The Corporate & Commercial Law Society Blog, HNLU

Category: Bankruptcy law

  • A New Chapter in India’s Insolvency Law: What the 2025 Amendments Mean for Stakeholders

    A New Chapter in India’s Insolvency Law: What the 2025 Amendments Mean for Stakeholders

    BY Suprava Sahu, Fourth-Year student at gnlu, Gandhinagar
    INTRODUCTION

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’) marked a shift in India’s approach to the corporate resolution process. By changing a fragmented framework into a unified, creditor-centric process, IBC aimed to expedite the resolution of non-performing assets and enhance the ease of doing business. While studies have highlighted that IBC succeeded in improving recovery rates and reducing the timelines, structural issues began to surface as the code matured. Delays in the resolution, underutilization of viable assets, and limited investor participation called for reform.

    Recognizing this need, the Insolvency and Bankruptcy Board of India (‘IBBI’) introduced the IBBI ((Insolvency Resolution Process for Corporate Persons) Fourth Amendment Regulations 2025 which aim to address the inefficiencies and enhance the effectiveness of the Corporate Insolvency Resolution Process (‘CIRP’). Key features of this amendment include enabling part-wise resolution of corporate debtors, harmonizing payment timelines for dissenting creditors, and mandating the presentation of all resolution plans to the Committee of Creditors (‘CoC’).

    The piece unpacks whether the regulatory changes align with the IBC and its intended goals or are just a mere paper over the institutional cracks.

    DIAGNOSING THE IBC’S STRUCTURE

    IBC rests on three foundational pillars: maximizing the value of assets, ensuring a time-bound insolvency process, and balancing the interests of all stakeholders. These principles are affirmed as the foundational principle behind the IBC by cases like Essar Steel India Ltd. v. Satish Kumar Gupta.

    Yet these principles exist in tension. For example, despite the 190–270-day timeline for the CIRP, the IBBI’s quarterly report shows that  more than 60% of the CIRPs have exceeded the timelines, which leads to diminished asset value, deters strategic investors, and disrupts the objective of value maximization.

    The framework also gives substantial control to financial creditors via the CoC, with operational creditors having a very limited say. This structure offers swift decision making it has attracted criticism for privileging institutional lenders at the cost of small creditors. The introduction of staged payments for dissenting creditors and asset-specific resolution under the new regulations can be seen as a regulatory response to this imbalance.

    The IBC initially favoured a rigid process to instill discipline in resolution, but a one-size-fits-all model may stifle innovation. Scholars have argued that insolvency systems need to adapt to varied market structures and varied market structures especially in emerging economies. A key question remains: can a rigid, rule-bound structure effectively adapt to the complexities of a diverse insolvency system? The amendments must be understood not as isolated tweaks but as strategic interventions to reconcile the tensions inbuilt in the IBC’s design.

    DISSECTING THE KEY AMENDMENTS

    The amendment introduces four main changes each targeting to address long-standing inefficiencies and gaps in the stakeholder engagement.

    • Part-wise Resolution of Corporate Debtors

    The amended regulations now allow the Resolution Professionals (‘RPs’)to invite resolution plans for specific business segments of the corporate debtor in addition to the entire company. This creates a dual-track mechanism that offers unprecedented flexibility to the CoC and RPs. It is grounded on the fact that many insolvency cases involve heterogeneous assets, some of which are viable, some of which are distressed. Under the earlier regime, focusing on a holistic resolution often led to delayed proceedings and discouraged potential resolution applicants who were only interested in certain businesses. A similar model has been employed in jurisdictions like UK, where the pre-pack administrative sales and partial business transfers allow administrators to sell parts of their enterprise to recover the maximum value. Studies have advocated for asset-wise flexibility as a strategy to reduce liquidation rates and protect value.

    However, this reform risks of cherry picking, where bidders might try to choose profitable units while leaving liabilities and nonperforming divisions. This can potentially undermine the equitable treatment of creditors and complicate the valuation standard and fair assessment. This concern was evident in cases like Jet Airways where bidders sought profitable slots while avoiding liabilities. Jurisdictions like the UK mitigate this through independent scrutiny in pre-pack sales, a safeguard which India could adapt.

    • Harmonized Payment Timelines for Dissenting Creditors

    In cases like Jaypee Kensington and Essar Steel, the Supreme Court upheld that dissenting creditors must receive at least the liquidation value but left ambiguity on payment. Previously, the treatment of dissenting creditors lacked clarity, especially around the payment timelines. The amendment resolves this ambiguity by laying down a clear rule. . By ensuring that dissenters are not disadvantaged for opposing the majority, it reinforces a sense of procedural justice and also encourages more critical scrutiny of resolution plans within the CoC. It seeks to balance the majority rule with individual creditor rights, thereby enhancing the quality of proceedings.

    But, this provision could also complicate cash flow planning for resolution applicants and disincentivize performance-based payouts. Early, mandatory payouts to dissenters could affect plan viability and reduce the flexibility needed for restructuring. There is also a risk that dissenters may use their position to strategically extract early payments, leading to non-cooperation or tactical dissent – an issue which the amendment has left unaddressed.

    The balancing act between fairness and functionality can be seen as a reform which not just enhances inclusivity but also introduces a new operational pressures.  

    • Enhanced role for interim finance providers

    Another noteworthy intervention is that the CoC may now direct RPs to invite interim finance providers to attend CoC meetings as observers. These entities will not have voting rights but their presence is expected to improve the informational symmetry within the decision-making process. Finance providers have more risk when they are lending to distressed entities. Allowing them to observe deliberation offers more visibility into how their funds are being used and enhances lender confidence. From a stakeholder theory perspective, this inclusion marks a shift away from creditor dominance towards a more pluralist approach. This was also argued by Harvard Professor Robert Clark, who stated that insolvency regimes must recognize the varied capital interests involved in business rescue.

    While the introduction of interim finance providers promotes transparency and may increase lender confidence, the observer status needs to be carefully managed. Without clear boundaries, non-voting participants could still exert indirect influence on CoC deliberations or access sensitive information. To mitigate such risks, the IBBI could consider issuing guidelines to standardize observer conduct. This highlights a broader concern – expanding stakeholder involvement without proper guardrails, which may create issues in the already complex process.

    • Mandatory Presentation of All Resolution Plans to the CoC

    Earlier, RPs would filter out non-compliant plans and only present eligible ones to the CoC. The new amendment mandates all resolution plans to be submitted to the CoC along with the details of non-compliance. This reform shifts from RP discretion to CoC empowerment. It repositions the RP as a facilitator and reduces the risk of biased exclusion of potential plans.

    The amendment enhances transparency and aligns with the principles of creditor autonomy, which states that the legitimacy of the insolvency process depends not only on outcomes but on stakeholder confidence in the process. It also carries a risk of “decision fatigue” if the CoC is flooded with irrelevant non-viable proposals. The RP’s expert assessment should still carry some weight and structured formats for presenting non-compliant plans may be needed to make this reform operationally sound.

    Taken together, the amendments do not merely fix operational gaps they reflect a broader evolution of India’s insolvency framework from rigidity to responsiveness.

    STAKEHOLDER IMPLICATIONS & CONCERNS

    The regulation significantly rebalances roles within the CIRP, with distinct implications for each stakeholder. For Financial Creditors, part-wise resolutions, allowing staged payments and overseeing finance participants through the CoC has deepened their influence. This aligns with the creditor-in-control model, which states that power demands fiduciary accountability. Dominant creditors could steer outcomes for selective benefit, risking intra-creditor conflicts previously flagged by IBBI.

