30th September, 2025 Research Publication: Transforming Insolvency Resolution in India (18.93 MB)

Insolvency and Bankruptcy Board of India 7th Floor, Mayur Bhawan, Connaught Circus, New Delhi - 110001 www.ibbi.gov.in Transforming Insolvency Resolution in India 2025

Title: Transforming Insolvency Resolution in India Copyright © Insolvency and Bankruptcy Board (IBBI) of India and contributors severally 2025 The IBBI and contributors have asserted their right under the Copyright, Design and Patents Act, 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise, without prior permission of the publishers. Published by: Insolvency and Bankruptcy Board of India 7th Floor, Mayur Bhawan, Connaught Circus, New Delhi - 110001 Email: research@ibbi.gov.in ISBN: 978-81-947537-4-2 Designed, Printed and Bound by: M/s. Indu Cards & Graphics New Delhi - 110006

Disclaimer: The views expressed in this publication are those of the authors and not of the IBBI. The IBBI bears no responsibility for any actions taken or decisions made on the basis of the viewpoints expressed by the authors in this publication. This Publication is designed for the sole purpose of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise.

on. This Publication is designed for the sole purpose of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. A reader must do his own research and / or seek professional advice if he intends to take any action or decision in the matters covered in this Publication. Any views and feedback on the publication may be mailed at research@ibbi.gov.in 978-81-947537-4-2

iii CONTENTS Preface ........................................................................................................................ V 1. Unravelling Jurisprudential Odyssey: Navigating Paths that Stray from ................. 01 the Legislative Intent of the IBC Shardul S. Shroff, Aishwarya Satija and Kritika Poddar 2. Assessing the Borrower-Level Impact of the Insolvency and Bankruptcy ................. 29 Code: A Study of the Fresh Start Process Natasha Agnes D’cruze, Dwijaraj Bhattacharya, Shree Harini V, and Indradeep Ghosh 3. Evaluating the Effectiveness of IBC in Balancing Recovery Rates by ....................... 53 minimising the ambit of Haircut Method Rakesh Kaidala and Chennu Bhargavi 4. Whether Resolving Insolvency Factors or Economic Factors are responsible ........... 73 for enhancing Entrepreneurial Activity in Asia with Special Focus on New Indian Insolvency and Bankruptcy Code NVV Satyanarayana Puchakayala and Ramanujam Veluchamy 5. Impact of Insolvency and Bankruptcy Code, 2016 on Bank’s Credit:.......................

al Focus on New Indian Insolvency and Bankruptcy Code NVV Satyanarayana Puchakayala and Ramanujam Veluchamy 5. Impact of Insolvency and Bankruptcy Code, 2016 on Bank’s Credit:....................... 109 A Panel Analysis Shivam Agarwal 6. Guarantor’s Quandary under IBC ............................................................................ 119 Ansh Gupta, Ajanta Gupta and Shiv Anant Shanker 7. Enhancing the Role of Insolvency Professionals in Managing Collective ................ 145 Investment Schemes Crisis in India: A Proposal for Regulatory Integration Asit Behera and Pooja Singla 8. India Should Introduce an Insolvency Law for the Municipalities and ................... 165 Local Bodies Devendra Mehta 9. Predictive Models for Different Corporate Insolvency Resolution Process .............. 189 (CIRP) Times Sunil Kumar Rajak, Sarvesh Kumar and Santosh Kumar 10. Role of Critical Factors in Distressed Company Valuation: A Sector- .................... 219 specific Case Study Seema Sharma and Deepika Dhingra

iv 11. SSFs and the IBC: A Symbiotic Relationship for Speeding Up NPL ......................... 243 Resolution in India Anushree Srivastava and Vardaan Mahajan 12. Strategic Abuse of Corporate Insolvency Resolution Process under the ................. 265 Insolvency & Bankruptcy Code, 2016 Debaranjan Goswami About the Authors………………………………………………………. ......................................... 277

olvency Resolution Process under the ................. 265 Insolvency & Bankruptcy Code, 2016 Debaranjan Goswami About the Authors………………………………………………………. ......................................... 277

v PREFACE The Insolvency and Bankruptcy Code, 2016 (IBC/Code), represents a landmark reform in India’s financial and legal systems, providing a consolidated framework to address insolvency and bankruptcy for corporations, partnerships, and individuals. Before the IBC, the country’s insolvency system was governed through multiple laws, with cumbersome & prolonged procedures. The IBC streamlined these process into a single & cohesive legislation, aiming to resolve insolvency in a time-bound manner, while ensuring realisation of maximum asset value as well as balancing of interests of all stakeholders. The Code led to a paradigm shift in the approach by placing creditors at the center of the resolution process and empowering them to initiate insolvency proceedings and participate actively in decision-making. It also stipulates the requirement for the timely completion of the corporate insolvency resolution process (CIRP). The IBC thus, encourages the revival and restructuring of distressed entities, supporting preservation of jobs and protecting the broader economic fabric of the country. In scenarios where revival is unviable, the Code provides a clear, transparent mechanism for liquidation, ensuring, thereby, orderly asset distribution. While promoting ease of doing business, the IBC also aims to build a robust framework for financial and economic resilience of the country. 2.

uidation, ensuring, thereby, orderly asset distribution. While promoting ease of doing business, the IBC also aims to build a robust framework for financial and economic resilience of the country. 2. The results from IBC can be assessed from the fact that, as of December 2024, a total of 8,175 cases were initiated under the Code, with 6,192 of them being successfully closed. Out of the total, while 3,485 companies accounting for 56% of the total closures were rescued, 2,707 cases led to liquidation. Of the rescued cases, 1,236 were closed due to appeals, reviews, or settlements, 1,130 cases were withdrawn, and 1,119 cases saw the approval of resolution plans. It is noteworthy that around 39% of the CIRPs that resulted in resolution plans were previously under the Board for Industrial and Financial Reconstruction (BIFR) or had been defunct. 3. The Economic Survey of 2024-25 has commended the IBC for transforming the behaviour of distressed companies, emphasizing its role as a deterrent that has encouraged firms to address financial distress proactively rather than face the consequences of a formal resolution process. The Code’s credible prospect of ownership transfer has significantly influenced debtor behaviour, as the potential loss of control over a company serves as a strong deterrent, prompting disciplined management and discouraging actions that could lead to insolvency. This impact is evident from the fact that, as of March 2024, over 28,818 cases involving a total debt of 10.22 lakh crore were withdrawn before reaching the admission stage.

could lead to insolvency. This impact is evident from the fact that, as of March 2024, over 28,818 cases involving a total debt of 10.22 lakh crore were withdrawn before reaching the admission stage. While ensuring expeditious recoveries, the IBC has also encouraged Indian banks to adopt a pro-active approach in managing their non-performing assets (NPAs). By emphasizing resolution over liquidation, the Code has encouraged banks to move away from protracted legal proceedings and adopt a more proactive, practical, and creditor-driven approach to maximize the realised value of distressed assets. The RBI’s Trend and Progress of Banking in India 2023-24 report, released on December 26, 2024, highlights the IBC as the dominant recovery mode, accounting for 48.1% of recoveries. The unparalleled contribution of the IBC in the form of bringing financial discipline is also reflected in terms of a sharp dip in the gross NPA ratio of Scheduled Commercial Banks to 2.54 per cent as on end-September, 2024, which is the lowest since March 2011. 4. As the regulatory body responsible for regulating the profession as well as processes under the IBC, Insolvency and Bankruptcy Board of India (IBBI) is at the forefront of promoting research that enhances the understanding of insolvency processes, challenges, and outcomes. By fostering an environment conducive to research, IBBI helps improve the functioning of the insolvency framework and ensures informed & timely decision-making within the sector.

nges, and outcomes. By fostering an environment conducive to research, IBBI helps improve the functioning of the insolvency framework and ensures informed & timely decision-making within the sector.

vi Moreover, IBBI actively collaborates with academic institutions, think tanks, and research organizations to support the development of high-quality research in the field of insolvency, which has increasingly become a multi-disciplinary area of study. 5. One such initiative was the 3rd International Research Conference on Insolvency and Bankruptcy, jointly organised by IBBI and the Indian School of Business (ISB), Hyderabad. The conference was held from 2nd to 3rd July, 2024, at the ISB in Hyderabad. The infrastructure and faculty support from ISB was pivotal in not only providing a world-class platform for organising the event but also equally crucial in making the conference a great success. This could also facilitate bringing together a diverse group of stakeholders from various sectors, academia, researchers, policymakers, industry experts, and practitioners in the field of insolvency on one platform for exchange of their ideas, sharing research findings, and discussing the evolving dynamics of IBC ecosystem in the country. 6. The conference facilitated cross-disciplinary collaboration, allowing participants from law, economics, finance, and business management to engage in insightful discussions. The speeches delivered during the conference significantly contributed towards advancing the dialogue around the Code.

