instead of facing outright liquidation, preserving jobs and economic value.

Efficiency and Timeliness

The Insolvency and Bankruptcy Code (IBC), 2016, has streamlined the insolvency resolution process, making it time-bound and transparent.

Protection of Stakeholders

Insolvency laws balance the interests of all stakeholders, including creditors, employees, and shareholders, ensuring a fair resolution process.

The introduction of the Insolvency and Bankruptcy Code (IBC), 2016, has revolutionized the insolvency landscape in India, replacing fragmented laws with a comprehensive and structured mechanism that facilitates quicker resolution, maximizes asset value, and improves the ease of doing business.

2 . WHICH KEY LAWS GOVERN INSOLVENCY AND RESTRUCTURING IN INDIA?

The Insolvency and Bankruptcy Code, 2016 (IBC) is the primary legislation governing insolvency and restructuring in India. It provides a unified framework for resolving financial distress in a time-bound manner.

The IBC covers:

R

Corporate Insolvency Resolution Process (CIRP) for companies and LLPs

R

Pre-packaged Insolvency Resolution Process (PIRP) for MSMEs

R

Liquidation Process if resolution fails

R

Personal insolvency and bankruptcy for individuals and partnerships

Other relevant laws include:

R

The Companies Act, 2013 – Governs schemes of arrangement and voluntary winding-up

R

SARFAESI Act, 2002 – Allows banks to recover secured debts without court intervention

R

The Recovery of Debts and Bankruptcy Act, 1993 – Provides mechanisms for financial institutions to recover debts

R

RBI’s Prudential Framework for Stressed Assets (2019) – Provides a framework for out-of-court restructuring

R

Banking Regulations Act, 1948: This sets out directions for the resolution or restructuring of distressed loans outside the framework of the Insolvency and Bankruptcy Code.

3. Does the Indian insolvency regime favour creditors or debtors? How does it compare to international standards?

The Indian insolvency framework, primarily governed by the Insolvency and Bankruptcy Code (IBC), 2016, is structured to strike a balance between creditor rights and debtor protection. However, in practice, it leans towards a creditor-driven approach, particularly favouring financial creditors.

Under the IBC, once the Corporate Insolvency Resolution Process (CIRP) begins, the debtor’s management is replaced by a Resolution Professional (RP), and decision-making power shifts to the Committee of Creditors (CoC), which consists mainly of financial creditors. The CoC has the authority to approve or reject resolution plans, making them the key decision-makers. Additionally, the moratorium period under Section 14 provides temporary relief to the debtor from recovery actions but ultimately benefits creditors by ensuring an organized and time-bound resolution process. The law also provides mechanisms for creditors to maximize recoveries through liquidation if resolution is not viable.

For operational creditors and other stakeholders, the IBC provides limited influence in the decision-making process, often leading to concerns about their treatment in resolution plans. Debtors have minimal control once CIRP is initiated, and promoters are barred from reclaiming control under Section 29A, which prevents defaulting promoters from bidding for their own company. However, in cases of pre-packaged insolvency resolution (available for MSMEs), debtors retain some control, allowing for a more balanced restructuring process.

Comparison with International Standards

United States (Chapter 11 Bankruptcy):

The U.S. model is more debtor-friendly, allowing management to retain control while restructuring. Companies can negotiate with creditors while continuing operations, unlike in India, where management is displaced.

United Kingdom (UK Insolvency Act):

The UK follows a creditor-driven model, similar to India, where administrators take control to protect creditor interests. However, the UK allows greater flexibility in restructuring plans.

European Union (EU Insolvency Framework):

EU laws emphasize business rescue and restructuring over liquidation, whereas India’s IBC, though designed for resolution, often results in liquidation due to procedural delays and lower recovery rates.

4. WHAT FORMAL RESTRUCTURING MECHANISMS ARE AVAILABLE UNDER INDIAN LAW?

Under Indian law, businesses facing financial distress have several formal restructuring mechanisms available to them. These mechanisms aim to ensure business continuity, maximize asset value, and provide creditors with an effective means of recovering their dues. The key restructuring mechanisms include:

a. Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC)

The Corporate Insolvency Resolution Process (CIRP) is a formal insolvency resolution process introduced under the Insolvency and Bankruptcy Code, 2016 (IBC). It provides a time-bound framework for financially distressed companies to restructure or resolve their debts. The primary objective of CIRP is to revive the company as a going concern or, if revival is not possible, to liquidate it in an orderly manner.

K

Key Features of CIRP:

Applicability

CIRP applies to corporate debtors with default amounts exceeding the prescribed threshold (currently ₹1 crore). It can be initiated by financial creditors, operational creditors, or the corporate debtor itself.

Moratorium

Once CIRP is initiated, an automatic moratorium is imposed, prohibiting creditors from taking legal actions or enforcing claims against the company.

Resolution Professional (RP)

A resolution professional is appointed to manage the company’s affairs and assist in the restructuring process.