    Dissenting creditors now gain recognition through statute in phased payouts, ensuring they receive pro rata payments before consenting creditors at each stage. However, operational creditors remain outside the decision-making process, raising concerns about continued marginalization. This concern was also highlighted by IBBI that insolvency regimes that overlook smaller creditors risk creating long-term trust deficits in the process. RPs must now present all resolution plans, including the non-compliant ones to the CoC. This not just curtails arbitrary filtering but also increases the administrative burden.. Beyond the RP’s procedural role, the reforms also alter the landscape for resolution applicants.  The amendment benefits RPs by offering flexibility to bid for specific parts of a debtor. This may attract specialized investors and increase participation. However, unless the procedural efficiencies are addressed alongside the increased discretion, both RPs and applicants may find themselves in navigating through a system which is transparent but increasingly complex.

    CONCLUSION AND WAY FORWARD

    The Fourth Amendment to the CIRP reflects a bold move that seeks to move from a procedural rigidity towards an adaptive resolution strategy. The reforms aim to align the IBC more closely with the global best practices which are mainly focused on value maximization and creditor democracy. Yet as numerous scholars have emphasized insolvency reform is as much about institutional capability and procedural discipline as it is about legal design. The real test would lie in implementation, how the CoCs exercise their enhanced discretion and how RPs manage rising procedural complexity. Equally important is ensuring that small creditors, operational stakeholders and dissenters are not left behind.

    Going forward, further reforms are needed which include standard guidelines for plan evaluation, better institutional support and capacity upgrades for the NCLTs. Without these, the system risks duplicating the old inefficiencies. Overall, the 2025 reform represents a necessary evolution, but whether it becomes a turning point or a missed opportunity will depend on how effectively the ecosystem responds.

  • Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

    Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

    BY PURNIMA RATHI, FOURTH-YEAR STUDENT AT SYBIOSIS LAW SCHOOL, PUNE

    On January 20, 2025, the Reserve Bank of India (‘RBI’) released a comprehensive revision of the Master Direction on Foreign Investment in India (‘Master Direction’). The update represents a landmark regulatory revision, particularly for Foreign Owned and/or Controlled Companies (‘FOCCs’) pursuing downstream investments. The updated Master Direction has attempted to resolve a number of ambiguities, align regulatory treatment with the Consolidated Foreign Direct Investment (‘FDI’) Policy, 2020 and the Foreign Exchange (Non- Debt_ Instruments) Rules, 2019 (‘NDI Rules’) and thus, stream lining the compliance requirements for both investors and companies.

    The blog shall analyse key regulatory changes made through the Master Direction and its effects on downstream investments made by FOCCs. This analysis is made by comparing the recent update to the earlier versions of the Master Direction.

    WHAT ARE FOCCs AND DOWNSTREAM INVESTMENTS ?

    To understand the significance of the Master Direction, it is first necessary to understand the meaning and the context in which FOCCs and downstream investments operate. A FOCC is defined in the Foreign Exchange Management Act, 1999 (‘FEMA’) and the NDI Rules as an Indian entity that is:

    •  Owned by non-resident entities (more than 50% shareholding); or

    •  Controlled by non-residents (in the sense of a non-resident entity or person is empowered to appoint a majority of directors or is empowered to influence decisions which are deemed to be strategic business decisions).

    Downstream investment is defined collectively, in this context, as an investment in capital instruments (equity shares, compulsorily convertible preference shares, etc.) made by said FOCC in another Indian entity. It is essentially an investment made by a company already partly or wholly owned by foreign investors, into another Indian entity.

    Analysis of Key Changes

    The updated Master Direction has important amendments which are aimed at reducing compliance complexities, providing legal clarity, and allowing flexibility with transaction structures. Analysed below are the key revisions from the Master Direction:

    1. Consistency with General FDI Norms

    The most important change is the explicit consistency of downstream investments by FOCCs with general FDI norms. Downstream investments are treated as a different investment category and require separate compliance obligations.  However, now it requires that FOCCs must comply with the same entry routes (automatic or government), sectoral restrictions, price restrictions, and reporting requirements as any direct foreign investment investor. The guiding principle of “what cannot be done directly, shall not be done indirectly” has the intention to place downstream investments on an equal level with FDI.

    This is particularly advantageous in sectors where the automatic route is available and removes unnecessary bureaucratic hurdles. For example, if a FOCC is investing in an Indian startup that provides services to the technology sector, they may now invest and treat it the same as a direct foreign investment provided that the sector cap and conditions are adhered to.

    2. Share Swaps Approved

    Another important change is the recognition of share swap transactions by FOCCs. Before the recent change, it was unclear whether share swaps were permitted for FOCCs at all, and companies tended to either seek informal clarifications or err on the side of caution.

    The updated direction explicitly provides that FOCCs can issue or acquire shares in lieu of shares of another company (either Indian or foreign) subject to pricing guidelines and sectoral limitations. This is an important facilitative measure for cross-border mergers, joint ventures, and acquisition deals where share swaps are the predominant form of consideration.

    This reform enhances transactional flexibility, encourages capital growth and will reduce friction in structuring deals between Indian FOCCs and foreign entities, thereby promoting greater integration with global capital market. 

    3. Permissibility of Deferred Consideration

    The RBI now formally recognizes deferred consideration structures such as milestone-triggered payments, escrows, or holdbacks. However, they are still governed by the ’18-25 Rule’, which allows 25% of total consideration to be deferred, which must be paid within 18 months of execution of the agreement. This represents a pragmatic acceptance of the commercial acknowledgment that not all transactions are settled upon completion.

    RBI shall have to give additional clarifications as the Master Direction still does not specify the extent to which provisions are applicable to downstream investments in comparison to the FDIs.

    4. Limitations on the Utilisation of Domestic Borrowings

    In an effort to safeguard the integrity of foreign investment channels and to deter round-tripping, or indirect foreign investment through Indian funds, the RBI continues to restrict FOCCs from utilising domestic borrowings for downstream investment. This implies that FOCCs can only downstream invest with foreign funds introduced through equity investments or through internal accruals. The restriction aims that downstream investments are made through genuine foreign capital introduced in the country through abroad, rather than through domestic borrowings.

    Practically this means that if the FOCC receives a USD 5 million injection from the parent organization abroad, then they can utilize such funds for downstream investment, but not if they were to borrow the same amount in INR through a loan from an Indian financial institution. This maintains investor confidence and enhances transparency in capital flows.

    5. Modified Pricing Guidelines for Transactions

    The revised framework reiterated pricing guidelines in accordance with the different types of company:

    •  For listed companies: The pricing must comply with the Securities and Exchange Board of India (‘SEBI’) guidelines,

    •  By unlisted companies: The price cannot be lower than the fair market value determined by internationally accepted pricing methodologies.

    Additionally, in all rights issues involving non-residents, if the allotment is greater than the investor’s allotted entitlement, price has to comply with these guidelines. In this case, the rights issue would protect minority shareholders and mitigate the dilution that would occur by no listings from unlisted companies.

    6. Reporting and Compliance via Form DI

    An excellent innovation is the new compliance requirement of filing on Form DI within 30 days of the date an Indian company becomes a FOCC or makes a downstream investment. This will assist the RBI in maintaining regulatory visibility and better tracking of foreign investment in India. Companies will have to implement stricter internal compliance mechanisms and timely reporting as failure to do so could result in penalties under FEMA. The RBI’s emphasis on transparency reflects a continuing trend toward digitization and live reporting of capital flows by Indian regulators.

    7. Clearer Application of the Reporting Forms (FC-GPR, FC-TRS, DI)

    In addition, the RBI has further clarified the documents to use the following forms:

    • Form FC-GPR: is for reporting the issuance of shares by an Indian entity to a FOCC. • Form FC-TRS: is for any transfer of shares involving FOCC as the non-resident and between residents and non-residents.

    • Form DI: is for downstream investments made by FOCC into any other Indian entity.

    This clarity will help eliminate confusion around these procedures and synchronize the reporting regime of the RBI with the reporting systems of the Ministry of Corporate Affairs (‘MCA’) and SEBI. FOCC should implement strong internal controls to monitor and track when these filings will become due.