economics, finance, and business management to engage in insightful discussions. The speeches delivered during the conference significantly contributed towards advancing the dialogue around the Code. The subsequent panel discussions also made it possible to bring together industry leaders for exploring strategies to attract investments, enhance value realization, and identify critical reforms to further strengthen the framework for resolving distressed assets under the IBC. Panelists also shared their perspectives on innovative practices, simplification of procedures, and legal amendments required to streamline resolution processes. The discussions also emphasized upon the need to adopt practical steps to reduce delays and improve the IBC’s effectiveness in achieving swift and efficient outcomes. 7. With more than 200 attendees present in person, the conference was a remarkable event that showcased the widespread interest in the topics discussed. Out of the 142 research proposals which were received for the conference, 59 were shortlisted, and ultimately, 26 papers were presented during the conference. Of these, 12 papers have been included in this publication. The papers have highlighted the diverse impact and evolving discourse surrounding the Code. They have tried to explore its transformative influence on credit channels within the Indian banking systems, its significant role in fostering entrepreneurial activity across Asia, and its efficacy in achieving substantial recovery rates.

ative influence on credit channels within the Indian banking systems, its significant role in fostering entrepreneurial activity across Asia, and its efficacy in achieving substantial recovery rates. The research studies also have thoughtfully explored the opportunities and subtle developments brought about by evolving jurisprudence and the potential of innovative tools like Special Situation Funds (SSFs) in resolving non-performing loans. They also investigate valuation regimes, the implications of insolvency processes for non-incorporated persons and municipal entities. 8. This compilation of research papers, presented at the 3rd International Research Conference on Insolvency and Bankruptcy, stands as a reflection of meaningful engagement with the evolving landscape of insolvency and bankruptcy. Each contribution reflects the dedication and expertise of researchers, practitioners, and policymakers in embracing the opportunities within this critical field. By encouraging inter-disciplinary discourse and offering innovative perspectives, this publication seeks to deepen the understanding and application of insolvency frameworks, particularly in the Indian context. We hope this collection not only offers actionable insights for advancing effective resolutions, but also contributes in fostering economic resilience and shaping a robust insolvency ecosystem in India, over the period of time. Thank You Dr. Bhushan Kumar Sinha (Whole Time Member)

resolutions, but also contributes in fostering economic resilience and shaping a robust insolvency ecosystem in India, over the period of time. Thank You Dr. Bhushan Kumar Sinha (Whole Time Member)

ABSTRACT Recent years have witnessed numerous instances where the interpretation and application of the Insolvency and Bankruptcy Code, 2016 (IBC/Code) in case law deviates from its foundational principles. Amidst this, the National Company Law Tribunal (NCLT) stands out for its commendable judicial innovation, stepping in to fill legal voids, as necessary. Judicial innovation, while beneficial, should ideally be accompanied by legislative changes to confer upon it the highest level of sanctity, especially in the context of an economic law like the IBC that fundamentally relies on certainty and predictability. In this background, the paper examines the foundational principles of the IBC, critically analyzes the evolving jurisprudence that poses a potential threat to these principles and emphasizes the need for interpreting the IBC in accordance with its legislative intent. INTRODUCTION In 2016, India made significant changes to its insolvency laws by enacting the IBC that codifies and consolidates all insolvency laws relating to companies, unincorporated businesses, and natural persons.

16, India made significant changes to its insolvency laws by enacting the IBC that codifies and consolidates all insolvency laws relating to companies, unincorporated businesses, and natural persons. The enactment of the Code was a result of nearly two decades of reform efforts that were aimed at inter alia promoting entrepreneurship, increasing availability of credit, and reducing cost of capital.1 The erstwhile statutory regime for corporate rescue namely the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) was marred with substantial flaws. Although intended to offer a prompt mechanism for revitalising sick industrial companies, the SICA garnered widespread criticism for its failure to deliver timely rescues, with proceedings often extending to 5-7 years.2 Factors contributing to this delay included routine challenges to Board of Industrial and Financial Reconstructing (BIFR) decisions, the BIFR’s struggle to differentiate between cases fit for rehabilitation and winding up, excessive focus on entity preservation, anti-creditor nature of the BIFR proceedings, and automatic moratorium on enforcement proceedings.3 The trigger event for initiation of proceedings under SICA was based on a net UNRAVELLING JURISPRUDENTIAL ODYSSEY: NAVIGATING PATHS THAT STRAY FROM THE LEGISLATIVE INTENT OF THE IBC 01 1 The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, https://www.ibbi.gov.in/ uploads/resources/BLRCReportVol1_04112015.pdf, at 14. 2 Interim Report of The Bankruptcy Law Reform Committee, at 39.

cy Law Reforms Committee Volume I: Rationale and Design, https://www.ibbi.gov.in/ uploads/resources/BLRCReportVol1_04112015.pdf, at 14. 2 Interim Report of The Bankruptcy Law Reform Committee, at 39. 3 Debanshu Mukherjee, Decoding the Bankruptcy Code, India Business Law Journal, February 2016; https:// vidhilegalpolicy.in/wp-content/uploads/2019/05/Article-Debanshu-IBLJBankruptcyCode.pdf.

2 worth erosion test to determine if the company was a ‘sick company’. This determination was significantly time-consuming and led to erosion of the company’s value, leaving effectively no scope for rescue and restructuring. BIFR proceedings were also deemed ‘notoriously dilatory’,4 allowing debtor companies to exploit SICA provisions to evade debt repayment, exacerbated by promoters retaining control and extracting value from the proceedings. In response to these challenges, the IBC was instituted as a streamlined corporate insolvency framework, characterised by some key features including an objective trigger based on payment default enabling early stress detection and stakeholder intervention; emphasis on time- bound resolution by prescribing timelines for various processes; curtailment of the company management’s authority during a corporate insolvency resolution process (CIRP); transferring control of the corporate debtor (CD) to an independent Insolvency Professional (IP) to prevent asset stripping; flexibility in the development of resolution plans that provide the best commercial decision for reviving the CD;

ebtor (CD) to an independent Insolvency Professional (IP) to prevent asset stripping; flexibility in the development of resolution plans that provide the best commercial decision for reviving the CD; and establishment of a clear hierarchy for distribution among all stakeholders. Notwithstanding the unequivocal legislative intent and the endorsement of such intent by multiple government reports, jurisprudence developed under the IBC has consistently veered off course. Recent years have witnessed numerous instances where the interpretation and application of the IBC in case law deviates from its foundational principles, posing a threat to the timely initiation of proceedings under the IBC, undermining the rights of secured creditors as established by the law and casting doubts on the well-established principle of the clean slate doctrine marking only a few instances among several. In this background, this research paper conducts a thorough examination of the foundational principles of the IBC, critically analysing the evolving jurisprudence that poses a potential threat to these principles and discusses the need for and importance of interpreting statutes in accordance with their legislative intent. PRINCIPLES UNDERLYING THE DESIGN OF THE IBC Background to enactment of the IBC The approach and design of the IBC was a result of the experience of implementation of the erstwhile insolvency laws in India.

PLES UNDERLYING THE DESIGN OF THE IBC Background to enactment of the IBC The approach and design of the IBC was a result of the experience of implementation of the erstwhile insolvency laws in India. Thus, it is worth noting the context in which the IBC was enacted. During the mid-2010s, the Indian banking sector witnessed an increase in stressed assets with several overleveraged Indian companies defaulting on repayments. This resulted in piling up of non-performing assets (NPAs) with banks and financial institutions. Despite lapses in the reporting of actual NPAs by banks, India recorded net NPAs amounting to 3.5 lakh crore in 2015.5 The net NPA saw an increase of approximately 6% in 2017 after the enactment of stricter rules for reporting of NPAs in 2016 by the Reserve Bank of India.6 The ballooning of NPAs was exacerbated by the low recovery rates of banks during this period. In 2015-2017, 4 supra note 2, at 41. 5 RBI, Database on Indian Economy. 6 Id. Unravelling Jurisprudential Odyssey: Navigating Paths that Stray from the Legislative Intent of the IBC

ing this period. In 2015-2017, 4 supra note 2, at 41. 5 RBI, Database on Indian Economy. 6 Id. Unravelling Jurisprudential Odyssey: Navigating Paths that Stray from the Legislative Intent of the IBC

3 Indian banks could only recover 26.4% of their loans on average, with public sector banks recovering merely half of the recovery made by private sector banks.7 The ineffectiveness of the insolvency regime at the time significantly contributed to this dire state of the Indian banking industry. Prior to the enactment of the IBC, India had a plethora of legislations dealing with resolving financial distress. This meant that the laws dealing with corporate insolvency were fragmented, overlapping and often conflicting. The insolvency regime was plagued by rampant delays leading to measly recoveries for creditors. The Doing Business Report prepared by the World Bank in 2014-15 suggests that in India, “resolving insolvency takes 4.3 years on average and costs 9.0% of the debtor’s estate, with the most likely outcome being that the company will be sold as piecemeal sale. The average recovery rate is 25.7 cents on the dollar.”8 The inefficiency of the corporate rescue and winding up/liquidation regime in India led to a situation where most creditors preferred to initiate separate recovery proceedings (often involving the same assets) irrespective of the viability of the company.