Committee of Creditors (CoC)

The creditors form a committee that evaluates and approves resolution plans.

Time-bound Process

The resolution must be completed within 180 days (extendable up to 330 days) to ensure swift action.

Approval of Resolution Plan

A resolution plan must be approved by at least 66% of the CoC and the National Company Law Tribunal (NCLT).

If no resolution plan is approved within the specified timeline, the company proceeds to liquidation.

K

Key Features of PIRP:

Applicability

Available to MSMEs with default amounts between ₹10 lakh and ₹1 crore.

Debtor-In-Possession Model

Unlike CIRP, where a resolution professional takes over management, PIRP allows existing management to continue running the business while working on restructuring.

Pre-Negotiated Plan

The debtor, in consultation with creditors, prepares a resolution plan before applying to the NCLT.

Time-bound Process

PIRP must be completed within 120 days.

Approval Requirement

The pre-approved plan requires the consent of at least 66% of the financial creditors before submission to the NCLT.

PIRP offers a quicker and less disruptive alternative to CIRP, reducing litigation and resolution costs for MSMEs.

b. Pre-Packaged Insolvency Resolution Process (PIRP) – For MSMEs

The Pre-Packaged Insolvency Resolution Process (PIRP) was introduced through the Insolvency and Bankruptcy Code (Amendment) Act, 2021, specifically to provide a faster and cost-effective resolution mechanism for Micro, Small, and Medium Enterprises (MSMEs). This mechanism allows debtors and creditors to pre-negotiate a resolution plan before formally initiating insolvency proceedings.

c. Scheme of Arrangement under the Companies Act, 2013

A Scheme of Arrangement is a court-approved restructuring mechanism under Sections 230-232 of the Companies Act, 2013. It allows companies to restructure their liabilities, capital, or business operations through an agreement between the company and its stakeholders.

K

Key Features of a Scheme of Arrangement:

Applicability

Used for mergers, demergers, debt restructuring, or capital reduction.

Initiation

The scheme can be proposed by the company, creditors, or shareholders.

NCLT Approval

Requires sanction from the National Company Law Tribunal (NCLT).

Creditors' and Shareholders' Approval

Affected parties must approve the scheme by a majority representing 75% in value.

Flexibility

Unlike CIRP and PIRP, this mechanism is voluntary and does not necessarily indicate financial distress.

This process is widely used for corporate restructuring, amalgamations, and financial reorganization, providing companies with a customized and court-approved framework for restructuring.

5. WHAT IS THE STEP-BY-STEP PROCESS FOR INITIATING INSOLVENCY PROCEEDINGS UNDER THE IBC?

The Insolvency and Bankruptcy Code (IBC), 2016 outlines a clear and time-bound process for initiating insolvency proceedings. The process varies slightly for corporate debtors, individuals, and partnership firms, but this guide focuses on the Corporate Insolvency Resolution Process (CIRP) under Chapter II of the IBC.

Step 1: Filing an application to Initiate Insolvency Proceedings

Any of the following parties can initiate insolvency proceedings against a corporate debtor:

Financial Creditors (e.g., banks, financial institutions) – Section 7
Operational Creditors (e.g., suppliers, service providers) – Section 8&9
Corporate Debtor Itself (voluntary initiation) – Section 10

Key Requirements for Filing:

For Financial Creditors

Evidence of debt default (e.g., loan agreements, payment defaults).

For Operational Creditors

A demand notice must be sent to the debtor (Form 3 or Form 4), followed by filing an application if the default is not resolved within 10 days.

For Corporate Debtors

– A special resolution must be passed by the shareholders approving insolvency initiation

Step 2: Admission or Rejection of the Application

National Company Law Tribunal (NCLT) reviews the application within 14 days of filing.
If the application is complete, the NCLT admits it and declares a moratorium (a legal stay on pending claims and recovery actions).
If the application is incomplete, the NCLT may reject it, providing the applicant an opportunity to rectify defects within 7 days.

Step 3: Commencement of the Corporate Insolvency Resolution Process (CIRP)

Upon admission of the application:

Interim Resolution Professional (IRP) is appointed by the NCLT.
Moratorium comes into effect (suspending legal proceedings, debt enforcement, and asset transfers).
Public announcement is made to invite claims from creditors.

Step 4: Verification of Claims and Formation of the Committee of Creditors (CoC)

The IRP verifies all claims received from creditors within 7 days.
The Committee of Creditors (CoC) is formed, consisting of all financial creditors.
Operational creditors only participate if there is no financial creditor, but they do not have voting rights.

Step 5: Appointment of Resolution Professional (RP)

The CoC votes to either confirm the IRP as the permanent Resolution Professional (RP) or appoint a new one.
RP manages the debtor’s business during CIRP and facilitates the creation of a Resolution Plan.

Step 6: Submission and Approval of the Resolution Plan

Resolution applicants (including existing promoters or external bidders) submit a Resolution Plan.
The plan must provide for
- Payment of insolvency costs.
- Priority repayment of operational creditors.
- A strategy for reviving the company or maximizing value.
The CoC votes on the plan (requires 66% approval of voting share).