    8. Classification of FOCCs based on Share Movement

    The new regulations will also provide clarity on how the status of a FOCC will influence a regulatory classification. Specifically:

    •  if a FOCC receives shares from an Indian entity, it will be treated as a ‘Person Resident Outside India’; and

    •  if it transfers shares to an Indian entity, it will be deemed to be domestic in nature but needs to comply with the repatriation norms.

    These classifications have an important bearing on the route and pricing of transactions especially in exits or complex internal restructuring transactions. Through these classifications, RBI intends to clarify the confusion from mischaracterizing transactions and reducing risk for the investors in the event of any enforcement action.

    Conclusion

    The amendments to the Master Direction represent a measured and thoughtful change in the foreign investment regulatory framework in India. The RBI has set the tone in favour of enabling policy predictability and investor confidence by clarifying FOCC structures’ downstream investment norms to be consistent with FDI, allowing for more sophisticated structures like share-swap transactions and deferred consideration, and imposing effective operational compliance requirements. Going forward, these refinements have set the foundation for deeper capital integration and increased investor trust in India’s FDI regime.

  • Reconsidering the Scope of Section 14 of IBC: Analysing the Inherent Extra-Territorial Scope of Moratorium 

    Reconsidering the Scope of Section 14 of IBC: Analysing the Inherent Extra-Territorial Scope of Moratorium 

    BY ADITYA DWIVEDI AND PULKIT YADAV, FOURTH-YEAR STUDENTS AT NUSRL, RACHI

    INTRODUCTION

    The moratorium provisions under the Insolvency and Bankruptcy Code, 2016 (‘The Code’), are important mechanisms to maintain the debtor’s assets and maximise value for all stakeholders. Yet, the territorial applicability of these provisions, especially in proceedings involving cross-border assets, is a matter of judicial interpretation and academic discussion. 

    This article analyses the extra-territorial applicability of moratorium under the Code with a special focus on comparing and contrasting the interpretation of moratoriums applicable to Corporate Insolvency Resolutions Process (‘CIRP’) and Insolvency Resolution Process (‘IRP’) under Sections 14 and 96 of the Code, respectively. 

    By analysing the recent judgment of the Calcutta High Court in Rajesh Sardarmal Jain v. Sri Sandeep Goyal, (‘Rajesh Sadarmal’) this article contends that whereas Section 96 moratorium might be restricted to Indian jurisdiction, Section 14 moratorium necessarily has extra-territorial application due to the interim resolution professional’s statutory obligation to manage foreign assets under Section 18(f)(i) of the Code.

    TERRITORIAL SCOPE OF MORATORIUM: DIVERGENT INTERPRETATIONS

    The Code provides for two types of insolvency proceedings: CIRP for corporate persons under Part II and IRP for individuals and partnership firms under Part III, with moratoriums under Sections 14 and 96, respectively, to facilitate these processes

    However, courts have interpreted the moratoria under Sections 14 and 96 differently. In P. Mohanraj v. Shah Bros. Ispat, the Supreme Court held that Section 14 has a broader scope but limited its analysis to domestic proceedings. In contrast, the Calcutta High Court in Rajesh Sadarmal highlighted the extra-territorial reach of Section 96. Hence, examining these interpretations is key to understanding the territorial scope of both provisions.

    INSOLVENCY RESOLUTION PROCESS VIS-A-VIS SCOPE OF SECTION 96: ANALYSING THE NARROW INTERPRETATION OF MORATORIUM UNDER PART III

    IIn Rajesh Sardarmal, the Calcutta High Court held that the Section 96 moratorium for personal guarantors does not extend to foreign jurisdictions, as the Code’s scope under Section 1 is limited to India and does not specify the enforcement of the Section 96 moratorium in foreign courts. Thus, the court held that actions in foreign jurisdictions cannot be suspended by Section 96. This interpretation implies that all provisions under the Code lack extra-territorial application.

    However, this view contradicts the Code’s inherent extra-territorial mechanism, as outlined in Sections 234 and 235 of the Code which respectively empower the central government to enter into reciprocal arrangements with other countries to enforce the provisions of the Code and allow the Adjudicating Authority (‘AA’) to issue a letter of request to the competent authority of a reciprocating country, requesting it to take necessary action regarding any ongoing homebound proceedings against the Corporate Debtor (‘CD’) under the Code. Further, this interpretation also negates the inherent extra-territorial scope of the moratorium under Section 14. 

    CORPORATE INSOLVENCY RESOLUTION PROCESS VIS-À-VIS SCOPE OF SECTION 14: A CASE WARRANTING BROADER INTERPREATAION OF MORATORIUM UNDER PART II

    The Supreme Court, in M/S HPCL Bio-Fuels Ltd v. M/S Shahaji Bhanudas Bhad, held that the Code, as an economic legislation, is intended for the revival of the CD rather than being used as a recovery mechanism. Further, in Swiss Ribbons Pvt. Ltd. v. Union of India, the Apex Court held that moratorium under section 14 envisions the protection of the assets of the CD, to facilitate its smooth revival. 

    Therefore, applying Rajesh Sadarmal’s narrow interpretation to Section 14 would weaken the moratorium’s purpose and hinder the CIRP. In a globalised economy, corporate debtors often hold foreign assets, which must be brought under the control of the interim resolution professional and the resolution professional under Sections 18 and 25 of the Code, respectively. This will maximise the value of the CD and enhance the chances of higher recovery for creditors. Further, it would also prevent successful resolution applicants from acquiring foreign assets of the CD without making any payment, and enable the committee of creditors to exercise their commercial wisdom judiciously in selecting the most suitable resolution plan after assessing the true financial position of the CD. 

    EXTRA-TERRITORIAL SCOPE: LEGISLATIVE INTENT AND STATUTORY FRAMEWORK

    In Dr. Jaishri Laxmanrao Patil v. The Chief Minister & Anr, the Supreme Court held that courts must act upon the intent of the legislature, and such intent can be gathered from the language used in the statute. Moreover, inRenaissance Hotel Holdings Inc. v.  B. Vijaya Sai & Others, the Apex Court ruled that the quintessential principle of interpretation is that every provision of a statute shall be interpreted considering the scheme of the given statute. Meaning thereby that the textual interpretation must align with the contextual one. 

    The Supreme Court went further ahead in the State of Bombay v. R.M.D. Chamarbaugwala, and held that a statute may have extra-territorial application if a sufficient territorial nexus exists. Hence, Section 1 of the Code does not bar such application. Interpreting Section 14 thus requires examining legislative intent and nexus, with Sections 18(f)(i), 234, and 235 providing key guidance.

    SECTION 18(f)(i): CONTROL OVER FOREIGN ASSETS

    After the commencement of insolvency and imposition of moratorium, the AA appoints an interim resolution professional under Section 16. As per Section 18(f)(i), the interim resolution professional must take control of all assets owned by the corporate debtor, including those located abroad. This establishes a clear territorial nexus, supporting extra-territorial application.

    In M/s Indo World Infrastructure Pvt. Ltd. v. Mukesh Gupta, the National Company Law Appellate Tribunal (‘NCLAT’) held that under Section 18(f), read with Section 20, the interim resolution professional must secure and preserve the corporate debtor’s assets. This interpretation aligns with the moratorium’s objective under Section 14. Such an intra-textual reading reflects the legislative intent to extend the moratorium to foreign assets for effective CIRP and value maximisation. While Section 1 poses no bar, supported by the doctrine of territorial nexus, actual enforcement abroad still depends on securing international cooperation through agreements under the Code.

    INTERNATIONAL AGREEMENT UNDER SECTION 234 AND 235: HIGHLIGHTING THE INHERENT EXTRA-TERRITORIAL SCOPE OF THE CODE

    Under Part V, the Code provides a legislative route under Sections 234 and 235 to facilitate the extraterritorial application of its provisions. This legislative structure recognises the necessity of international coordination and highlights the extraterritorial nature of the Code. 