liquidation regime in India led to a situation where most creditors preferred to initiate separate recovery proceedings (often involving the same assets) irrespective of the viability of the company. This led to conflicts, disorderly distribution, delays, and depletion in value of the company, which could have otherwise been rescued. Given this, on 22 August 2014, the Ministry of Finance formed the Banking Law Reforms Committee (BLRC) headed by Dr. T.K. Viswanathan. The mandate of the BLRC was to create a uniform framework that would cover matters of insolvency and bankruptcy of all legal entities and individuals, save those entities with a dominantly financial function. The BLRC submitted – (i) An interim report in February 2015, containing the drawbacks of the existing insolvency regime at the time, international best practices and provided key recommendations for its approach to designing an insolvency law for India. (ii) A final report in November 2015 wherein Volume 1 provides the rationale for design of a new Insolvency and Bankruptcy Code, and Volume 2 provides the draft law. The IBC, as drafted by the BLRC, is a consolidated insolvency and bankruptcy framework that aims to improve the time taken to resolve insolvency which in turn would maximise value of assets of the CD. A modified version of the draft Code submitted by the BLRC, with public comments incorporated, was tabled in Parliament in the winter session on 23 December 2015.

maximise value of assets of the CD. A modified version of the draft Code submitted by the BLRC, with public comments incorporated, was tabled in Parliament in the winter session on 23 December 2015. Thereafter, a Joint Parliamentary Committee on Insolvency and Bankruptcy Code, 2015 (JPC) was set up to analyse the draft bill in detail. The JPC submitted its report, along with a modified Bill, in April 2016 and the IBC received Presidential assent on 28 May 2016. Objectives and Principles in the design of the IBC The BLRC laid down the following policy objectives that a well-designed insolvency law must address – (i) the protection of creditor interests by maximising returns to creditors; (ii) the promotion of economic growth through efficient reallocation of resources; 7 RBI, Insolvency and Bankruptcy Code and Bank Recapitalisation, (Dec. 17, 2017). 8 supra note 2, para 2.3.

4 (iii) the development of credit markets; (iv) the protection of other stakeholders such as employees and shareholders; and (v) enhancement of investor confidence.9 An efficient insolvency regime must strike the right balance between the interests of all the stakeholders of the distressed entity by reasonably allocating the risks among them.

nvestor confidence.9 An efficient insolvency regime must strike the right balance between the interests of all the stakeholders of the distressed entity by reasonably allocating the risks among them. However, the BLRC was cognizant that the law in the books is not solely sufficient for creating such a regime, and the institutional context within which it operates plays as significant a role as the substantive law itself.10 Therefore, it recommended a complete overhaul of the insolvency law and its institutional framework by enactment of a unified and comprehensive Code to deal with insolvency of corporate entities, individuals and partnership firms. The BLRC defined three key objectives when designing the provisions of the IBC, i.e. (a) quicker turnaround by lowering the time undertaken for resolution; (b) maximising value by lowering the loss in recovery to creditors; and (c) boosting credit by achieving increased levels of debt financing.11 It adopted a principle-based approach while designing the law to achieve these goals.

ing the loss in recovery to creditors; and (c) boosting credit by achieving increased levels of debt financing.11 It adopted a principle-based approach while designing the law to achieve these goals. To arrive at these principles, the BLRC reviewed most well-developed insolvency and bankruptcy regimes across the globe and carved out the following core features that were common to all – (i) a clear and linear process that creditors and debtors follow once an insolvency process is triggered; (ii) a collective mechanism for resolving insolvency within a framework of equity and fairness to all stakeholders to preserve economic value in the process; (iii) a time bound process that either ends in keeping the firm as a going enterprise or liquidates and distributes the assets to the various stakeholders.12 In line with these, the BLRC laid down the principles underlying the design of the IBC tailored for the Indian context. These foundational principles, discussed below, are vital tools for interpreting the law in a way that effectively meets its objectives13 - (a) Early detection of distress and easy trigger – The primary principle in the design of the IBC is to detect distress and assess viability of an enterprise as early as possible.14 The BLRC underscored the importance of timeliness in addressing financial distress and noted that identifying such distress at an early stage is key to preserving the value of the enterprise.

ible.14 The BLRC underscored the importance of timeliness in addressing financial distress and noted that identifying such distress at an early stage is key to preserving the value of the enterprise. Given this, the IBC provides a simple default test for initiating an insolvency resolution process whereby the process is triggered if it is established 9 supra note 4, para 2.2. 10 Id. 11 supra note 1, para 3.4.1. 12 Debanshu Mukherjee, Priyadarshini Thyagarajan, and Anjali Anchayil, The place of a collective liquidation process in an effective bankruptcy regime: A comparative analysis, Working Paper, FRG IGIDR (2015). 13 Please note that we have focused on design principles relating to corporate insolvency and have not considered principles for individual insolvency as put down by the BLRC. 14 supra note 1, para 3.4.2.

5 that the debtor made a payment default that is above the requisite threshold.15 This marks a shift from the balance sheet tests required under the erstwhile insolvency laws for initiation of rescue and winding up procedures. These tests required courts to undertake detailed assessments of the financial health of the enterprise by assessing its books of accounts and were mired by inconsistent jurisprudence and protracted litigation.

required courts to undertake detailed assessments of the financial health of the enterprise by assessing its books of accounts and were mired by inconsistent jurisprudence and protracted litigation. Thus, the BLRC recommended an objective mechanism for triggering an insolvency resolution process with little to no discretion for the tribunal to establish insolvency.16 Further, the IBC also allows both the creditors (financial and operational) and the debtor to initiate the insolvency resolution process albeit with differing documentary requirements for each.17 (b) Judicial intervention limited to matters of procedure – The delineation of the decision- making powers of the creditors committee as opposed to the insolvency tribunal is central to the design of the insolvency resolution process. The BLRC distinguishes between business decisions that assess the viability of the enterprise and decisions that ensure procedural fairness. The BLRC recommended that the law must explicitly state that the viability of the enterprise is a matter of business, and that matters of business can only be negotiated between creditors and debtor.18 The final decision regarding rescue of the entity must be an agreement among creditors who are the financiers willing to bear the loss in the insolvency.

be negotiated between creditors and debtor.18 The final decision regarding rescue of the entity must be an agreement among creditors who are the financiers willing to bear the loss in the insolvency. Thus, the role of the NCLT as the Adjudicating Authority (AA) in a CIRP is limited to ensuring adherence to the applicable laws and procedural rules, maintaining procedural fairness, and hearing allegations of violation and fraud during the process.19 To buttress the rationale for a limited role of the AA, the BLRC noted that the key reasons for failure of the erstwhile rescue procedures under Indian insolvency law included lack of institutional capacity and excessive judicial intervention. (c) Creditors in control – The IBC departs from its predecessors and replaces a debtor- in- possession model with a creditor-in-control model. Under the erstwhile regime, the promoters retained control of the management of the company while it was undergoing insolvency which led to siphoning off funds and stripping the company of its assets and value.

rstwhile regime, the promoters retained control of the management of the company while it was undergoing insolvency which led to siphoning off funds and stripping the company of its assets and value. For example, SICA was grossly misused by the debtor company as a reference with BIFR was deliberately filed to seek an automatic stay on creditor enforcement against the company.20 The moratorium was an effective cover for promoters of distressed companies to continue with business as usual, often bleeding the company further or stripping its assets.21 In stark contrast, upon initiation of CIRP under the IBC, the board of directors of the insolvent company are suspended and the management of the 15 Insolvency and Bankruptcy Code, 2016, § 4. 16 supra note 1, para 3.4.2. 17 Insolvency and Bankruptcy Code, 2016, § 7, § 8, § 9. 18 supra note 1, para 3.4.2. 19 Id., Chapter 5, at 74. 20 Kang & Nayar; Omkar Goswami, ‘Corporate Governance in India’ in Taking Action Against Corruption in Asia and the Pacific (ADB 2002) 94. 21 Committee on Financial Sector Reforms, A Hundred Small Steps, https://www.jrvarma.in/reports/Raghuram-Rajan/ cfsr_all.pdf, at 173.

Action Against Corruption in Asia and the Pacific (ADB 2002) 94. 21 Committee on Financial Sector Reforms, A Hundred Small Steps, https://www.jrvarma.in/reports/Raghuram-Rajan/ cfsr_all.pdf, at 173.