Step 7: NCLT Approval of the Resolution Plan

If approved by the CoC, the plan is submitted to the NCLT for final confirmation.
If approved by the NCLT, the plan is binding on all stakeholders.
If no plan is approved within 330 days (including extensions), the NCLT orders liquidation.

Step 8: Liquidation (if Resolution Fails)

If no viable plan emerges or the CoC decides on liquidation, the NCLT orders the liquidation of the corporate debtor.
A Liquidator is appointed to sell the debtor’s assets and distribute proceeds as per the IBC waterfall mechanism (Section 53).

Timelines under CIRP

Application Admission: Within 14 days of filing.
CIRP Process: To be completed within 180 days (extendable by 90 days, with a maximum cap of 330 days).

This structured and time-bound process under the IBC promotes speedy resolution, maximizes value, and ensures fair treatment of all stakeholders.

6. WHO IS AUTHORIZED TO INITIATE INSOLVENCY PROCEEDINGS, AND ON WHAT LEGAL GROUNDS?

In India, the following parties can initiate restructuring or insolvency proceedings under the Insolvency and Bankruptcy Code (IBC):

Financial Creditors (e.g., banks, NBFCs): They can initiate insolvency if the corporate debtor defaults on debt of ₹1 crore or more..
Operational Creditors (e.g., suppliers, employees): They can file insolvency applications if the debtor defaults on payments over ₹1 crore.

Corporate Debtor: The company itself can voluntarily initiate insolvency proceedings if it is unable to pay its debts.
Minimum Default: A default of ₹1 crore is required for the Corporate Insolvency Resolution Process (CIRP) to be initiated.

7. WHAT ARE THE KEY MILESTONES AND TIMELINES IN THE INSOLVENCY PROCESS?

The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, follows a structured and time-bound framework aimed at resolving financial distress faced by corporate entities. The process unfolds as follows:

Initiation of CIRP

The National Company Law Tribunal (NCLT) formally commences the CIRP upon receiving an application from a financial creditor, operational creditor, or the corporate debtor itself.

Appointment of Interim Resolution Professional (IRP):

Once the process is initiated, an Interim Resolution Professional (IRP) is appointed to take control of the debtor’s management, replacing the existing board of directors. The IRP is responsible for safeguarding assets and overseeing the continuation of business operations.

Formation of the Committee of Creditors (CoC):

After CIRP commencement, the IRP constitutes the Committee of Creditors (CoC), comprising all financial creditors. This committee plays a decisive role in the resolution process.

Confirmation or Replacement of IRP

At the first CoC meeting, creditors have the discretion to either confirm the IRP as the Resolution Professional (RP) or appoint a new one. The RP is responsible for driving the resolution process forward.

Eligibility Criteria for Resolution Applicants

To ensure that only credible applicants submit resolution proposals, the CoC sets specific eligibility standards, typically in line with Section 29A of the IBC, which restricts defaulting promoters and certain related parties from participating.

Invitation for Resolution Plans

After CIRP initiation, the RP, on behalf of the CoC, formally invites expressions of interest from prospective resolution applicants. This allows interested parties to indicate their willingness to submit a resolution plan.

Shortlisting of Applicants and Due Diligence

The RP conducts a thorough vetting process to ensure that applicants meet the eligibility requirements. A list of qualified resolution applicants is then prepared, and the CoC is informed.

Issuance of Information Memorandum

The RP provides an information memorandum and other relevant financial documents to the shortlisted applicants. This helps them formulate viable resolution plans.

Submission and Evaluation of Resolution Plans

Resolution plans submitted by eligible applicants must comply with IBC provisions. The CoC evaluates these proposals based on feasibility, financial viability, and the potential for reviving the debtor.

Approval of a Resolution Plan

If the CoC finds a resolution plan suitable, it is approved by a minimum of 66% voting share of financial creditors in the CoC. The RP then submits the approved resolution plan to the NCLT for final confirmation.

Judicial Approval by NCLT

The NCLT reviews the approved resolution plan to ensure compliance with the IBC and other applicable laws. Upon approval, the plan becomes legally binding on all stakeholders, and the company exits insolvency.

Timelines and Extensions:

The CIRP must be completed within 180 days from initiation. However, an extension of up to 90 days is permitted, making the total timeline 270 days. In cases of legal proceedings or complex cases, the process may extend further to 330 days, including all delays.

In a recent ruling, the Supreme Court of India clarified that the 330-day limit is not absolute. In exceptional circumstances, where genuine complexities or legal delays occur, the NCLT has the discretion to extend this timeframe beyond 330 days to ensure a fair resolution.

This process is designed to ensure timely debt resolution, maximize asset value, and promote business continuity while balancing the interests of creditors and stakeholders.

8. WHAT ARE THE IMMEDIATE LEGAL AND FINANCIAL REPERCUSSIONS OFCOMMENCING THE CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)?