    However, their efficacy is yet to be tested because, to date, no notification[i] has been issued by the central government in this regard. Therefore, unless the central government gives effect to these provisions through mutual agreement with other countries, no provision of the Code can be extended to foreign proceedings or assets situated in foreign lands. 

    However, in State Bank of India v. Videocon Industries Ltd., the National Company Law Tribunal (‘NCLT’) held that the  CD’s foreign assets will form part of the CIRP and be subject to Sections 18 and 14 of the Code. Yet, the NCLT has not provided any judicial framework for the consolidation of the CD’s foreign assets in the CIRP. 

    Therefore, even if the CD’s foreign assets are considered part of the CIRP, in the absence of a judicial or legislative framework (such as mutual agreements), those assets cannot be included in the CIRP.

    NEED FOR A COMPREHENSIVE CROSS-BORDER FRAMEWORK

    In DBS Bank Limited Singapore v. Ruchi Soya Industries Limited & Another, the Apex Court held that the primary aim of the Code is to balance the rights of various stakeholders by enabling the resolution of insolvency, encouraging investment, and optimising asset value. 

    Therefore, it is necessary to address the concerns of distressed Indian companies with a foreign presence and foreign companies having the centre of main interest (‘COMI’) in India. This will ensure that stakeholders or creditors are not left in the lurch due to skewed recovery resulting from the non-inclusion of the CD’s foreign assets in the CIRP. 

     However, to effectively address these concerns, there is a need to devise a cross-border framework that encompasses not only the CIRP but also the IRP. At present, India lacks such a framework, which constitutes a significant regulatory gap in its insolvency regime. In cases where personal guarantors possess assets located outside the country, this gap severely impairs the ability of creditors to recover dues effectively. The present framework is limited in scope and fails to provide mechanisms for the recognition and enforcement of foreign proceedings involving personal guarantors, thereby undermining the efficiency of cross-border recoveries.

    While the Report of the Insolvency Law Committee on Cross-Border Insolvency, 2018 (‘The Report’) laid down a robust foundation for dealing with CDS, it did not address personal insolvency, as Part III of the Code had not yet been notified at that time. The report emphasised the importance of providing foreign creditors access to Indian insolvency proceedings and of enabling Indian insolvency officials to seek recognition abroad. However, with the subsequent notification of provisions relating to personal guarantors, there is now an urgent need to expand the cross-border framework to encompass personal guarantor insolvency as well. The report also supports this view as it provides for the subsequent extension of cross-border provision on IRP, post notification of Part III. 

    Moreover, in Lalit Kumar Jain v. Union of India,  the Supreme Court held that due to the co-extensive nature of the liability of the surety with that of the principal debtor under Section 128 of the Indian Contract Act, 1872, creditors can recover the remaining part of their debt from CIRP by initiating IRP against the personal guarantor to the CD.

    Therefore, failing to extend the cross-border insolvency regime to IRP would limit creditors’ access to the guarantor’s foreign assets, thereby impeding the full and effective realization of their claims.

    To address this regulatory shortfall, a pragmatic way forward would be to operationalise Section 234 through mutual agreements with key trading partners of India, by expanding the scope of the cross-border framework, as suggested in the report   to include IRP, and amending the Code accordingly. 

    Further, the Courts should also refrain from narrowly interpreting the scope of moratoriums and other provisions of the Code, and should take into account the doctrine of territorial nexus while analysing the scope of any provision of the Code. 

    A broader interpretation, especially in cases involving foreign assets or proceedings, would facilitate a more effective and holistic resolution process by recognising the global footprint of many CDs. This approach aligns with the objective of maximising the value of assets under Sections 20 and the preamble of the Code and ensures that proceedings under the Code are not rendered toothless in cross-border contexts. 

    Additionally, invoking the doctrine of territorial nexus can help establish a sufficient legal connection between India and foreign assets or persons, thereby allowing Indian insolvency courts to issue directions that can have extraterritorial reach, wherever justified. This interpretive approach will ultimately enhance creditor confidence and will reinforce India’s credibility as a jurisdiction with a robust insolvency regime.

    Moreover, in the absence of any judicial and legislative framework, the doctrine of Comity of Courts can be invoked by the creditors seeking the enforcement of insolvency proceedings on foreign lands. This common law doctrine postulates an ethical obligation on the courts of one competent jurisdiction to respect and to give effect to the judgments and orders of the courts of other jurisdictions.

    Creditors can also seek recognition of Indian insolvency proceedings abroad through the UNCITRAL Model Law on Cross-Border Insolvency, as seen in Re Compuage Infocom Ltd., where the Singapore High Court recognised the Indian CIRP but denied asset repatriation. This highlights the urgent need for a comprehensive cross-border insolvency framework aligned with the spirit of the Code and the report that is primarily based on the Model Law.

    CONCLUSION

    While the Calcutta High Court’s ruling in Rajesh Sardarmal limits the territorial reach of Section 96 moratorium, Section 14 moratorium has to be interpreted more expansively, considering its inextricable link with Section 18(f)(i). Further, while interpreting the Code, the courts must give due regard to the legislative intent and the judicial principle of territorial nexus.  The success of the Code’s insolvency resolution mechanism, especially in cross-border asset cases, relies on acknowledging and enabling the extra-territorial operation of moratorium provisions. Legislative amendments, international cooperation frameworks, and judicial interpretation of the Code’s provisions based on legislative intent are essential to realise this goal.

    [i] Uphealth Holdings, INC. v. Dr. Syed Shabat Azim & Ors. Co., 2024 SCC OnLine Cal 6311 ¶ 20

  • Bharati Airtel & Anr v. V.V. Iyer – Unraveling the Set-Off Saga in Insolvency

    Bharati Airtel & Anr v. V.V. Iyer – Unraveling the Set-Off Saga in Insolvency

    by Pratishtha Agarwal and Prabhav Tripathi, students of third-year at the Institute of Law, Nirma University

    Introduction

    While the Insolvency and Bankruptcy Code, 2016 (“IBC”) serves as a complete code, many a time, the exclusive nature of the Act presents a legal lacuna in the procedure and calls for determining the application of other general laws in such absence of relevant provisions. On a similar note, in the recent case of Bharati Airtel Limited and Anr. v Vijaykumar V. Iyer and Anr., the Supreme Court decided upon the question of the right to claim set-off in the Corporate Insolvency Resolution Process (“CIRP”). In set-off, it is a debtor’s right to settle the smaller claim owed to him against the larger claim payable to his creditor. As there is no statutory provision on setting off the balance amount once the CIRP has been initiated, the Bench comprising Justice Sanjiv Khanna and Justice S.V.N. Bhatti observed the appeal.

    It was held that insolvency set-off and statutory set-off do not apply to CIRP. Though the right to claim of set-off is generally granted under Order VIII Rule 6  of the Civil Procedure Code, 1908 (“CPC”), it is not permitted in the CIRP when the Resolution Professional proceeds to take control and custody of Corporate Debtor’s assets under Section 25(2)(a) of IBC.

    This blog aims to understand the rationale behind the judgement and the exceptions it carved, discuss the arguments presented from both sides and analyse the dissenting stances of foreign jurisdictions on claim of set-off in insolvency proceedings.  

    Facts of the Case 

    In April 2016, eight spectrum trading agreements were executed between Bharti Airtel Limited, Bharti Hexacom Limited, Aircel Limited, and Dishnet Wireless Limited to acquire the usage rights of the spectrum allocated to the latter. Since the agreement was contingent on the approval of the Department of Telecommunications, Government of India, (“DoT”) it had demanded that the Aircel entities submit bank guarantees for Rs 457.73 crores owing to certain licenses and spectrum dues.

    After the Aircel entities filed a challenge with the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”)regarding DoT’s directive, they were ordered by TDSAT to provide bank guarantees for which they approached the Airtelentities. On the Aircel entities replacing the bank guarantees furnished by the Airtel entities and Airtel entities receiving them from the DoT, Rs. 411.22 crores were payable by the Airtel entities to the Aircel entities.

