Nilesh Sharma and Sandeep Kumar Gupta of Dhir & Dhir Associates assess the bankruptcy and insolvency regime in India

Section 1: processes and procedures

1.1 What reorganisation and bankruptcy processes are available for financially troubled debtors?

Under the existing legal regime, the main procedures of reorganisation and rehabilitation for companies in financial difficulties include schemes for compromise, arrangements and reconstruction under the Companies Act 1956, or revival and rehabilitation under the Sick Industrial Companies (Special Provisions) Act 1985 (SICA).

There are also guidelines issued by the Reserve Bank of India (RBI) for restructuring of corporates facing distress. The corporate debt restructuring (CDR) mechanism was introduced in 2001, a voluntary, non-statutory system that allows a financially distressed company with two or more lenders and debts of more than Rs100 million ($1.6 million) to restructure its debts with the super-majority consent of its lenders.

1.2 Is a stay on creditor enforcement action available?

SICA envisages stay of coercive recovery proceedings including suits, without the express approval of BIFR or the Appellate Authority in terms of section 22(1) of SICA. The protection is automatically available to a sick company from the date of registration of its reference with the BIFR and continues till the continuation of implementation of the sanctioned scheme.

Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act 2002), RDDB (Recovery of Debts Due to Banks and Financial Institutions Act 1993) and the SFC Act (State Financial Corporations Act 1951) empower the secured creditors to enforce their security interest in each process. However, in case of proceedings pending under SICA, coercive recovery proceedings – except through the mechanism of Sarfeasi – are not permitted without the express approval off the BIFR or AAIFR (Appellate Authority for Industrial and Financial Reconstruction) as per section 22(1) of SICA.

In cases where winding-up proceedings have been initiated, the pending suits, if any, are stayed under the terms of section 446 of the 1956 Act (section 279 of 2013 Act) and the only option available to the unsecured creditors is to file their claim before the liquidator.

1.3 What are the key features of a reorganisation plan and how is it approved?

Under SICA, the BIFR may appoint any one of the secured lenders or some independent bank or FI as the operating agency (OA) to formulate a scheme for the revival of the company. The reorganisation or rehabilitation plan under SICA may provide for: the financial reconstruction of the sick industrial company; or the proper management of the sick industrial company by change in or takeover of its management, its amalgamation with any other company, sale or lease of a part or whole of any of its industrial undertaking, the rationalisation of managerial personnel and workmen in accordance with law and such other preventive, ameliorative and remedial measures as may be appropriate. The said measures may also include: reduction in the interest or rights of the shareholders of the company; reduction of the debts of the company to a sustainable level and re-schedulement of the same to synchronise with the cash flow of the company; relief and concession from statutory creditors; reduction and payment of dues of unsecured creditors; lease of the industrial undertaking of the sick company to any person including a co-operative society formed by the employees of such undertaking; and, sale of the industrial undertaking of the sick industrial company, free from all encumbrances and all liabilities of the company or free from specified encumbrances and liabilities to any person, including a co-operative society formed by the employees of such undertaking.

The scheme prepared by the OA is examined by BIFR and, thereafter, a draft rehabilitation scheme (DRS) is formulated and published by BIFR to seek suggestions and objections from all concerned. The DRS is also required to be circulated to the central government, state government any schedule or other bank, a public FI or state-level institution, or any other institution or authority from which any financial assistance has been sought under the DRS, for their consent. In case the DRS has the consent of three-quarters or more of the secured creditors, in value terms, then upon sanction by the BIFR, the restructuring of debts in terms of the DRS becomes binding on all concerned. For the purpose of the consent of the said parties, a time period of 60 days is allowed which may further be extended by BIFR by another 60 days. BIFR may, after considering the objections and suggestions of the various parties, sanction the scheme for the revival of the company. The implementation of the sanctioned scheme is monitored by BIFR and a monitoring agency is appointed by BIFR for this. The sanctioned scheme may be modified by the BIFR, and the scheme sanctioned by the BIFR is binding on all the concerned parties. There is no requirement under the provisions of SICA to seek any specific consent from any of the unsecured creditors.

Chapter XIX of the 2013 Act provides for consent by 75% of the secured creditors and 25% of the unsecured creditors for sanctioning the scheme.

Under the Companies Act 1956, in a compromise or arrangement between a company and its creditors or between a company and its members, the Company Court will order a meeting of the creditors (separate class for secured and unsecured) or members to be conducted in such manner as the court directs. If the scheme of compromise or arrangement is approved by creditors representing three-quarters in value of the creditors of each class and members of each class, and if the court deems fit, it will sanction the same which will be binding on all the creditors or members, and also on the company (or the liquidator and contributories of the company).

1.4 Can a creditor or a class of creditor be crammed-down?

In case of a scheme of arrangement (section 391-394 of the Companies Act 1956), minority creditors who have less than 25% exposure in the dues of the company can be crammed down and directed to fall in line with the majority of creditors.