When CIRP is initiated, the following immediate consequences occur:

Moratorium: Legal actions against the company are suspended, including recovery actions and lawsuits.
Resolution Professional (RP): An RP is appointed to take control of the company’s operations and finances.
Creditor Actions Frozen: Creditors cannot take independent action to recover debts.

Committee of Creditors (CoC): A committee of financial creditors is formed to evaluate and approve a resolution plan.
Time-Bound Process: The resolution must be completed within 180 days (extendable by 90 days). If unresolved, liquidation may follow.

9. WHAT ARE THE ROLES, RIGHTS, AND RESPONSIBILITIES OF VARIOUS STAKEHOLDERS, SUCH AS DEBTORS, DIRECTORS, CREDITORS, EMPLOYEES, AND OTHERS DURING RESTRUCTURING?

Corporate Debtor

The corporate debtor is at the centre of the restructuring process. Once insolvency proceedings begin, its management is replaced by a Resolution Professional (RP). However, the debtor has the right to voluntarily apply for restructuring under Section 10 and submit a resolution plan unless disqualified under Section 29A. The debtor must fully cooperate with the RP, provide financial records, maintain transparency with the Committee of Creditors (CoC), and continue business operations under RP’s supervision.

Directors of the Corporate Debtor

Once CIRP begins, the directors lose control over the company’s management. While they can attend CoC meetings, they do not have voting rights. They can, however, challenge CIRP initiation if they believe it was unfairly admitted. Their key responsibility is to hand over management to the RP and provide necessary financial details. If found guilty of fraudulent or wrongful trading, they may be held personally liable under Section 66 of the IBC.

Committee of Creditors (CoC)

The CoC is the primary decision-making body in the restructuring process, consisting mainly of financial creditors such as banks, NBFCs, and bondholders. CoC members have voting rights based on their debt exposure and can approve or reject a resolution plan with a 66% majority. They also have the authority to replace the Interim Resolution Professional (IRP) if needed. Their main responsibility is to ensure the best resolution outcome, whether through revival or liquidation, while acting in the collective interest of all creditors.

Secured Creditors

Secured creditors, such as banks and financial institutions, have a claim over the debtor’s assets. If they are financial creditors, they have voting rights in the CoC. In case the restructuring fails, they can enforce security outside CIRP under the SARFAESI Act. However, they must comply with the moratorium period, which restricts them from initiating separate recovery actions during CIRP.

Unsecured Creditors

Unsecured creditors include trade creditors, bondholders, and suppliers who do not have collateral backing their claims. They can submit their claims to the RP and may be included in the CoC if they qualify as financial creditors. They also have the right to object to unfair restructuring plans. However, they must ensure that their claims are accurately documented and submitted on time.

Operational Creditors

Operational creditors, including suppliers, vendors, employees, and government authorities, are those who provide goods, services, or statutory dues such as taxes. They can initiate CIRP if their dues exceed ₹1 crore and have a right to fair distribution in resolution or liquidation. To be considered, they must submit their claims with proper documentation. In some cases, they may be required to continue supplying essential goods and services necessary for the debtor’s survival.

Employees and Workmen

Employees and workmen fall under operational creditors and have the right to claim unpaid salaries and wages, which are given priority in the insolvency process. If they have substantial outstanding dues, they may participate in the resolution process. They are generally expected to continue working unless the company shuts down. If wages remain unpaid, they can raise concerns through the RP.

Insolvency Resolution Professional (IRP/RP)

The RP is responsible for managing the debtor’s operations during CIRP. They verify claims, invite resolution plans, and oversee the entire restructuring process. The RP has the authority to take control of the debtor’s assets and evaluate resolution applicants. Their primary duty is to ensure compliance with the IBC, conduct due diligence, and submit the CoC-approved resolution plan to the National Company Law Tribunal (NCLT) for final approval.

Each stakeholder plays a crucial role in determining whether the restructuring process leads to a successful resolution or liquidation. Their cooperation, transparency, and adherence to the IBC framework significantly influence the outcome.

10. UNDER WHAT CIRCUMSTANCES COULD DIRECTORS FACE PERSONAL LIABILITY IN INSOLVENCY?

Directors of a company undergoing insolvency proceedings can be held personally liable under the Insolvency and Bankruptcy Code (IBC), 2016, and other Indian laws if their actions contribute to financial distress or involve misconduct. Their liability primarily arises in the following circumstances:

Fraudulent Trading (Section 66(1) of IBC)

If directors carry out business with an intent to defraud creditors or engage in fraudulent activities before insolvency, the Adjudicating Authority (NCLT) can hold them personally liable. Fraudulent activities may include misrepresenting financial health, concealing liabilities, or diverting funds to personal accounts.

Wrongful Trading (Section 66(2) of IBC)

Directors may be held liable if they continue business operations recklessly when they knew (or ought to have known) that insolvency was inevitable. This applies when they fail to take preventive measures, worsening the financial condition of the company and harming creditors’ interests.