    Pertinently, the bone of contention arose on 10th January 2019 when the Airtel entities made a payment of Rs 341.80 crores due to Aircel entities after setting-off a balance amount of Rs 145.20 crores on the ground that Aircel entities owed that amount to them. This set-off was contested before the Adjudicating Authority (“AA”) in Mumbai by Airtel wherein an order in favour of the Airtel entities held that they had a right to set off Rs. 112.87 crores from the payment. The Resolution Professional contested the Adjudicating Authority’s order before NCLAT which held ‘set-off to be antithetical to the objective of the IBC.’ 

    Provisions And Principles: No Right To Claim Set-Off In The CIRP

    Relying upon the opening part of the enactment, the Supreme Court judgement addresses IBC as a complete code to consolidate the laws relating to insolvency resolution and reorganization. The intentional omission of statutory set-off or insolvency set-off provisions during CIRP reflects a legislative decision to preclude the assertion of such rights in insolvency proceedings. Additionally, Regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) which addresses setoff and mutual credits, is confined to Chapter III Part II, specifically about the liquidation process. This posits that if there were a conflicting legislative intent, the law would have encompassed Chapter II Part II of the IBC to allow the application of set-off claims during CIRP.

    Section 238 IBC provides an overriding power wherein notwithstanding anything inconsistent present in any other law for the time being in force, the laws laid down are in effect. This legal position also disarms Regulation 29 from subsuming the CIRP under its scope of insolvency set-off. Further, Order VIII Rule 6 of CPC creates a legal or statutory set-off wherein the defendant has a right to claim set-off against the plaintiff’s demand for an ascertained sum of money that is legally recoverable and is not beyond the pecuniary limits of the court’s jurisdiction. However, this set-off too, is overridden by Section 238 and rendered inapplicable from being exercised during insolvency proceedings, thus maintaining the rigidity and exclusivity of the Code.

    It was further argued that the concept of insolvency set-off, in its entirety, goes against the principle of pari passu. Section 53 of the IBC lays down the priority order of creditors for the distribution of sale proceeds of liquidation assets under the “waterfall mechanism”. Here, set-off offers an overriding effect and primacy to the creditor entitled to claim set-off against the demanded credits of the Corporate Debtor. In the process of dealing with these cross demands by set-off, the assets are depleted in favour of that single creditor with set-off entitlement that was initially available to be settled amongst the general body of creditors. As a consequence, with a decrease in the dividend payable, the same class of creditors are not treated equally and the liquidation hierarchy is also compromised. Thus, if such a claim is permitted in the CIRP, it is bound to go against the waterfall mechanism by keeping the entitled creditor on a higher footing and the other creditors at a disadvantageous position.

    Contradictory Viewpoint on the Applicability of Set-Off to CIRP

    The SC judgment attempts to clear the air on the applicability of set-off to CIRP however it raises pertinent questions on whether the Apex Court has taken an erroneous stance. The judgment moots the contention that Regulation 29 of the Liquidation Regulationsmandates the mutual set-off however the instant regulation only corresponds to liquidation.

    Pertinently, as noted earlier, the judgment of the SC in the case of Swiss Ribbons v. Union of India held that set-off can be considered during CIRP subject to the challenge before the AA. Interestingly, the judgment takes note of the mandatory nature of insolvency set-offs in the United Kingdom as highlighted by the judgment in the case of National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.. Therefore, it is vital to highlight that set-off is a widely accepted and practised principle of insolvency law internationally. Notably, Section 553  of the U.S. Code provides for the right of a creditor to offset a mutual debt that arose before the commencement of the case i.e. pre-petition debt. However, per the ratio of In re Shopper’s Paradise,  it was highlighted that a creditor can never offset a post-petition debt against a pre-petition debt. This in line with the distinction drawed upon in the instant judgment in relation to set-off pre and post the initiation of the CIRP. 

    Further, in the matter of Pramod Kumar Sharma Uniworld Sugars Pvt. Ltd. v. ED&F Man Sugar Ltd., NCLT Chandigarh had held that set-off was permissible during CIRP in view of ‘the treatment reflected in the book of accounts of the Corporate Debtor while determining the liability of the parties with regard to the purchase and sale of sugar.’ A case has been made out in detail below for allowing set-off in the context of CIRP. 

    Justifications for Permitting Set-off in the Context of CIRP

    1. Litigation Minimization: Permitting setoffs can aid in the reduction of litigation throughout the CIRP. The presence of set-off may potentially mitigate disputes concerning the validity and magnitude of claims, as it incentivizes the involved parties to negotiate settlements rather than engage in protracted legal disputes.

    2. Encourages Credit Flow: An effectively operating set-off mechanism has the potential to encourage credit flow. If creditors are certain that the quantities owed by the debtor can be offset against their exposure, they may be more inclined to grant credit to financially distressed companies. This would subsequently increase the availability of credit in the market.

    3. Promoting Creditor Engagement: Permitting set-off enables creditors to be more motivated to actively participate in the CIRP. To encourage greater participation in negotiations, contribution to the resolution plan, and support for the company’s revival, creditors might be more inclined to offset their claims against the liabilities of the debtor.

    Conclusion

    However, the Apex Court has carved out two exceptional conditions in Paragraphs 30 and 32 of the judgement, wherein the set-offs are permitted in CIRP in two circumstances. Firstly, a contractual set-off is allowed if its entitlement is effective before or on the date of CIRP initiation.  As the same cannot be precluded, the terms of the contract remain binding besides the moratorium period. Secondly, equitable set-off, wherein the claim and counter-claim are linked by transactions that can be treated as one, was also made an exception by the Bench. Herein, the set-off needs to be “quantifiable, genuine, and established on fact and in law.” Through this judgement, the Supreme Court reiterated the sanctity and exclusivity of IBC and settled the position of law on the applicability of the right to claim set off in the CIRP. In the context of insolvency law, the ratio decidendi is a right step in the way to establish a proper demarcation of claims in CIRP and other laws.

  • Shareholder Intervention in Resolution Proceedings: A Potential Misinterpretation of IBC 2016

    Shareholder Intervention in Resolution Proceedings: A Potential Misinterpretation of IBC 2016

    BY YADU KRISHNA PALLIKKARA, FOURTH-YEAR STUDENT AT SYMBIOSIS LAW SCHOOL, PUNE

    Introduction

    Recently, in Dr. Ravi Shankar Vedan vs. Tiffins Barytes Asbestos (Tiffins), the shareholder of a corporate debtor sought an appeal for two interlocutory orders of the adjudicating authority. First of which was an application seeking a forensic audit of the books of accounts of the corporate debtor and the second regarding approval of resolution application under Section 30 (6) of the Insolvency and Bankruptcy Code (Code). The court dismissed the shareholders’ objections and clarified that shareholders have no locus standi to challenge the resolution plan initiated against the corporate debtor. 

    The post aims to analyse the rationale employed by the court in denying locus standi to the shareholders. It offers a critique of the tribunal’s decision by first, expounding on the concept of shareholders as “persons aggrieved” under Section 61 of the Code . Second, it analyses the interpretation of Section 30(2) of the Code  related to deemed approval and the existing legal position surrounding it. It concludes by advocating for a nuanced approach that protects shareholders’ legitimate concerns while maintaining the effectiveness of the insolvency resolution framework.

    Shareholder as a person aggrieved 

    Herein, the Hon’ble National Company Law Appellate Tribunal (NCLAT) held that the shareholders have no locus standito challenge the resolution plan at any stage, by reasoning that Section 30(2) of the Code provides for deemed approval by shareholders of the corporate debtors, which cannot be taken away by objecting to a resolution plan. 