In a restructuring scheme sanctioned by the BIFR under SICA, the minority secured lenders (banks and FIs) can be crammed down to accept the terms of restructuring agreed to by the secured lenders representing three-quarters or more of them in value terms. Although there is no specific provision dealing with the unsecured creditors for a scheme under SICA but in the interest of the revival of a sick company, the BIFR may reduce the interests of unsecured creditors. However, as per a recent judgment of the Delhi High Court (Continental Carbon India v Modi Rubber 2012) such unsecured creditors may not consent for such reduction in interest and may opt to stand outside of the scheme and seek recovery of their entire dues after the expiry of the scheme period.

1.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?

Credit bidding or stalking-horse bids are not allowed. For secured assets, where the lenders have a security interest, they can enforce the sale of the secured assets under the provisions of the Sarfaesi Act 2002, without the intervention of the court. If the company is being wound up, the secured creditors can choose to stand out of the proceedings and the amount realised through the sale of the secured assets will be appropriated in accordance with the provisions of the Companies Act. Under the SICA provisions, the sale of assets can only happen in a transparent manner through an asset sale committee constituted under the aegis of the BIFR, as is envisaged in a scheme to be sanctioned by the BIFR.

1.6 What are the duties of directors of a company in financial difficulty?

SICA requires that, if a company becomes a potentially sick industrial company, its board of directors should declare this (with reasons) to the shareholders by convening a meeting, and to the BIFR by filing a report.

SICA further requires that if a company becomes a sick industrial company, it should file a mandatory reference with BIFR within 60 days of the date of finalisation of the accounts for the relevant period, seeking adoption of necessary remedial measures for its revival. In case of non-compliance, the directors of the company are liable for strict penal action.

In a voluntary winding up of the company, the directors of the company are required to make a declaration verified by an affidavit to the effect that they have made full inquiry into the affairs of the company and to the insolvency of the company.

The directors are further required to give a notice of the appointment of the liquidator of the company at its general meeting to the registrar of companies. The directors of the company will cease to exercise all powers of the board, and the managing directors and other full-time directors will cease to exercise their powers for winding up the company. In a creditors' voluntary winding up, the directors must convene the meeting of the creditors of the company, where they must present a statement of the position of the company's affairs together with a list of the estimated amount of each creditor's claim.

In the winding up by court the directors have a duty to defend the company in the winding-up petition filed by the creditor. The directors will also file a statement on the state of affairs of the company, upon appointment of an official liquidator.

Directors must act honestly, without any negligence and in good faith in the bona fide best interest of the company, or they may be made liable for breach of trust and be required to compensate the company for losses or damages.

As per section 542 of the Companies Act 1956, if in the course of the winding up of a company, it appears that the business of the company has been carried on with intent to defraud creditors of the company or any other persons, the court may direct that the person responsible will be personally liable without any limitation of liability for all or any of the debts or other liabilities of the company as the court may direct

1.7 What priority claims are there and is protection available for post-petition credit?

In winding up, the claims of various stakeholders will be settled in order of priority as provided in sections 529A, 530 of the 1956 Act (sections 326 and 327 of the 2013 Act). The dues of the secured creditors and workers' dues have a priority, on pari-passu basis, followed by crown debts and other dues (even if creditors have enforced their security interest under the applicable statutes such as Sarafesi, RDDB, and the State Financial Act). As per some state enactments, some of the statutory dues (such as VAT) have overriding first charge over the assets of a company, the workers' liabilities and the crown debts, and need to be appropriately dealt with prior to the appropriation of any amounts by the secured creditors. In proceedings pending under SICA, the statute does not provide any priority per se; however, the consent of secured creditors, statutory authorities, for example, who are section 19(1) parties, are specifically sought.

In winding up petitions, there is a stay on all pending suits and under the SICA provisions. Protection under section 22(1) of the Act is available against coercive recovery measures for all dues outstanding by the cut-off date (as may be determined by the BIFR under the sanctioned scheme for restructuring and reconstruction) until the continuation of the implementation period of the sanctioned scheme. Schemes sanctioned by the BIFR invariably provide that dues after the cut-off date should not have protection against recovery proceedings. The High Court of Judicature at Allahabad has, in the matter of Modi Spinning and Weaving Mills, held that an electricity supplier is entitled to disconnect the power (even during the period in which protection is available) if the sick company does not pay for the electricity being supplied to it, after the date of registration of reference of the company with the BIFR.

1.8 Is there a different regime for banks and other financial institutions?

The Banking Regulation Act 1949 applies to the reorganisation of banks. The RBI has discretionary powers to approve the voluntary amalgamation of two banking companies under the provisions of section 44A of the Banking Regulation Act 1949. Large cooperative banks with paid-up share capital and reserves of Rs100,000 ($1,570) were brought under the purview of the Banking Regulation Act 1949 with effect from March 1 1966 and within the ambit of the RBI's supervision.