Fraudulent Preference and Undervalued Transactions (Sections 43 & 45 of IBC)

If directors approve transactions that unfairly Favor certain creditors, transfer assets below market value, or siphon off company funds before insolvency, these transactions can be reversed by the NCLT. Directors responsible for such transactions may face financial penalties and personal liability.

Misfeasance and Breach of Fiduciary Duty

Directors have a fiduciary duty to act in the best interest of the company and its creditors, especially when insolvency is imminent. If they misappropriate funds, engage in unauthorized transactions, or prioritize personal interests over creditors, they can be personally liable for losses caused.

Failure to Cooperate with the Resolution Professional (RP)

During insolvency proceedings, directors must cooperate with the Resolution Professional (RP) by providing all necessary records and financial documents. If they withhold information, mislead the RP, or refuse to comply with CIRP requirements, the NCLT can impose penalties, including personal liability.

11. WHAT ROLES DO THE RESOLUTION PROFESSIONAL AND THE COMMITTEE OF CREDITORS PLAY DURING INSOLVENCY?

Under the Insolvency and Bankruptcy Code (IBC), 2016, the Resolution Professional (RP) and the Committee of Creditors (CoC) play crucial roles in the Corporate Insolvency Resolution Process (CIRP). Their primary objective is to ensure a fair, transparent, and time-bound resolution process that maximizes value for all stakeholders.

Roles and Responsibility of the Resolution Professional (RP)

The Resolution Professional (RP) is an insolvency professional appointed to manage the debtor’s affairs during CIRP. Initially, an Interim Resolution Professional (IRP) is appointed, who may later be confirmed or replaced by the CoC.

Taking Over Management of the Corporate Debtor
- Assumes control of the company’s operations.
- Suspends the powers of the Board of Directors.
- Prevents the transfer of assets to ensure value preservation.
Initiating the Moratorium
- Ensures a moratorium (legal stay) on debt recovery and litigation during CIRP.
Public Announcement and Claims Verification
- Issues a public notice inviting claims from creditors.
- Verifies and classifies claims (Financial, Operational, and other creditors).
Committee of Creditors (CoC)
- Identifies financial creditors and constitutes the CoC, which takes key decisions in CIRP.
Managing Business Operations
- Ensures the corporate debtor continues operating as a going concern.
- Seeks CoC approval for transactions beyond ordinary business.
Facilitating Resolution Plan Submission
- Invites and evaluates Resolution Plans from interested parties.
- Ensures plans comply with IBC requirements before presenting them to the CoC.
Reporting to the NCLT
- Regularly updates the National Company Law Tribunal (NCLT) on the CIRP progress.
- If no resolution plan is approved, recommends liquidation of the corporate debtor.

The Resolution Professional (RP) acts as the process administrator, managing the debtor’s affairs and facilitating resolution.

Role and Responsibilities of the Committee of Creditors (CoC)

The CoC consists of financial creditors who hold voting power and make key decisions in the CIRP. Operational creditors are invited to meetings but do not have voting rights unless there are no financial creditors.

Appointment of the RP
- Confirms or replaces the Interim Resolution Professional (IRP).
Approval or Rejection of the Resolution Plan
- Ensures a moratorium (legal stay) on debt recovery and litigation during CIRP.
Key Business Decisions
- Approves any critical business decisions during CIRP (e.g., interim financing, asset sales).
Monitoring the RP’s Actions
- Ensures the RP follows due process and protects creditors’ interests.
Voting on Liquidation
- If no viable resolution plan is received, CoC can vote for liquidation with a 66% majority.

The Committee of Creditors (CoC) plays a decisive role in approving the resolution plan or opting for liquidation.

Together, the RP and CoC ensure a fair and transparent insolvency resolution process that maximizes value for all stakeholders.

12. WHAT ARE THE CRITICAL DIFFERENCES BETWEEN RESOLUTION AND LIQUIDATION OUTCOMES?

When a company undergoes insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016, it can result in either resolution or liquidation. Here are the critical differences:

Objective
- Resolution aims to revive the corporate debtor as a going concern.
- Liquidation results in winding up the company and selling its assets.
Process
- In resolution, a Resolution Plan is submitted by interested parties, approved by the Committee of Creditors (CoC), and finalized by the NCLT.
- In liquidation, assets are sold under a structured process, and proceeds are distributed as per the IBC waterfall mechanism.
Control of the Company
- Under resolution, management is temporarily transferred to the Resolution Professional (RP) and later to the successful resolution applicant.
- Under liquidation, the Liquidator takes control, and the company ceases operations.
Impact on Stakeholders
- Resolution allows creditors to recover a higher percentage of their dues and helps employees retain jobs if the business continues.
- Liquidation often results in lower recoveries for creditors, and employees lose their jobs.