    Similarly, in Nirej Vadakkedathu Paul & Ors v. Sunstar Hotels and Estates Pvt. Ltd. & Ors  (McDowell Holdings), the NCLAT Chennai denied locus to shareholders who challenged the Corporate Insolvency Resolution Process (CIRP) initiated against the corporate debtor in which they held majority shares.  It forms a part of a catena of judgements, including ICP Investments v. Uppal Housing, Punit Garg vs. Ericsson India Pvt. Ltd., and Anant Kajare vs. Eknath Aher, denying locus standi to shareholders in CIRP proceedings by reasoning that shareholders cannot be aggrieved by initiating CIRP against the corporate debtor, as such interventions in the name of derivative action can render the entire process futile. Accordingly, the contesting parties can only be the financial creditor or the corporate debtor as represented by the Interim Resolution Professional.

    These judgements seemed to altogether overlook the true intention of Section 61 (1) and Section 61 (3) of the Code . While Section 61 (1) provides for “any person aggrieved” by an order of the Adjudicating Authority to prefer an appeal to the NCLAT, Section 61 (3) provides the grounds under which such appeals can be set out, allowing for resolution plan to be challenged for the first time in the appellate stage. While it does specifically identify those who may file an appeal, it sets out that any person aggrieved under Section 61(1) can initiate a proceeding challenging a plan approval order, and shareholders shall come well under this meaning. On a combined reading of both provisions, it is in no way anticipated to exclude shareholders from the meaning of “aggrieved persons,” as that would be a clear injustice and in effect a narrowing of the scope of Section 60 (1).    

    While in McDowell Holdings, the shareholders were denied locus by citing a lack of statutory backing for shareholders ability to challenge a CIRP process and such frequent derivative actions being against the efficiency and purpose of the Code, the court in order to reach its decision had expounded Section 61 (1) of the code. It stated that under Section 61 (1) of the Code, any ‘person aggrieved’ by the order of the Adjudicating Authority may prefer an appeal to the “NCLAT”. The definition of ‘person’ as provided under Section 3(23) of the Code includes ‘individual’, which is a term wide enough to encapsulate ‘shareholders’ within it. This clarifies that while interference from shareholders are generally not preferred, the Code in no manner intends the deprivation of their representative capacity in insolvency proceedings as held in the case of Tiffin’s. 

    In Ashish Gupta v. Delagua Health India Private Limited, the court held that the majority shareholders of a company have the right to challenge the admission of CIRP against the corporate debtor when the admission arose out of collusion among the creditors. It is an example of when courts have considered the specific circumstances demanding intervention by the shareholders and dealt with the same on merits. It proves that shareholder intervention may not always be against the efficiency and purpose of a resolution process under the code and can help in identifying irregularities’ and illegalities in the resolution plan,  aiding in the successful revival of the corporate debtor.

    Also in Tiffins, by interpreting Regulation 2(k) of the Liquidation Regulations 2016, the court held that shareholders who come under the category of ‘stakeholders’ are only recognised in the liquidation process and lack representative capacity in the CIRP. But, according to the same logic, other stakeholders of the corporate debtor such as directors or creditors, can be denied representative capacity by categorizing them as “shareholders” and their consent deemed to be approved, which is totally unwarranted under the code.

    Blurred lines of Deemed Approval and Locus Standi

    Deemed approval of a resolution plan finds no backing in the Code. Under Section 30(2) of the Code, the Resolution Professional (RP) has to ensure that the resolution plan to be submitted meets certain requirements. Under clause (e) of the provision, the RP shall ensure that the plan submitted does not contravene any law in force. The explanation to it provides that the shareholder approval required under the Companies Act, 2013, or other relevant laws for the implementation of the resolution plan is deemed to have been given, provided it is valid and not in contravention of that Act or law. 

    Through Tiffin’s judgement, court has interpreted this explanation of clause (e) as a mechanism of ‘deemed approval’, allowing actions under the resolution plan requiring shareholder approval to have been automatically approved, and more importantly, holding that shareholders have no locus to challenge or object to it. Similar subscription to the deemed approval doctrine can be seen in cases including Jaypee Kensington Boulevard Apartments Welfare Association. vs. NBCC (India) Ltd., DMI Finance Pvt. Ltd. v. Abloom Infotech Pvt. Ltd., Airro Holdings v. Abhilash Lal,  Mr. Keshav Agrawal  Vs. Abhijit Guhathakurta where the courts have rooted their reasoning to the explanation of Section 30 (2) (e) of the Code.

    The courts have overlooked the fact that the explanation was intended solely to facilitate actions that typically need shareholder approval under laws like the Companies Act, such as capital reductions or director appointments, without requiring specific approval for each. It wasn’t meant to cover the entire resolution plan but only those actions needing shareholder consent, and it cannot be used to oust the shareholder’s locus on all matters concerning the CIRP. The MCA notification of 2017 also clarified that the approval mechanism applies only to specific actions required for the implementation of a resolution plan as required under the Companies Act 2013 or any other law in force.

    Shareholders should be allowed to voice concerns about other aspects of the plan, such as illegality, procedural irregularity, or actions harming the company or the public interest, which do not require shareholder approval. [AM7] The same has been clearly set out under Section 60 (5) (c) and Section 61 (3) of the Code, the former of which provides that the Adjudicating authority is empowered to hear any question of law or facts arising in relation to the insolvency resolution of the corporate debtor. The latter provides that any person aggrieved may appeal against an order of the Adjudicating Authority approving a resolution plan, in the circumstance it contravenes the provision of law or if there is material irregularity in the powers exercised by the resolution professional. The provisions can be seen to have been deployed by shareholders to resolve their concerns in various cases including Synergy Technologies vs Parthiv Parikh and Dr. Periasamy Palani Gounder vs Mr. Radhakrishnan Dharmarajan. 

    Conclusion

    In the landmark case of Swiss Ribbons v UOI, the Supreme Court had held that the Code is a beneficial legislation that is aimed at putting the company back on its feet rather than being mere recovery legislation for the creditors. Such an effort to recoup the company requires adequately tending to all the stakeholders involved, including the shareholders of the corporate debtor. While sources such as the Bankruptcy Law Reform Committee Report of 2015 hints that the Code aims at a complete reduction of share capital and the shifting of control to creditors, the mechanism of ‘deemed approval’ of the shareholders and depriving them of representative capacity is not envisaged under the code.

    There is no contention as to the fact that the resolution plan is generally binding on the shareholders post-approval under Section 30(6) and that those shareholders challenging the plan for malicious and vindictive reasons shall not stand strict judicial scrutiny under Section 61(3) of the Code. However, there is no reasonable explanation to prohibit them from challenging the plan for bona fide reasons. 

    Such a blanket decision denying locus to shareholders on all and any matters of Code is unwarranted and can bring in uncertainty considering the concerns that the shareholders can face during a CIRP, including procedural irregularity or illegality in the resolution plan as seen in DHFL’s case  or unfair treatment of shares of the company in the resolution plan as seen in Sintex Industries Case . SEBI had issued a consultation paper in November 2022 proposing protection to minority shareholders of companies undergoing resolution. If the position as laid out in the case of Tiffin’s is maintained, such protections shall be rendered redundant, putting shareholders in a vulnerable position. Given these circumstances, it is imperative that the code does not restrain shareholders from raising their grievances, and the courts may hear the instances and decide on the merits of the case and the degree and reason for such intervention. This will aid in balancing the interests of relevant stakeholders and help in an effective and successful revival of the company. 

  • Regulating The Fees Of Insolvency Professional: A Hit Or A Miss?

    Regulating The Fees Of Insolvency Professional: A Hit Or A Miss?

    BY SANYAM GUPTA, FOURTH YEAR AT NLIU, BHOPAL

    Introduction

    Since the advent of the Insolvency and Bankruptcy Code (“the Code”) in 2016, the Code has been evolving through various dictums given by the judiciary and regulations by the Insolvency and Bankruptcy Board of India (“the Board”) to ensure that it works in tandem with the current economic situation of the nation. These regulators ensure that the main spirit of the Code, i.e., value maximization and speedy resolution in a ‘creditor-in-control model’ is upheld and its scope is enhanced. In order to maximize the payment of the debt to the relevant stakeholders, it becomes incumbent to minimize the Insolvency Resolution Process Cost (“IRPC”). The remuneration of the Insolvency Professional (“IP”) forms a relevant portion of the IRPC; therefore, it must be regulated.