6 company vests with the IP appointed as the interim resolution professional.22 A committee of creditors (CoC) is formed comprising all unrelated financial creditors (FCs) of the CD.23 It is worth noting at this juncture that the IBC divides creditors into two key categories – FCs (who disburse credit against consideration for the time value of money) and operational creditors (OCs) (who grant credit against the provision of goods and services, including employees and debts owed to the Central Government, State Government, and other authorities). Unlike FCs, OCs do not form part of the CoC.24 This distinction is crucial since the CoC is tasked with taking business decisions regarding the viability of the debtor during the CIRP. This includes evaluating proposals to keep the entity as a going concern, making key decisions regarding management of the company during the process, and deciding on liquidation where a revival is not viable. To ensure fruitful negotiations, the IBC also provides for a calm period in the form of a “time bound moratorium against debt recovery actions and any new cases filed”25 against the debtor company.26 (d) Time-bound process for maximisation of value – The BLRC places huge emphasis on the crucial role of time in resolving insolvency for the purposes of maximising value available to stakeholders.

26 (d) Time-bound process for maximisation of value – The BLRC places huge emphasis on the crucial role of time in resolving insolvency for the purposes of maximising value available to stakeholders. The BLRC Report also notes this in the following terms: Speed is of essence Speed is of essence for the working of the bankruptcy code, for two reasons. First, while the “calm period can help keep an organisation afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer. Second, the liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realisation can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction.

going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realisation is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay… The most important objective in designing a legal framework for dealing with firm failure is the need for speed.27 Given this, the BLRC recommended a limited timeline of 180 days extendable once by 90 days28 for the completion of the CIRP along with timelines for different stages within the process. (e) Equitable treatment of creditors in a collective process – In line with international best practices on insolvency laws, the BLRC recommended that the IBC must ensure 22 Insolvency and Bankruptcy Code, 2016, § 17(1). 23 Insolvency and Bankruptcy Code, 2016, § 21(2). 24 Id. 25 supra note 1, chapter 5, at 74. 26 Insolvency and Bankruptcy Code, 2016, § 14. 27 supra note 1, at 14-15. 28 This has now been amended and a maximum timeline of 330 days has been provided in the IBC for completion of the CIRP. See Section 12, Insolvency and Bankruptcy Code, 2016.

supra note 1, at 14-15. 28 This has now been amended and a maximum timeline of 330 days has been provided in the IBC for completion of the CIRP. See Section 12, Insolvency and Bankruptcy Code, 2016.

7 that the insolvency and liquidation processes are collective in nature.29 This means that the law should deal with all creditors of the distressed company equitably by balancing their competing interests. Once insolvency is triggered, the interests of the general body of creditors trumps individual interests of each creditor. Notably, however, this does not mean that differently placed creditors are to be treated equally or that all commercial bargains made by creditors prior to insolvency (like security interest) are to be disregarded.30 (f) No prescriptions on solutions to resolve insolvency – The BLRC recommends that the law should first attempt to rescue a distressed company to ensure that maximum value is derived for stakeholders in instances where the company or its business is economically viable. Failing such an attempt at rescue, however, the company should be liquidated.31 A plan for revival of the CD, i.e. the resolution plan, would require a 75% majority in value terms of the CoC (this threshold is now amended to 66%). Thereafter, when such plan is approved by the AA, it would bind all stakeholders of the CD.

lution plan, would require a 75% majority in value terms of the CoC (this threshold is now amended to 66%). Thereafter, when such plan is approved by the AA, it would bind all stakeholders of the CD. The BLRC noted that the choice of the solution to revive the distressed company depends on the decision of the CoC and there are “no constraints on the proposals that the Resolution Professional can present to the creditors committee”.32 Thus, the CoC should have discretion to choose a plan that is the most value maximising in the facts and circumstances of a given case. Other than ensuring that the resolution plan is approved by the requisite threshold of the CoC, the AA is only required to assess whether the plan meets legal requirements such as granting priority to interim finance, complying with existing laws, providing for payment to creditors who are not on the CoC, etc.33 Further, the BLRC also intended for the law to be outcome neutral and recommended that where a rescue is not possible, a liquidation should be ordered expeditiously.34 This agnostic approach in deciding the best remedy to deal with a distressed company is influenced by the failure of the erstwhile SICA regime due to its bias towards rescue, even of commercially unviable companies. (g) An irreversible, time-bound liquidation with defined payout prioritisation – The BLRC envisaged that a liquidation would be ordered by the AA where no plan has been agreed to by the CoC or where the plan does not meet the requirements for approval by the NCLT.

rioritisation – The BLRC envisaged that a liquidation would be ordered by the AA where no plan has been agreed to by the CoC or where the plan does not meet the requirements for approval by the NCLT. Such liquidation process should have finality and be irreversible to ensure that no value depletion is caused due to continual attempts at rescuing unviable enterprises. Further, the liquidation process was recommended to be a time bound process with the priority of distribution amongst stakeholders clearly laid down in the law. In designing this priority, the BLRC noted the importance of “incentivising all stakeholders to participate in the cycle of building enterprises with confidence”. Thus, one of the key changes made in the payment priority provided in the IBC compared to erstwhile 29 supra note 1, para 3.4.2. 30 UNCITRAL, Legislative Guide on Insolvency (2005), https://uncitral.un.org/sites/uncitral.un.org/files/media- documents/uncitral/en/05-80722_ebook.pdf, at 11. 31 supra note 1, para 3.4.2. 32 supra note 1, chapter 5, at 75. 33 Id. 34 Id.

ency (2005), https://uncitral.un.org/sites/uncitral.un.org/files/media- documents/uncitral/en/05-80722_ebook.pdf, at 11. 31 supra note 1, para 3.4.2. 32 supra note 1, chapter 5, at 75. 33 Id. 34 Id.

8 insolvency laws is placing crown debts (or government dues) below the dues owed to FCs. The BLRC noted that this demotion of government dues in the payment priority under the IBC “would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth” in the long run. JUDICIAL DEVIATIONS FROM THE DESIGN PRINCIPLES OF THE IBC Admission on proving default As discussed above, one of the primary principles underlying the design of the Code is a quick and easy trigger for the insolvency process which is based on an objective criterion that places the least cost on the AA. Therefore, the IBC provides that an application for initiation of a CIRP is to be admitted where the applicant proves default by the CD that is above the requisite threshold.35 The rationale for this simple mechanism for initiation of insolvency proceedings under the IBC is that erstwhile insolvency laws witnessed inordinate delays in admission due to the subjective criteria of proving insolvency provided therein.

or initiation of insolvency proceedings under the IBC is that erstwhile insolvency laws witnessed inordinate delays in admission due to the subjective criteria of proving insolvency provided therein. This is evident from the discussion on the experience of implementation of SICA in the Interim BLRC Report. The Interim BLRC Report relies on doctoral research of Kristin van Zwieten (now Clifford Chance Professor of Law and Finance at the University of Oxford), who conducted a comprehensive study of the development of corporate insolvency law in India, particularly considering the influence of the courts in the failure of the liquidation and corporate rescue procedures.36 One of the findings of this research was that the wide discretion available with the courts in India under the erstwhile insolvency regime to assess whether a debtor was ‘unable to pay debts’ had not only resulted in inordinate delays but also generated ambiguity in respect of creditors’ rights.37 This, in turn, had affected the efficiency of the process as a whole. Accordingly, in designing the IBC, the BLRC envisioned the role of the NCLT to be limited to determining that evidence of default is provided and that the application meets the procedural requirements provided under law.38 No further discretion is intended to be provided to the NCLT in deciding whether to admit or reject an application for initiation of CIRP. This is also evident from the Notes on Clauses appended to the Insolvency and Bankruptcy Bill, 2015 (Bill) which has now been enacted as the IBC.

dmit or reject an application for initiation of CIRP. This is also evident from the Notes on Clauses appended to the Insolvency and Bankruptcy Bill, 2015 (Bill) which has now been enacted as the IBC. For instance, the Notes to Clause 7 of the Bill (now Section 7 of the IBC) that deals with the application for initiation of CIRP by an FC provide that – …Once the adjudicating authority/Tribunal is satisfied as to the existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed resolution professional, it shall admit the application. The adjudicating authority/Tribunal is not required to look into any other criteria for admission of the application. It is important that parties are not allowed to abuse the legal process by using delaying tactics at the admissions stage.39 (“Emphasis Supplied”) 35 Section 4 read with Sections 7, 9 and 10, Insolvency and Bankruptcy Code, 2016. 36 supra note 4, para 4.1B, at 42-43; See van Zwieten, K., The Demise of Corporate Insolvency Law in India, University of Oxford, 2012. 37 Id. 38 supra note 1, Chapter 5, at 79. 39 Clause 7, Notes on Clause, Insolvency and Bankruptcy Bill, 2015.

wieten, K., The Demise of Corporate Insolvency Law in India, University of Oxford, 2012. 37 Id. 38 supra note 1, Chapter 5, at 79. 39 Clause 7, Notes on Clause, Insolvency and Bankruptcy Bill, 2015.