Timeframe
- The resolution process must be completed within 330 days (including extensions).
- Liquidation does not have a strict deadline but usually takes longer.
Moratorium
- Under resolution, a moratorium continues throughout the Corporate Insolvency Resolution Process (CIRP) to protect the company from legal proceedings.
- Under liquidation, the moratorium ends once liquidation is ordered, and recovery actions can proceed.
Outcome for Creditors
- Resolution generally leads to a better recovery rate for creditors.
- Liquidation follows a payment hierarchy where secured creditors, workmen, and employees get priority, but recoveries are usually lower.
Company’s Legal Existence
- If a resolution plan is approved, the company survives and continues operations.
- After Liquidation, the company is dissolved permanently.

Resolution is preferred as it preserves business value, saves jobs, and ensures better creditor recovery.

Liquidation is the last resort, taken when resolution efforts fail.

The IBC framework prioritizes resolution over liquidation to maximize asset value and keep viable businesses running.

13. HOW DOES THE RESTRUCTURING PROCESS DIFFER FROM INSOLVENCY PROCEEDINGS UNDER INDIAN LAW?

Restructuring and insolvency proceedings are two distinct mechanisms available to financially distressed businesses in India. While both aim to resolve financial distress, they differ in purpose, process, and legal framework.

Definition and Objective

- Restructuring: A voluntary process where a company reorganizes its debts and operations to improve financial health while continuing operations. The goal is to prevent insolvency.
- Insolvency Proceedings: A formal process under the Insolvency and Bankruptcy Code (IBC), 2016) initiated when a company defaults on payments. The aim is to resolve insolvency or liquidate the company.

Legal Framework

Restructuring is governed by multiple laws, including:
- RBI’s Prudential Framework for Stressed Assets (for banks and NBFCs).
- Scheme of Arrangement under Companies Act, 2013 (Section 230-232).
- One-Time Settlements (OTS) and debt restructuring schemes between companies and lenders.
Insolvency Proceedings fall under the IBC, 2016, which provides a structured, time-bound Corporate Insolvency Resolution Process (CIRP).

Initiation and Control

Restructuring:
- Initiated voluntarily by the debtor in agreement with creditors.
- The existing management retains control and negotiates terms with lenders.
Insolvency Proceedings:
- Initiated by creditors (financial/operational) or the corporate debtor in case of default.
- Control shifts to a Resolution Professional (RP), and the Committee of Creditors (CoC) makes key decisions.

Process

Restructuring

- Negotiation-driven and may involve debt rescheduling, interest reduction, asset sales, or mergers.
- Can be informal (bilateral agreements) or formal (under the Companies Act).

Insolvency Proceedings:
- A structured legal process involving admission by the National Company Law Tribunal (NCLT).
- A moratorium is imposed, and the CoC decides whether to approve a resolution plan or liquidate the company.

Outcome

Restructuring

- Focuses on business revival and maintaining operations.
- Debt is modified but the company continues as a going concern.

Insolvency Proceedings:
- Leads to either resolution (if a viable plan is approved) or liquidation (if resolution fails).

Impact on Creditors

- Restructuring: Creditors may take a haircut (partial loss on dues) but usually recover more compared to insolvency proceedings.
- Insolvency Proceedings: Creditors recover dues based on a priority system, with secured creditors getting preference over others. Recovery rates are often lower than in restructuring.

Timeframe

- Restructuring: Flexible, depending on negotiations and agreements.
- Insolvency Proceedings: Time-bound (330-day limit) under IBC, ensuring faster resolution or liquidation.

14. HOW IS A RESOLUTION PLAN DEVELOPED, EVALUATED, AND APPROVED UNDER THE IBC?

Under the Insolvency and Bankruptcy Code (IBC), 2016, a resolution plan is developed to revive a financially distressed company while ensuring optimal recovery for creditors. The process begins with the Resolution Professional (RP) inviting Expression of Interest (EOI) from prospective Resolution Applicants (RAs). Only applicants meeting the eligibility criteria under Section 29A of the IBC can submit a plan. A resolution plan must outline a strategy to restructure the corporate debtor, address debt repayment, ensure business continuity, and comply with all legal requirements. Once submitted, the RP examines the plan to ensure it meets statutory conditions under Section 30(2) of the IBC, including priority payment of CIRP costs, fair treatment of operational creditors, and compliance with applicable laws. The Committee of Creditors (CoC) then evaluates the resolution plan based on financial viability, repayment structure, and long-term sustainability. The plan must be approved by at least 66% of the voting share of the CoC. If multiple plans are submitted, the CoC may negotiate with applicants for better terms before finalizing their decision. Once a plan is approved by the CoC, it is submitted to the National Company Law Tribunal (NCLT) for final approval under Section 31 of the IBC. The NCLT ensures that the plan complies with legal provisions, treats all stakeholders fairly, and does not violate any laws or public policy. If approved, the resolution plan becomes binding on all creditors, employees, and stakeholders, allowing the company to continue operations under new management. If no resolution plan is approved within the 330-day time limit, the corporate debtor proceeds to liquidation. This structured and time-bound process ensures value maximization and business revival while protecting creditor interests.