Section 44A of the Banking Regulation Act 1949 requires that the draft scheme of amalgamation be approved by the shareholders of each banking company through a resolution passed by a majority in number representing two-thirds in value of the shareholders, present in person or by proxy at a meeting called for the purpose. Before convening this meeting, the draft scheme of amalgamation needs to be approved individually by the boards of directors of the two banking companies. Section 44A of the Banking Regulation Act 1949 also requires that after the scheme of amalgamation is approved by the shareholders, it should be submitted to the RBI for sanction.

Section 2: international/cross border issues

2.1 Can bankruptcy or reorganisation proceedings be opened in respect of a foreign debtor?

Indian insolvency laws do not have any extra territorial jurisdiction, and as such the provisions of SICA are not applicable to a foreign debtor. However, a company incorporated in a foreign country may be wound up as an unregistered company as per the provisions of sections 583 and 584 of the 1956 Act (sections 375 and 376 of the 2013 Act) if it has office and assets in India. The pendency of a foreign liquidation does not affect the jurisdiction to make winding up orders. The winding up procedure as laid down in sections 426 to 483 and 528 to 559 of the Companies Act (chapters XX and XXI of the 2013 Act) has to be followed in respect of the assets of the company.

2.2 Can recognition and assistance be given to foreign bankruptcy or reorganisation proceedings?

A judgment or proceeding in a foreign court can be recognised in India under sections 13 and 44-A of the Civil Procedure Code. India has neither adopted UNCITRAL (United Nations Commission on International Trade Law) Model Law, nor do EC regulations apply to it. As per the provisions of the Companies Act 1956, Indian courts exercise jurisdiction over the winding-up proceedings in spite of the fact that that the place of main activities of the particular companies may be outside Indian boundaries. Foreign entities with dues recoverable from the said companies may, however, approach the Indian court conducting the winding up, to lodge their claims over the estate of the company being wound up.

Section 3: other material considerations

3.1 What other major stakeholders (such as governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?

In the event of winding up, claims of various stakeholder will be settled in order of priority as provided in sections 529A, 530 of the 1956 Act (sections 326 and 327 of the 2013 Act). The workers' dues, which include salary, wages, accrued holiday remuneration, pension, gratuity or any other workmen welfare fund, are a priority and they rank pari-passu with the dues of the secured lenders of the company. In proceedings pending under SICA, the statute does not provide any priority per se. However, the consent of secured creditors and statutory authorities are specifically sought. The workers' dues and statutory dues can be restructured only with the consent of the workers or the concerned statutory authority.

Section 4: current trends

4.1 Outline any bankruptcy and reorganisation trends specific to your jurisdiction.

In the recent budget speech, the finance minister suggested setting up a Model Bankruptcy Code to deal with the issues of restructuring and reorganising sick companies. The Bankruptcy Law Reform Committee (BLRC) set-up by the Government of India for submitting a report on the corporate bankruptcy legal framework in India has vide its interim report (February 2015) made a large number of recommendations for reforming the existing regime. The recommendations include initiating rescue proceedings based on inability to pay criteria; allowing creditors representing 25% of the debt of all unsecured creditors to initiate rescue proceedings; specifying the grounds on which a moratorium may be withdrawn; reducing time lines; allowing secured creditors to appoint company administrators directly; specifying the grounds on which the NCLT may direct a company administrator to take over the management or assets of the sick company; and, granting of super-priority status to rescue financing.

It is expected that the Government of India will, based on these recommendations, prepare a bill to be introduced in parliament for amending the existing provisions under the Companies Act 2013 for the rescue of distressed companies.

Overall, the legal framework in India, with respect to insolvency and reorganisation of financially distressed companies, is under transition. Efforts are being made to align them with best international practices.


  First published by our sister publication IFLR magazine. Take your free trial today.

Nilesh Sharma
Dhir & Dhir Associates
New Delhi

About the author

Nilesh Sharma is a senior partner at Dhir & Dhir Associates, Advocates & Solicitors. He is a law graduate and a chartered accountant, and leads the firm's restructuring and insolvency practice. He has been with the firm as a professional for over two decades, and his experience includes providing advice on restructuring and insolvency issues, negotiating settlements, cross-border insolvency issues and representation before the bankruptcy courts. He is a member of Insol India and the AAIFR-BIFR Association of India.


Sandeep Kumar Gupta
Dhir & Dhir Associates
New Delhi

About the author

Sandeep Kumar Gupta is an associate partner at Dhir & Dhir Associates, Advocates & Solicitors. He is a qualified chartered accountant with more than 20 years' extensive experience in banking, project finance and debt restructuring of entities in distress, both through the corporate debt restructuring mechanism and on a bilateral basis. He is part of the firm's corporate consultancy team, advising clients on matters related to settlements with lenders and other insolvency-related issues.