9 This limit on discretion of the AA at the admissions stage has also been upheld by the Supreme Court in cases like Swiss Ribbons v. Union of India40 and Innoventive Industries Limited v. ICICI Bank and Another41 wherein it was held that for admission of a CD into CIRP, only the existence of debt and default needs to be demonstrated (commonly known as twin test). Despite the above, the Supreme Court in its recent decision of Vidarbha Industries Power Ltd. v. Axis Bank Ltd.42 (Vidarbha Industries) has held that the AA (i.e. the NCLT) while hearing an application filed by an FC under section 7(5)(a) of the Code for admission of a CD into CIRP, has discretionary powers in making an assessment as to whether the application ought to be admitted irrespective of the existence of debt and default. The Supreme Court has held that the factors relating to financial health of a debtor are relevant for assessment by the NCLT before it decides to admit the CD into CIRP. In this case, the adjudicated claim of the debtor against a third party (although under appeal) was more than the debt owed by it to the FC for which petition for initiation of CIRP was filed before the NCLT.

ase, the adjudicated claim of the debtor against a third party (although under appeal) was more than the debt owed by it to the FC for which petition for initiation of CIRP was filed before the NCLT. The Supreme Court held that in such cases where initiation of CIRP is opposed on the ground of existence of an award or a decree in favour of debtor and such award / decretal amount exceeds the amount of debt owed to the FC, the application of such creditor has to be kept in abeyance, unless there is good reason not to do so. The Court noted the language of section 7(5)(a) in comparison to section 9(5) (applicable to application filed by an OC) of the Code and observed the use of word “may” in section 7(5)(a) as against “shall” in section 9(5). Relying on this, the Court concluded that fulfilment of the twin test requirements merely gives a right to the FC to apply to the NCLT for initiation of CIRP but does not mandate the NCLT to admit such an application. Resultantly, the judgment of the Supreme Court in Vidarbha Industries has enlarged the role of the NCLT at the threshold and granted it discretion to not admit an application, even when the objectively defined threshold of existence of debt and default stands proved in accordance with provisions of the Code and its interpretation by the Supreme Court. This is starkly opposed to the legislative intent of the IBC which is buttressed by the Notes on Clauses to section 7 quoted above which have been overlooked by the Supreme Court in interpreting section 7 of the IBC.

pposed to the legislative intent of the IBC which is buttressed by the Notes on Clauses to section 7 quoted above which have been overlooked by the Supreme Court in interpreting section 7 of the IBC. Further, despite a subsequent order of the Supreme Court in review43 of the Vidarbha Industries decision to clarify that the same was held in context of the facts of the said case, various benches of the NCLT have relied upon the Vidarbha Industries decision to reject initiation of CIRP by going into subjective factors beyond the existence of debt and default.44 This has added significant delays in admission of CIRP, which is in addition to the huge pendency and delays at the NCLTs at the admission stage despite observance of the objective twin test, and clogged the already choking NCLT infrastructure. 40 (2019) 4 SCC 17. 41 (2018) 1 SCC 407. 42 (2022) 8 SCC 352. 43 Axis Bank Limited v. Vidarbha Industries Power Limited, (2022) 8 SCC 352. 44 Bank of Maharashtra v. Newtech Promoters and Developers Private Limited, C.P. (IB) No. 2465/NCLT/ND/2019, NCLT, New Delhi, order dated October 14, 2022; State Bank of India v. Krishidhan Seeds Pvt. Ltd., C.P. (IB) No. 500/ NCLT/MP/2018, NCLT, Indore, decided on August 25, 2022.

B) No. 2465/NCLT/ND/2019, NCLT, New Delhi, order dated October 14, 2022; State Bank of India v. Krishidhan Seeds Pvt. Ltd., C.P. (IB) No. 500/ NCLT/MP/2018, NCLT, Indore, decided on August 25, 2022.

10 In a subsequent decision, the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank and Others45 (Suresh Kumar) has distinguished Vidarbha Industries and reaffirmed the twin test established in previous judgments under the IBC. The Apex Court noted that the review petition for the decision in Vidarbha Industries has specifically clarified that observations made in this decision by the Court regarding additional grounds for admission of CIRP applications, such as solvency and viability of a CD, should only be understood to be made for the specific facts in Vidarbha Industries and must not be treated as universally applicable. It was also clarified that views expressed in a judgment cannot be taken to reflect the actual provisions of a statute. The Code as well as various judgments interpreting the Code clearly state that the NCLT’s discretion is limited to the satisfaction of debt and default. Thus, the Court held that Vidarbha Industries cannot be relied upon to deviate from this settled position. Although the judgment in Suresh Kumar has clarified the legislative intent and rectified the effects of Vidarbha Industries to a certain extent, it should be noted that both these cases have been decided by two-judge benches of the Supreme Court. Thus, Suresh Kumar has potentially diluted the precedential value of Vidarbha Industries without explicitly overruling the same.

ese cases have been decided by two-judge benches of the Supreme Court. Thus, Suresh Kumar has potentially diluted the precedential value of Vidarbha Industries without explicitly overruling the same. A judgment by a larger bench of the Supreme Court or a statutory amendment clarifying the intent of the law are necessary to ensure that the rigours of the admission process under the IBC are not diluted. Notably, on 18 January 2023, the Ministry of Corporate Affairs (MCA) invited public comments on several proposed changes to the IBC, including an amendment to Section 7 to clarify the same. However, no such amendment has been introduced in the IBC yet. Rescue as primary aim and scope of resolution plans Rescue as primary aim Several judgments interpreting the IBC have held that the primary goal of the law is to rescue a distressed company through the resolution process and have considered that liquidation should be the last resort.46 In Binani Industries Ltd. v Bank of Baroda,47 the National Company Law Appellate Tribunal (NCLAT) laid down the aims of the Code and noted that the– The first order objective is “resolution”. The second order objective is “maximisation of value of assets of the ‘Corporate Debtor’’ and the third order objective is “promoting entrepreneurship, availability of credit and balancing the interests”.

econd order objective is “maximisation of value of assets of the ‘Corporate Debtor’’ and the third order objective is “promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.48 Given that liquidation under the IBC is only permissible on failure of a CIRP, courts have repeatedly held that the objective of the Code is to “to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation”49. In K.N. Rajakumar’ v. V. Nagarajan & Ors.,50 the Apex Court noted that – 45 Suresh Kumar Reddy v. Canara Bank & Others, Civil Appeal No. 7121 of 2022, order dated May 11, 2023, Supreme Court of India. 46 For instance, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17. 47 Company Appeal (AT) (Insolvency) No. 82 of 2018, Judgement dated 14th November, 2018 of the NCLAT. 48 Id., para 17. 49 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17. 50 Civil Appeal No. 1792 of 2021, Judgment dated 15 September, 2021 of the Supreme Court of India.

, 2018 of the NCLAT. 48 Id., para 17. 49 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17. 50 Civil Appeal No. 1792 of 2021, Judgment dated 15 September, 2021 of the Supreme Court of India.

11 It could thus be seen that one of the principal objects of the IBC is providing for revival of the Corporate Debtor and to make it a going concern. Every attempt has to be first made to revive the concern and make it a going concern, liquidation being the last resort.51 (Emphasis Supplied) This rescue focused approach of Indian courts has prompted the conduct of multiple rounds of bidding with the aim of reviving companies during CIRP, often leading to inordinate delays and erosion of value.52 The NCLAT in Y. Shivam Prasad53 has gone a step further and held that even where a liquidation order is passed, the liquidator must first attempt to revive the company and run it as a going concern before selling the assets of the company. This has led to going concern sale of the CD being attempted in several liquidation proceedings subsequently. The concept of attempting going concern sales has even been incorporated into the regulations governing the liquidation process.54 This means that no matter whether the market sees value in the company, a long-drawn process to keep the company running at all costs will often be undertaken. The above-mentioned interpretation of the IBC as prioritising resolution regardless of failed attempts at garnering resolution plans in CIRP is however completely at odds with the statute’s legislative intent.

mentioned interpretation of the IBC as prioritising resolution regardless of failed attempts at garnering resolution plans in CIRP is however completely at odds with the statute’s legislative intent. The BLRC in its interim report noted that one of the key reasons for the failure of SICA was that courts endlessly attempted to rescue companies, which ultimately led to destruction of value and low returns for creditors.55 In this regard, the BLRC relied on research undertaken by Professor Van Zwieten who analysed a set of 1066 judgments under the SICA and argued that “while the existing literature on the SICA has largely linked the failure of the corporate rescue procedure under the SICA to the formal features of the legislation, an equally or more convincing explanation for the SICA’s failure lies in the interpretation and application of SICA provisions by courts.”56 Van Zwieten concludes that one of the primary judicial ‘innovations’ that led to the downfall of SICA was the development of judicial practice in the High Courts of permitting companies to explore rehabilitation options even after the issuance of a liquidation opinion by the BIFR.57 She notes – Arguably the most important judicial innovation revealed by the SICA cases is a largely informal one: a judicial practice of permitting the SICA company, its promoters or its workers to explore the possibility of its rehabilitation after the issuance of a liquidation opinion by the BIFR.