15. WHAT ALTERNATIVE RESTRUCTURING MECHANISMS EXIST OUTSIDE THE FORMAL INSOLVENCY PROCESS?

Apart from the formal Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016, several alternative restructuring mechanisms exist in India to help distressed companies recover without undergoing insolvency proceedings. These mechanisms are often faster, more flexible, and less disruptive, allowing businesses to resolve financial stress while avoiding the stigma of insolvency.

RBI’s Prudential Framework for Resolution of Stressed Assets (June 2019)

The Reserve Bank of India (RBI) introduced this framework to enable out-of-court restructuring by allowing banks and financial institutions to restructure loans of defaulting borrowers before they enter insolvency. This framework is primarily designed for banks and financial creditors to provide relief to borrowers through loan rescheduling, interest rate modifications, or additional financing. The framework mandates lenders to identify stress early and implement a Resolution Plan (RP) within 180 days of default.

The restructuring options under this framework include modifying repayment schedules, converting a portion of debt into equity, providing additional credit, or entering into One-Time Settlements (OTS). If lenders fail to implement a resolution plan within the prescribed timeline, they are required to make additional provisions on the loan, thereby incentivizing timely resolution.

Scheme of Arrangement Under the Companies Act, 2013 (Sections 230-232)

A Scheme of Arrangement is a court-approved restructuring tool under the Companies Act, 2013, which allows companies to reorganize their debt and business structure. This mechanism is useful for companies looking to negotiate settlements with creditors, merge with another company, demerge business segments, or restructure liabilities to regain financial stability. For a Scheme of Arrangement to be implemented, it requires approval from creditors, shareholders, and the National Company Law Tribunal (NCLT). This method provides greater flexibility and control to existing management while ensuring that all stakeholders are consulted. Although it involves NCLT oversight, it remains an out-of-insolvency mechanism, allowing businesses to restructure without undergoing the Corporate Insolvency Resolution Process (CIRP).

Corporate Debt Restructuring (CDR) (Now Replaced by RBI’s Framework)

Earlier, the Corporate Debt Restructuring (CDR) mechanism was a structured process allowing lenders to collectively restructure the debt of viable businesses facing temporary financial difficulties. It facilitated multi-lender coordination, enabling companies to renegotiate repayment terms without triggering insolvency proceedings.

While the formal CDR mechanism has been phased out, many banks and non-banking financial companies (NBFCs) continue to follow consensual debt restructuring approaches that mirror the CDR model. Under such arrangements, lenders may extend loan tenures, reduce interest rates, or temporarily suspend repayments to support the company’s recovery. This mechanism remains useful for businesses with multiple lenders who need coordinated restructuring efforts.

Pre-Packaged Insolvency Resolution Process (Pre-Pack) (Under IBC, But Out-of-Court Negotiation)

The Pre-Packaged Insolvency Resolution Process (Pre-Pack or PIRP) is a hybrid restructuring mechanism introduced under the IBC, primarily for Micro, Small, and Medium Enterprises (MSMEs). It allows financially distressed companies to negotiate a resolution plan with creditors before filing for insolvency, ensuring a quicker and less disruptive resolution process. Under the Pre-Pack framework, the debtor remains in control of the business, unlike traditional CIRP, where a Resolution Professional (RP) takes over management. This process encourages early settlement between creditors and the company, reducing litigation costs and the time spent in insolvency proceedings. Since Pre-Packs are initiated voluntarily, they provide a structured yet less adversarial method for corporate recovery.

One-Time Settlement (OTS) and Bilateral Debt Restructuring

One-Time Settlement (OTS) is a widely used mechanism where banks and financial institutions agree to settle outstanding dues by accepting a reduced amount from the borrower. This method helps companies close their loan accounts at a discounted value, avoiding lengthy insolvency proceedings while providing creditors with immediate recovery. Similarly, bilateral debt restructuring occurs when companies negotiate directly with their lenders to modify loan terms. This could involve extending loan repayment schedules, reducing interest rates, or converting outstanding debt into equity. These approaches are faster, more flexible, and customized, making them a preferred option for businesses that can negotiate effectively with their lenders.

Strategic Asset Sales and Refinancing

Companies facing financial distress often turn to strategic asset sales to raise liquidity and manage their debt burden. This could involve selling non-core assets, such as real estate, machinery, or subsidiaries, to generate immediate funds and avoid defaulting on loans. Asset monetization allows companies to focus on their core business operations while managing financial stress effectively. Another approach is debt refinancing, where companies replace existing high-cost loans with new loans at better terms. This can be done through private equity investment, venture debt, or external commercial borrowings (ECBs). By refinancing at lower interest rates, companies can improve cash flow and financial stability without resorting to insolvency proceedings.

16. How does Indian law address cross-border insolvency, and what challenges do foreign creditors and debtors face?

Cross-border insolvency arises when a debtor has assets or creditors in multiple countries, requiring coordination between different legal systems. As businesses expand globally, insolvency laws must address cases where foreign creditors seek repayment from Indian companies or Indian firms with international operations face insolvency. India’s legal framework for cross-border insolvency is currently limited, relying on bilateral cooperation and judicial discretion instead of a structured law.