    The IP plays a crucial role in the Corporate Insolvency Resolution Process (“CIRP”). He not only acts as the catalyst facilitating resolution but also runs the Corporate Debtor (“CD”) during the CIRP. It is his expertise that ensures the successful and profitable resolution of the CD. In the case of Essar Steel, the CD reported a profit gain of 5% during the CIRP and reported the highest production as well, under the supervision of the Resolution Professional (“RP”), which further lead to most Financial Creditors realizing 100% of their principal outstanding and 90% of their claim. The credit for this can surely be given to the RP running the CD.

    The Adjudicating Authority (“AA”) has on numerous occasions reiterated that there should be some regulations w.r.t. the remuneration of the IPs.  Starting from the case of Madhucon Projects Limited, wherein the fees of the Interim Resolution Professional (“IRP”) were 5 crores by the first meeting of the Committee of Creditors, while the total amount of debt was 4.45 crores; to the case of Variscon Engineering Services Pvt. Ltd. Vs. Pier-One Constructions Pvt. Ltd. wherein the AA specifically pointed out the need for regulations governing fees of the IPs. There are also instances wherein the IP quotes fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. All this leads to further unnecessary bleeding of the CD. Thus, regulations and guidelines to regulate the remuneration of the IP become quintessential.

    The Board introduced such regulations and guidelines by uploading a discussion paper titled, “Discussion Paper on Remuneration of an Insolvency Professional” which discusses various aspects of how the Board plans on regulating the remunerations of the IPs. The contents of this paper further went on to amend the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IRP Regulations”), to provide incentives to meet the spirit of the code i.e. timely resolution and value maximization in addition to providing for a base pay for IRPs and IPs. The author of this article has criticized this approach of the Board of setting a base pay, while not regulating the extensive expenses charged by IPs that lead to unnecessary bleeding of the CD. The author further goes on to analyze the ‘ratio of cost of the process to recovery rate’ of insolvency proceedings in India, highlights the problems in the amendment, and provides solutions to improve the same.   

    The Regulation

    The Board, vide notification No. IBBI/2022-23/GN/REG091 published the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2022 (“Amendment”) on September 13, 2022. By this notification, the Board has amended IRP Regulations, in order to facilitate the regulation on the remuneration of IRPs and IPs, appointed on or after 1st October 2022.  The Board has followed a two-pronged structure, wherein a minimum/base pay is set up on the basis of the quantum of claims admitted, followed by incentivizing the fees based on performance towards; i) timely resolution and ii) value maximization. The minimum pay scale will be as follows:

    Quantum of Claims AdmittedMinimum Fee (Rs. Lakh) per month
    (i) <= Rs. 50 crore1.50
    (ii) > Rs.50 crore < = Rs.100 crore2.00
    (iii) > Rs.100 crore < = Rs.500 crore2.50
    (iv) > Rs.500 crore < = Rs.1,000 crore3.00
    (v) > Rs.1,000 crore < = Rs.2,500 crore3.50
    (vi) > Rs.2,500 crore < = Rs.10,000 crore5.00
    (vii) > Rs.10,000 crore7.50

    Since time efficiency and value maximizations are the essence of the Code and the IPs play a major role in its realization, the board has added that apart from the minimum or floor fees, the IPs would be incentivized on the basis of i) resolution of CD in the prescribed timelines as given in the Code, and ii) achieving value maximization of CD. Thus, the Amendment provides a performance-linked fee structure for the timely completion of CIRP, wherein a certain percentage of actual realizable value shall be given to the IP as an incentive based on the time taken to resolve the CD. This ranges from 1% for resolution in less than or equal to 180 days to 0% for resolution after 330 days. Furthermore, a variable fee of 1% of the positive difference between the actual realizable value and fair value will be paid as an incentive to IPs who work towards value maximization. These sums must not exceed Rs. 5 crores and must be approved by the CoC. 

    The Amendment in the IRP Regulations ensures that all IPs are paid adequately and are incentivized for following the Code to its essence. While the same is beneficial for the creditors, it is detrimental and might lead to unnecessary bleeding of the CD.

    Critique

    The Bankruptcy Law Reforms Committee in its report mentioned the prodigal nature of any constraint to be imposed on the fees of the RP. It further mentions that due to a competitive market for IPs (where the lowest bidder gets the CIRP), the fees to manage the insolvency resolution process will converge to the fair market value for the size of the entity involved.

    Even though the board has ensured that the IPs be paid a minimum (floor) payment for their services based on the quantum of claims, however, as stated earlier, during the process of appointment of the RP, the IPs quote fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. Regulation 34 of the IRP Regulations provides for the fees and expenses incurred by the RP which shall be fixed by the CoC and shall be a part of IRPC. While fixing this cost, the RP indicates the approximate estimation of the expenses that would be incurred by them during the CIRP. It shall be assumed that since the RP is a professional, he would quote expenses with a reasonable understanding of the general expenses that would be incurred during CIRP. The RP’s exorbitant expenses should thus be regulated to avoid unnecessary bleeding of the CD and wrongful gains to the RP. The board should fix a maximum criterion (like 250% of the approximate cost stated) in order to ensure that the RP does not get illicit benefits. In cases wherein the RP crosses this statutory limit, they should bear these over-the-top expenses on their own, as a penalty.

    The Board has also failed to address the issue of exorbitant fees charged by the IPs during the CIRP. The following is a list of countries along with their recovery rate during insolvency proceedings (cents on every dollar) as well as their cost of process on the basis of the percentage of the estate of the debtor as per data given in the Doing Business Data published by the World Bank in 2019 :

    Name of the CountryRecovery rate (cents on every dollar)Cost of the process (% of estate)
    India26.59%
    United Kingdom85.36%
    United States of America81.810%
    Norway921%
    Sweden789%
    Slovenia88.74%
    Singapore88.84%

    It is quite evident that India has one of the highest costs of the process as well as one of the lowest recovery rates when it comes to insolvency regimes in the world. Thus, it becomes essential for the Board to regulate the IRPC as well as set a maximum limit on the remunerations filed by the RP, similar to the laws in Canada and the USA. The Board may propose different maximum limits on remuneration for different valuations of claims, similarly as it has done for minimum (floor) pay. Further, these limits can be relaxed for a speedy resolution and value maximization, as has been proposed by the Board.

    The Board has also failed in providing a revision mechanism for these minimum (floor) pay scales as well as for the rate of incentivization. For the same purpose, the board may constitute a committee that may meet on an annual or bi-annual basis. The committee should analyze the prevailing market situation and the fair market value of the fees of IPs for various categories of CIRPs based on the quantum of claims, following which the minimum (floor) pay scales as well as the maximum pay scales of the IPs shall be revised by this committee. 

    Conclusion

    The Amendment is merely a start to regulating the fees of IPs and subsequently the IRPC, but it is a long road ahead. While the IP plays a crucial role in the running of CD during the CIRP, they also have to ensure that the CIRP is completed in a timely manner with the aim of value maximization. The Amendment has tried to ensure that the IPs get a minimum pay as well as an incentivization towards the realization of the core values of IBC. This was done in order to reduce the burden of litigation between parties and on the AA. Yet, the Board should consider practical scenarios which lead to the bleeding of CD and hamper the spirit of the code and its core values and ensure rules and regulations such as regulating the maximum fees charged by the IPs, penalty for charging exorbitant expenses after quoting minimal expenses while getting the CIRP assigned to them, ensuring that these minimum (floor) pay rates and maximum rates are revised in a timely manner to be in tandem with the prevailing market rates are put in place to avoid such scenarios.