nformal one: a judicial practice of permitting the SICA company, its promoters or its workers to explore the possibility of its rehabilitation after the issuance of a liquidation opinion by the BIFR. Relief came in a variety of forms, sometimes on an interim basis (for example, by a stay of the BIFR’s liquidation opinion, or an adjournment of the hearing on the BIFR’s liquidation opinion), and sometimes in the form of directions to propose a scheme, either before the court or (on remittance to) the BIFR... Crucially, relief of this form did not depend on any finding of error on the part of the BIFR: what was being offered to petitioners was, to varying degrees and on a rather ad hoc basis, a form of merits review.58 (Emphasis Supplied) 51 Id., para 16. 52 For instance, Vistra ITCL (India) Ltd. v. Torrent Investments Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 132, 133 & 135 of 2023 & 139 of 2023, Order dated 2 March 2023 of the NCLAT. 53 Y. Shivam Prasad v. S. Dhanapal & Ors., Company Appeal (AT) (Insolvency) No. 224 of 2018, Order dated 27 February 2019 of the NCLAT. 54 Regulation 2B, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 55 supra note 4, para 4.1B, at 42-43; van Zwieten, K., The Demise of Corporate Insolvency Law in India, University of Oxford, 2012. 56 supra note 4, para 4.1B, at 42. 57 Id. 58 van Zwieten, K. supra note 36, at 242.

para 4.1B, at 42-43; van Zwieten, K., The Demise of Corporate Insolvency Law in India, University of Oxford, 2012. 56 supra note 4, para 4.1B, at 42. 57 Id. 58 van Zwieten, K. supra note 36, at 242.

12 Van Zwieten notes that this judicial development introduced several delays in the SICA process, allowing debtors to delay repayment to creditors and siphon off assets during the pendency of the lengthy litigation.59 As an example of delays involved in the process, one may note the case of Gujarat High Court in Madhu Textiles Ahmedabad Ltd v. Official Liquidator60 where the BIFR recommended liquidation in 2000 after two failed attempts at schemes since the company registered with the BIFR in 1992. While adjudicating an application by the company praying for rehabilitation, the High Court allowed it to propose a scheme of arrangement in 2002. The High Court subsequently concluded that a winding up hearing would have to be scheduled after the company submitted a scheme that failed to garner the requisite creditor approval in 2005. Such delays eventually led to increased costs for certain creditor groups under the SICA and an erosion in the company’s asset value.61 It may appear in the short term that keeping a company running will always be the best outcome as it preserves jobs and avoids the impression that banks have unfairly captured the wealth of the company. However, India’s experience with SICA suggests that this assumption is incorrect and that the long-term ill effects of such a rescue focused approach need to be considered.

the wealth of the company. However, India’s experience with SICA suggests that this assumption is incorrect and that the long-term ill effects of such a rescue focused approach need to be considered. Keeping the capital of financial institutions tied up in companies that have not been viewed as valuable by the market impedes the ability of such institutions to finance viable projects that can provide a higher number of economically useful jobs. The IBC has been designed with the intention of freeing up capital in a timely manner when a company is not commercially viable. This is evident from the bar on attempting another resolution process once liquidation has been ordered under the IBC.62 Further, the BLRC Report has specifically noted that preservation of time value is of primary importance in collective action proceedings like insolvency and has therefore recommended that liquidation orders should be irreversible.63 Given that going concern sales during liquidation go against the legislative intent of the IBC, the 32nd Standing Committee on Finance recommended that going concern sales should be disallowed in the regulations governing the liquidation process.64 However, this recommendation has not yet been accepted by the Government. Limited scope of resolution plans Instead of attempting to revive a company that has been ordered to be liquidated, perhaps a more effective remedy is to expand the scope of resolution plans during the CIRP. The IBC requires that a CIRP is attempted before a liquidation process commences.

ordered to be liquidated, perhaps a more effective remedy is to expand the scope of resolution plans during the CIRP. The IBC requires that a CIRP is attempted before a liquidation process commences. Thus, any revival that can be undertaken should ideally be within the procedure and timelines of the CIRP. Accordingly, having flexibility in the manner of rescue that can be made under a resolution plan is likely to increase the chances of revival of distressed companies during CIRP. This is in line with the way the BLRC envisaged for the IBC to operate. However, judicial authorities have generally interpreted the definition of ‘resolution plan’ narrowly, thereby limiting the scope of rescue in the CIRP. 59 Id. 60 I (2006) BC 98. 61 van Zwieten, K. supra note 36, para 8.2.2 and 8.3. 62 Insolvency and Bankruptcy Code, 2016, § 11(d). 63 supra note 1, chapter 5, para 5.5. 64 Standing Committee on Finance, Implementation of Insolvency and Bankruptcy Code- Pitfalls and Solutions, at 27.

nsolvency and Bankruptcy Code, 2016, § 11(d). 63 supra note 1, chapter 5, para 5.5. 64 Standing Committee on Finance, Implementation of Insolvency and Bankruptcy Code- Pitfalls and Solutions, at 27.

13 Section 5(26) of the Code defines a resolution plan as “resolution plan” means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern in accordance with Part II. Explanation. - For removal of doubts, it is hereby clarified that a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger;” The legislative intent in defining the scope of the resolution plan was to allow creditors with flexibility to design varied kinds of resolution plans including to allow both reorganisation and going concern sale of the CD as whole or in part. The rationale behind this was that creditors should have the freedom to take business decisions to arrive at the most value maximising way of resolving the CD’s distress. This legislative intent is evident from the discussions of the BLRC in its interim and final reports noted below:  The Interim Report of the BLRC notes the benefits of allowing flexibility to stakeholders to choose the mode of resolution that is most suited to the facts and circumstances of a particular case.

:  The Interim Report of the BLRC notes the benefits of allowing flexibility to stakeholders to choose the mode of resolution that is most suited to the facts and circumstances of a particular case. It discussed that – It is widely recognized that as long as a failing company remains economically viable it should be first subject to a reorganization or rescue process (and not liquidation). Unlike liquidation, where the company is closed down, reorganisation is a process of “organizational rebirth” where the “debts are renegotiated, costs are cut and the firm may be shrunk, in order to return to profitable operations”. Such reorganisation could also involve change of owners or management. It is important to point out that although a company’s economic viability differs from its financial health (which is primarily related to its level of indebtedness), there could be a strong link between the two, i.e. a company’s financial health could be a strong indicator of its economic viability. It may be noted that reorganization is not the only efficient rescue mechanism for saving a financially distressed company. The business could also be sold on a going concern basis (and proceeds distributed to the creditors) followed by liquidation of the residual entity (especially, when there is a ready market for that business).

ss could also be sold on a going concern basis (and proceeds distributed to the creditors) followed by liquidation of the residual entity (especially, when there is a ready market for that business). Some scholars argue that such approaches afford the possibility of avoiding protracted negotiations with various stakeholders and other costs associated with the reorganization process.65  Further, the BLRC Report notes that “All decisions on matters of business will be taken by a committee of the financial creditors. This includes evaluating proposals to keep the entity as a going concern, including decisions about the sale of business or units, retiring or restructuring debt.”,66 and recommends that the IBC should not be prescriptive regarding the desired outcomes of an insolvency process.67  This legislative intent is also reflected in the Notes on Clauses appended to the Insolvency and Bankruptcy Bill, 2015, wherein the notes to Clause 31 (now section 31 of the IBC) state that … a resolution plan may provide for any proposal for its insolvency resolution (including sale of the business as a going concern, takeover of the corporate debtor by another entity, reorganising or retiring debt etc. — all in compliance with law) … Where the resolution plan meets the criteria set out in Clause 31(1), the adjudicating authority 65 supra note 4, at 32. 66 supra note 1, chapter 5, at 74. 67 Id., at 75.

l in compliance with law) … Where the resolution plan meets the criteria set out in Clause 31(1), the adjudicating authority 65 supra note 4, at 32. 66 supra note 1, chapter 5, at 74. 67 Id., at 75.