Existing Legal Framework for Cross-Border Insolvency in India

India does not have a dedicated cross-border insolvency law but relies on Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC), 2016. Section 234 allows India to enter into reciprocal agreements with foreign countries for insolvency cooperation, but no such agreements have been finalized yet. Section 235 permits Indian courts to send letters of request to foreign courts for assistance, though this process remains uncertain and discretionary.

In addition to the IBC, Indian courts may recognize foreign insolvency judgments under the Civil Procedure Code (CPC), 1908, but only if they originate from a reciprocating territory recognized by the Indian government. However, Indian courts often scrutinize foreign rulings and may reject them if they conflict with local laws or public policy.

A notable case highlighting judicial cooperation in cross-border insolvency is Jet Airways (2019), where the National Company Law Tribunal (NCLT) Mumbai coordinated with a Dutch Bankruptcy Court for parallel proceedings. While this case demonstrated India’s willingness to cooperate internationally, such instances remain rare and depend on judicial discretion rather than a formal legal framework.

Challenges Faced by Foreign Creditors and Debtors

Foreign creditors often struggle with uncertainty and enforcement delays in India due to the lack of a structured legal framework. Unlike many other countries that follow global standards, India still relies on case-by-case judicial cooperation, making insolvency proceedings unpredictable.
Another challenge is the difficulty in proving claims due to procedural barriers such as documentation requirements and legal formalities. Additionally, foreign exchange regulations and repatriation restrictions can make it harder for international creditors to recover funds. These factors discourage foreign investment and complicate the insolvency resolution process.

Asset recovery in cross-border cases is another significant hurdle. Indian authorities often face difficulties in reclaiming assets located abroad, as there are no reciprocal enforcement agreements with other jurisdictions. Similarly, foreign creditors attempting to recover assets in India must navigate complex legal procedures, leading to delays and high costs.

Jurisdictional conflicts further complicate cross-border insolvency cases. A company undergoing insolvency in a foreign country may simultaneously face separate proceedings in India, resulting in competing claims over assets and potential conflicts between Indian and foreign laws. This lack of coordination makes resolution lengthy, expensive, and uncertain.

Proposed Reforms: Adopting the UNCITRAL Model Law on Cross-Border Insolvency

To improve cross-border insolvency resolution, India has proposed adopting the UNCITRAL Model Law on Cross-Border Insolvency, a globally accepted framework followed by countries like the US, UK, and Singapore. This model provides clear rules for recognizing foreign insolvency proceedings, allowing foreign creditors to participate in Indian cases, and ensuring cooperation between Indian and foreign courts.
By implementing this model law, India would offer greater certainty and efficiency in handling cross-border insolvency cases. It would also reduce jurisdictional conflicts and enforcement delays, making India’s insolvency regime more attractive to international investors. If adopted, this reform would bring India’s legal system in line with global best practices and enhance its ability to deal with international insolvency matters effectively.

17. HOW CAN THE CURRENT LANDSCAPE FOR RESTRUCTURING AND INSOLVENCY IN INDIA BE DESCRIBED, AND WHAT ANTICIPATED DEVELOPMENTS ARE EXPECTED IN THE COMING YEARS?

India’s restructuring and insolvency framework is primarily governed by the Insolvency and Bankruptcy Code (IBC), 2016, which has significantly improved the efficiency of debt resolution. Over the years, the IBC has strengthened creditor rights, introduced a time-bound process, and enhanced transparency in insolvency proceedings. However, challenges such as delays in resolution, low recovery rates, and the overburdening of the National Company Law Tribunal (NCLT) continue to impact its effectiveness. In recent years, pre-packaged insolvency resolution has been introduced for MSMEs, offering a quicker and less disruptive alternative to traditional CIRP. Additionally, increasing reliance on out-of-court settlements, including debt restructuring under the Reserve Bank of India’s (RBI) Prudential Framework, has provided companies with more flexible options. The evolving role of distressed asset funds and alternative investment mechanisms has also contributed to a more dynamic restructuring environment.

Looking ahead, several developments are anticipated in the coming years. Reforms aimed at reducing procedural delays, strengthening the rights of operational creditors, and improving recovery rates are expected. The long-awaited framework for cross-border insolvency, aligned with the UNCITRAL Model Law, is likely to be introduced, providing greater clarity for foreign creditors and facilitating global debt resolution. Additionally, regulatory authorities may focus on enhancing pre-packaged insolvency mechanisms for larger corporations and streamlining liquidation processes to improve creditor recoveries.

Overall, India’s insolvency and restructuring landscape continues to evolve, with efforts being made to strike a balance between efficient debt resolution, creditor protection, and business revival. The coming year is likely to witness legislative amendments, digitalization of insolvency processes, and a stronger focus on out-of-court restructuring, making the system more effective and accessible.