  • Vidarbha Industries v Axis Bank: A Slumping Case for Financial Creditors

    Vidarbha Industries v Axis Bank: A Slumping Case for Financial Creditors

    By Neelabh Niket and Nitish Dubey, fourth-year students at HNLU, Raipur

    Introduction

    The Hon’ble Supreme Court (the Court) recently in the case of Vidarbha Industries Power Limited Vs Axis Bank Limited has held that the power of the National Company Law Tribunal (NCLT) to admit an application for initiation of CIRP by a financial creditor under section 7(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) is only directory and not mandatory in nature. This ruling, in simple words, signifies that even if an application is complete under section 7(5)(a), the Adjudicating Authority (AA) in exceptional cases such as where an impending order lies in favour of the Corporate Debtor (CD), may not accept such an application and keep the CIRP in abeyance to protect the entity from being resolved. The Court was of the opinion that the legislature intended section 7(5) to be discretionary in nature as the word ‘may’ has been used in the provision as opposed to the word ‘shall’ used in section 9(5) which postulates a mandatory requirement in the case of operational creditors. The authors through this article intend to revisit the judgement from critical lenses and would lay down the implications of the judgement. 

    Facts

    The Court, in this case, was considering a Special Leave Petition of the Vidarbha Industries Power Limited (VIPL/defaulting Company) which had defaulted on a loan from Axis Bank Limited,, i.e., the financial creditor. The appellant pleaded that the default was on account of a dispute relating to the price of the electricity which was to be settled by the Maharashtra Electricity Regulatory Commission (MERC) and upon which the appellant was expecting to receive a substantial amount which would enable the appellant to pay off the debt. The appellants have gotten a favourable order from the Appellate Tribunal for Electricity (APTEL), however the same has been challenged in the Supreme Court whose order on the issue is awaited. 

    Analysis

    Before we delve into the nuances of the judgement, it is imperative to make it clear that the discretion conferred upon the Adjudicating Authorities to give a breathing space to the CD cannot be asked as a matter of right but can only be granted by the AA when there exist extraordinary circumstances. The authors however will argue that even this step of the Hon’ble Court is unwarranted and will open up Pandora’s box in an otherwise smooth IBC jurisprudence.  The same has been done under four heads which are as follows-

    • Overlooking Past Jurisprudence

    Prior to the instant case, it was well settled through the verdict in E.S. Krishnamurthy vs M/S Bharath Hi Tech Builder judgement that the AA had only two options when an application under section 7(5)(a) came for adjudication: (i) accept it; (ii) reject it. A judgement on similar lines was also expressed impliedly in the landmark case of  Innoventive Industries Ltd vs ICICI Bank wherein the Hon’ble Court held the following, 

    “The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete…” (emphasis supplied)

    However, the present judgement has in effect provided for a third option for the AA— to keep the insolvency proceedings in abeyance. Such an interpretation is not only against the established jurisprudence but also has little backing from the statute itself as neither the IBC nor the rules therein provide the AAs with the power to defer proceedings on account of an external/unrelated event. 

    • Diluting the Cash Flow Insolvency Test

    The Supreme Court’s decision to read discretion into section 7(5)(a) is not simply a simple shift in AA’s routine power but has the potential to disrupt the entire insolvency regime in India. The regime which was built on the solid foundation of a certain and determinable occurrence of a default has been unsettled and may attract bogus excuses by CDs to escape CIRP, causing prolonged litigation. In doing that, the Court has inadvertently dumped the Cash Flow Insolvency Test and allowed facets of the Balance Sheet Test in the Indian insolvency jurisprudence. Before delving into the tests, it becomes imperative to understand their scope and meaning. 

    There exist majorly two tests for determining an entity’s solvent status i) The Cash Flow Insolvency Test and; ii) The Balance Sheet Test. The Cash Flow Insolvency Test concentrates on whether the company can meet current debts from cash and other assets which can be readily realized; if it defaults in such repayment then it is considered insolvent. As long as an entity keeps paying its dues, and does not default no action can be taken against it under this test. Thus, the triggering point in the Cash Insolvency Test is an event of ‘default’. On the other hand, the Balance Sheet Insolvency Test requires the courts to pierce deeper into the company’s balance sheet and gauge its medium to long term liquidity, taking into account the company’s wider circumstances and be satisfied of the company’s insolvency if the company’s assets are less than its liabilities.

    The IBC strictly follows the ‘Cash Insolvency Test’, terming an entity insolvent only when it accounts for defaults. However, the Court via the judgement has digressed from the determination of insolvency from defaults to assessing whether there are other available assets of the company which may be utilized for repayment of debt at a later stage. This approach, as discussed earlier, inclines towards the Balance Sheet Insolvency Test which has not been prescribed or advocated by the IBC. 

    The erstwhile section 433(e) of the Companies Act, 1956 was based on the pretext of Balance Sheet Insolvency as it did not determine insolvency on the basis of defaults but on the entity’s inability to pay dues- a scenario which occurred when the company’s liabilities were greater than its assets.  In simple words, according to this section, an occurrence of default was insufficient in attracting the provisions of insolvency. This was however rejected and replaced by the IBC which ushered significant changes in the Indian Insolvency Regime. Importantly, the Court in Swiss Ribbons Pvt. Ltd. vs Union of India  indirectly approved the Cash Flow Insolvency Test and  noted that in a situation of financial stress, the cause of default is not relevant; and protecting the economic interest of the CD  is more relevant. 

    • Proper Usage of Discretion

    The authors are of the opinion that the usage of ‘may’ in section 7(5)(a) shall be construed to confer discretion to AAs in rejecting a CIRP application only when a mala fide intention is detected and such discretion shall not extend to provide weightage to any extraneous matter which is independent of the loan availed. The discretion in this sense is necessary to curb malicious attempts of financial creditors and CDs in deliberately forcing a Company into insolvency. The same is somewhat prevalent in the IBC jurisprudence and can be traced in few cases. For instance, the NCLAT in the case of Hytone Merchants v. Satabadi Investments Consultants rejected a section 7 application which had fulfilled all pre-requisites on the ground that the debtors and the financial creditors colluded and were acting against the interests of the company. 

    Further, the legislature’s usage of ‘shall’ for operational debt can also be justified on the same premise; the operational creditors are third parties who are not concerned with the entity and hence the chances of such collusion between the CD and operational creditors is very slim and unlikely. The Court has failed to delineate properly the different expressions used in the sections and has wrongly expanded the scope of the word ‘may’ on this premise, which in the authors’ view is wholly unnecessary. 

    • Abridging the Powers of the CoC

    If there is a possibility that the CD may get a favorable order or award, then there is always an option of settlement available with the debtor and the Committee of Creditors(CoC) to settle their claims and withdraw the resolution processunder section 12A of IBC. In any case, it is the Committee of Creditors who after assessing the financial condition of the company, shall decide the best course of action for the Company’s revival. The IBC has not conferred any powers to the NCLT to prima facie decide, at the stage of admitting a petition under section 7, whether a Company is solvent or not. It is counterintuitive to say that  an order or award will operate to save the debtor and confer the NCLT the power to stall the very commencement of the CIRP. 

    Thus, authorizing the NCLT and deferring the initiation of the CIRP on account of an uncertain event in the future may adversely affect the interests of all stakeholders, as with time other assets of the debtor may depreciate for the lack of investment and proper management. 

    Conclusion

    The Insolvency & Bankruptcy Code has been built upon the detection of insolvency upon the occurrence of a default or the Cash Flow Test. The Hon’ble Court via this judgement has diluted this Test and has allowed some element of the redundant Balance Sheet Test to again creep into the regime. The authors herein believe that the broad interpretation of the word ‘may’ in section 7(5)(a) by the Supreme Court will create unnecessary confusion and chaos in the Insolvency scenario in India. One must also not forget that in a commercial setup, there is a chain of transactions which are dependent on each other and a major delay in repayment may culminate in a domino effect, disrupting cash flow across sectors. On an optimistic note, it may however be hoped that such discretion does not become the rule and is only exercised in exceptional cases by the AA.