14 shall sanction the plan. The plan shall be binding on the corporate debtors, its creditors, employees, shareholders, guarantors and other stakeholders.68 However, interpretation of the definition of ‘resolution plan’ by judicial authorities has been limited in scope. In Binani Industries Ltd. v. Bank of Baroda,69 the NCLAT noted that a ‘resolution plan’ means a plan proposed by a resolution applicant for insolvency resolution of the CD as a going concern in accordance with Part II. While noting that the Code in totality does not spell out the exact nature of a resolution plan and leaves it up to the imagination of stakeholders, it was held that the resolution plan cannot provide for sale of CD. While discussing the scope of a resolution plan, the Appellate Tribunal noted that – It is not a sale. No one is selling or buying the ‘Corporate Debtor’ through a ‘Resolution Plan’. It is resolution of the ‘Corporate Debtor’ as a going concern. One does not need a ‘Resolution Plan’ for selling the ‘Corporate Debtor’. If it were a sale, one can put it on a trading platform. Whosoever pays the highest price would get it. There is no need for voting or application of mind for approving a ‘Resolution Plan’, as it will be sold at the highest price.

it on a trading platform. Whosoever pays the highest price would get it. There is no need for voting or application of mind for approving a ‘Resolution Plan’, as it will be sold at the highest price. One would not need ‘Corporate Insolvency Resolution Process’, ‘Interim Resolution Professional’, ‘Resolution Professional’, interim finance, calm period, essential services, Committee of Creditors or ‘Resolution Applicant’ and detailed, regulated process for the purpose of sale. It is possible that under a ‘Resolution Plan’, certain rights in the ‘Corporate Debtor’, or assets and liabilities of the ‘Corporate Debtor’ are exchanged, but that is incidental.70 Therefore, sale of the business of the CD on a going concern basis has not been permitted through a resolution plan under the Code, instead resolution has only been permitted on an entity level. However, in recent cases related to real estate companies, this restrictive interpretation of the definition of resolution plan has led to roadblocks in maximisation of value. For instance, in Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.,71 the NCLAT has allowed project-wise CIRP of the CD. This means that CIRP for each project would be conducted separately.

Flat Buyers Association Winter Hills-77, Gurgaon v. Umang Realtech Pvt. Ltd.,71 the NCLAT has allowed project-wise CIRP of the CD. This means that CIRP for each project would be conducted separately. The rationale of the NCLAT was that this would be “in the interest of the allottees and survival of the real estate companies and to ensure completion of projects which provides employment to large number of unorganized workmen.”72 Accordingly, in such cases of real estate insolvency, resolution plans dealing with only specific projects of the CD would made and not those dealing with the CD as a whole. Notably, the Code does not contain any provisions or bestow any power (explicitly) on the AAs to allow project-wise CIRPs. The NCLAT has read this power from observations of the Supreme Court in the Swiss Ribbons73 case wherein the Court noted that “The Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole…To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.”74 68 Clause 31, Notes on Clauses, Insolvency and Bankruptcy Bill, 2015. 69 Company Appeal (AT) (Insolvency) No. 82 of 2018, Judgement dated 14th November, 2018 of the NCLAT. 70 Id., para 17, at 15-16. 71 Company Appeal (AT) (Insolvency) No. 926 of 2019, NCLAT, Order Dated 4 February 2020. An appeal was filed against this order in the Supreme Court, which was however dismissed. 72 Id., para 25. 73 (2019) 4 SCC 17. 74 Id., para 120.

No. 926 of 2019, NCLAT, Order Dated 4 February 2020. An appeal was filed against this order in the Supreme Court, which was however dismissed. 72 Id., para 25. 73 (2019) 4 SCC 17. 74 Id., para 120.

15 Thus, interpretation of the definition of resolution plan has largely limited the scope of rescue to instances where the entity is preserved as a going concern after a new management has taken over the entity. This interpretation is arguably narrower than originally intended by the BLRC. Further, the interpretation of ‘resolution plan’ has not been consistent and plans dealing with only parts or projects of the CD are being considered in real estate insolvency cases. Thus, expansion of the scope of resolution plans is left to discretion of the NCLT which is exercised in an ad hoc manner instead of being guided by the rule of law. Accordingly, there is a need for amending the IBC to broaden the scope of resolution plans and allow more flexibility to the CoC to rescue different parts of the CD in different ways. For instance, multiple resolution plans may be called for different business units of the CD if it is likely to bring more value than only allowing one plan that deals with all business units of the debtor. To account for its peculiarities, specific amendments regarding insolvency proceedings of real estate companies may also be considered.

wing one plan that deals with all business units of the debtor. To account for its peculiarities, specific amendments regarding insolvency proceedings of real estate companies may also be considered. Similar recommendations for amending the IBC have also been made by the Standing Committee on Finance.75 Notably, the regulations governing CIRP have recently been amended to allow the CoC to call for bids that provide for sale of one or more assets of the CD if resolution plans for the whole entity have not been received.76 This amendment however falls short of fixing the issues with interpretation of the definition of ‘resolution plan’ as described above. The Principle of Clean Slate The principle of the “clean slate” has long stood as a cornerstone principle underlying the intended ramifications of the IBC. This principle denotes that upon the acceptance of a resolution plan by the CoC and its subsequent approval by the AA, no claim, regardless of satisfaction or dissatisfaction, shall survive. Thus, all claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what must be paid in order, that it may then take over and run the business of the CD on a fresh slate.

decided by the resolution professional so that a prospective resolution applicant knows exactly what must be paid in order, that it may then take over and run the business of the CD on a fresh slate. This principle has also been codified in section 31 of the IBC which provides that once a resolution plan has been approved by the AA, the plan shall be “binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.” Propounded in the case of Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta and Ors.,77 the principle of ‘clean slate’ has also been relied on in subsequent judgments. The Supreme Court of India in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,78 held that The legislative intent behind this is to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very 75 Standing Committee on Finance, supra note 64, at 26-27. 76 Regulation 36B(6A), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. 77 (2020) 8 SCC 531. 78 (2021) 9 SCC 657.

note 64, at 26-27. 76 Regulation 36B(6A), Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. 77 (2020) 8 SCC 531. 78 (2021) 9 SCC 657.

16 calculations on the basis of which the resolution applicant submits its plans would go haywire and the plan would be unworkable. Similarly, in Indian Oil Corporation Ltd. v. Arcelor Mittal Nippon Steel India Ltd.,79 when an OC petitioned for the appointment of an arbitrator to settle its claim against the CD post approval of a resolution plan for the latter, the High Court dismissed the petition and held that the approval of the resolution plan is statutorily recognized as conferring a closure upon all claims that persons or entities may have had against the CD. The claims or liabilities which could have been enforced against the CD are duly considered in the course of the CIRP with the AA undertaking a detailed exercise with respect to identification of the various creditors of the CD, including the classes thereof, the scrutiny of claims received, and the ultimate apportionment of the amounts deposited by the successful resolution applicant amongst the creditors inter se. In fact, in a recent ruling of M/S RPS Infrastructure Limited v. Mukul Kumar & Another,80 the Supreme Court took a firm stance by disallowing the admission of claims even before the formal approval of the resolution plan by the AA. The case arose from a dispute between the CD and RPS Infrastructure, leading to arbitration proceedings and a subsequent award in favour of the latter.

rmal approval of the resolution plan by the AA. The case arose from a dispute between the CD and RPS Infrastructure, leading to arbitration proceedings and a subsequent award in favour of the latter. While an appeal against the award was pending before the Supreme Court, a CIRP was initiated against the CD, culminating in the CoC’s approval of a resolution plan pending final approval by the AA. During this interim period, RPS Infrastructure asserted its claim arising from the arbitral award to the resolution professional. However, the resolution professional rejected the claim citing two grounds: first, the claim was submitted 287 days beyond the stipulated 90-day period from the initiation of CIRP, and second, a resolution plan had already been approved by the CoC. RPS Infrastructure contested this decision before the NCLT, which ruled in its favour. However, the decision was overturned by the NCLAT. Upon appeal, the Supreme Court dismissed RPS Infrastructure’s plea, emphasizing that IBC is a time-bound process, with limited scope for extending timelines. The Court emphasized the need for vigilance on the part of appellant regarding the ongoing CIRP against CD. The Court held that allowing claims solely because the AA has not yet approved the resolution plan would potentially prolong the CIRP indefinitely, opening the floodgates for numerous similar claims.

The Court held that allowing claims solely because the AA has not yet approved the resolution plan would potentially prolong the CIRP indefinitely, opening the floodgates for numerous similar claims. Such an approach would disrupt the resolution process and may unleash the hydra-headed monster of undecided claims on the resolution applicant. This view has also been endorsed by the NCLAT in the case of Anju Industries v. Supervising Agency of Rishi Ganga Power Corporation Ltd.,81 wherein the NCLAT ruled that entertaining fresh claims at a belated stage, particularly when the resolution plan is under consideration by the AA, would not be justified. Such an action would essentially introduce a new dimension to the proceedings, akin to adding another head to the hydra, and could potentially disrupt the resolution process. However, while the principle of clean slate itself has been firmly reaffirmed by various judicial authorities, some decisions have engendered interpretive challenges, potentially paving the 79 ARB.P. 102/2022; Order dated 10 October 2023. 80 Civil Appeal No. 5590 of 2021; order dated 11 September 2023. 81 2020 SCC OnLine NCLAT 863.

ndered interpretive challenges, potentially paving the 79 ARB.P. 102/2022; Order dated 10 October 2023. 80 Civil Appeal No. 5590 of 2021; order dated 11 September 2023. 81 2020 SCC OnLine NCLAT 863.

17 way for creditors to exploit perceived loopholes. A striking deviation from the norm is illustrated in the case of Fourth Dimension Solutions Ltd. v. Ricoh India Ltd. & Ors.82 wherein the continuity of arbitration proceedings between the CD and the creditor was affirmed by the Supreme Court despite the approval of the resolution plan. The resolution professional had published a list of claims wherein the claims of the creditor were denoted as ‘Nil’, accompanied by a notation stating: “The claims attributed to FDSL are under dispute and are currently subject to arbitration proceedings/appellate scrutiny. The liability is contingent upon the outcome of these proceedings.” Subsequently, the approval of the resolution plan for the CD ensued, sans a definitive allocation towards the creditor’s claim. Notably, the Hon’ble Supreme Court ultimately decreed that, given the prevailing factual circumstances, the appeal required disposal by reaffirming the aforementioned fact, granting the parties the liberty to pursue all available contentions in the proceedings ongoing at the relevant time, if any. Furthermore, it was emphasized that if arbitration proceedings were pending between the parties, all contentions accessible to both sides would be adjudicated within the said proceedings based on their individual merits, in accordance with the established legal framework.

ng between the parties, all contentions accessible to both sides would be adjudicated within the said proceedings based on their individual merits, in accordance with the established legal framework. Consequently, the civil appeal was disposed of accordingly. Respectfully, the stance adopted by the court gravely distorts resolution dynamics and unfairly burdens the resolution applicant with future liabilities. Further, while the principle of the clean slate doctrine is unequivocal in its assertion that the failure to lodge claims during the CIRP leads to the nullification of such claims under a resolution plan, this standard is inconsistently applied in certain instances. In the case of SEL Manufacturing v. Punjab Small Industries & Export Corporation Ltd.,83despite the government creditor’s failure to file a claim during the CIRP, the NCLAT contended that the protective shield provided by the IBC should not be stretched to the point where public authorities are compelled to relinquish their assets without receiving full settlement of their dues or without adhering to the stipulations outlined in sale or lease agreements, or their transfer policies. The ‘clean slate principle’ was deemed inapplicable to the factual context of the case due to the existence of a prior demand from a public sector land authority, which was also not disclosed during the CIRP proceedings to the insolvency resolution professional or the CoC. Internationally, jurisdictions also apply the clean slate principle to their restructuring laws, though they vary in their application and scope.

to the insolvency resolution professional or the CoC. Internationally, jurisdictions also apply the clean slate principle to their restructuring laws, though they vary in their application and scope. In the United States, for instance, confirmation of a plan under Chapter 11 of the US Bankruptcy Code leads to the discharge of pre-bankruptcy debts for the debtor, unless explicitly stated otherwise in the plan or confirmation order. This discharge encompasses all claims, regardless of whether proof of claim has been filed or deemed filed, and whether or not the claim is allowed. Furthermore, the discharge terminates the rights and interests of equity security holders and general partners as delineated in the plan. However, the provision allows for exceptions to be made regarding certain specified debts, subject to the terms of the plan or confirmation order.84 Even the German Insolvency Code’s objective is to “serve the collective satisfaction of a debtor’s creditors by means of liquidation of the debtor’s assets and distribution of the proceeds or by reaching an arrangement in an insolvency plan, in particular in order to maintain the enterprise. Honest debtors are given the opportunity to 82 Civil Appeal 5908/2021; Order dated 21 January 2022. 83 Company Appeal (AT) (Insolvency) No. 881/2022; Order dated 20 March 2024. 84 11 U.S. Code § 1141 - Effect of confirmation.

e opportunity to 82 Civil Appeal 5908/2021; Order dated 21 January 2022. 83 Company Appeal (AT) (Insolvency) No. 881/2022; Order dated 20 March 2024. 84 11 U.S. Code § 1141 - Effect of confirmation.

18 achieve discharge of residual debt.”85 The Code accordingly provides for insolvency plans that can restructure debts and may involve the compromise or discharge of pre-insolvency claims. As soon as the order approving the insolvency plan become final, the same becomes binding on all parties to the proceedings and the debtors are discharged of the claims of the insolvency creditors.86 In India, courts have largely upheld the clean slate principle in insolvency cases, ensuring the integrity of the IBC. However, certain judicial precedents, as discussed earlier, have weakened this robust principle and created vulnerabilities that could be exploited to challenge decisions aligned with the spirit of the IBC. India, as one of the fastest-growing economies globally, stands to gain significantly from unlocking investments in stressed assets and reallocating them towards more productive uses. The enactment of the IBC aimed to foster investments in the Indian distressed assets market. The law has provided a legal framework, defined processes, and set time limits to maximize value for all stakeholders in distressed asset transactions.

stments in the Indian distressed assets market. The law has provided a legal framework, defined processes, and set time limits to maximize value for all stakeholders in distressed asset transactions. While the IBC has undoubtedly facilitated opportunities for investors seeking business expansion through acquisitions, mergers, amalgamations, and demergers at competitive prices,87 it is imperative to note that such opportunities come with the expectation of acquiring assets free from the past liabilities of erstwhile promoters. However, judicial decisions that undermine the clean slate principle risk undermining the efforts of the law. When investors perceive the possibility of acquiring assets burdened with past liabilities and encumbrances due to legal ambiguities, they may become hesitant to invest. These loopholes created by judicial precedents not only discourage domestic investments but also deter international investors from engaging in the Indian market.

they may become hesitant to invest. These loopholes created by judicial precedents not only discourage domestic investments but also deter international investors from engaging in the Indian market. Thus, it is crucial to address and rectify such loopholes to maintain investor confidence and promote robust investment inflows into the Indian economy. Treatment of secured creditors under the IBC The BLRC recommends that a secured FC’s security interest, including the nature, quality, and value of such security, is a fundamental consideration and needs to be given credence to both in the CIRP as well as the liquidation process.88 One of the principles set out by the BLRC for the design of the Code includes the “recognition of existing creditor rights and establishment of clear rules for ranking priority of claims”.89 Further, while emphasizing and encouraging collective participation of stakeholders, the BLRC stressed that the “core principle” of payout in liquidation is retaining the order of priorities that existed prior to liquidation.90 Therefore, the legislative intent gathered from the BLRC report makes it clear that the Code does not intend to override or abrogate the security interest owed to secured creditors and its priority. The principle governing priority in cases of multiple charges on a property is encapsulated by the Latin maxim “qui prior est tempore potior est jure,” meaning “he who is earlier in time is 85 German Insolvency Code, § 1, https://www.gesetze-im-internet.de/englisch_inso/englisch_inso.html#p1130.

e Latin maxim “qui prior est tempore potior est jure,” meaning “he who is earlier in time is 85 German Insolvency Code, § 1, https://www.gesetze-im-internet.de/englisch_inso/englisch_inso.html#p1130. 86 German Insolvency Code, § 254, https://www.gesetze-im-internet.de/englisch_inso/englisch_inso.html#p1130. 87 IBC: Developing a Market for Distressed Assets, https://ibbi.gov.in/uploads/resources/ b7d255fa23b6d70f3dda575e9ec0dfae.pdf. 88 Bankruptcy Law Reform Committee dated November 2015, Para. 3.4.2, Principle VII; Para. 6.4.2; Box 6.7, Entry 5. 89 Bankruptcy Law Reform Committee dated November 2015, para. 3.3.1. 90 Id., para 5.5.8.

19 stronger in law.” This maxim finds its place in section 48 of the Transfer of Property Act, 1882 (TP Act) and is commonly referred to as the rule of priority. According to this rule, when multiple charges are created on an asset, the claim of the first charge holder takes precedence over those of subsequent charge holders, and the debts of the initial charge holder must be settled in full before those of the subsequent charge holders. Section 48 of the TP Act allows for the general rule of priority based on the timing of charge creation to be altered by a special contract among charge-holders, thereby allowing for the establishment of sub-categories of priority, such as senior and junior charges. In the event of the sale of the asset, senior charges are accorded priority and are settled before subordinate charges.

establishment of sub-categories of priority, such as senior and junior charges. In the event of the sale of the asset, senior charges are accorded priority and are settled before subordinate charges. This principle governing the ranking of multiple charge holders is known as the doctrine of priority, which stands as a fundamental principle in secured lending. The case of Essar Steel stands out as a pivotal judgment in this regard, particularly due to the ruling by the NCLAT.91 In this landmark decision, the NCLAT determined that FCs should not be categorized as ‘secured’ or ‘unsecured’ when distributing resolution proceeds under a resolution plan. The NCLAT reasoned that the presence of security interest held no significance during the CIRP and consequently, the CoC could not devise a distribution mechanism considering the value and priority of security interest among secured creditors. Instead, the NCLAT asserted that all creditors of the CD must be treated equally for a resolution plan to be deemed ‘fair and equitable’. Accordingly, the NCLAT redistributed the resolution proceeds equally among financial and OCs, disregarding the hierarchy and value of security interest. This ruling faced substantial criticism from the credit industry, prompting the government to swiftly amend the IBC in 2019. These amendments, among other things, empowered the CoC to consider security interest, its value, and priority under section 30(4) when determining the distribution of resolution proceeds.

C in 2019. These amendments, among other things, empowered the CoC to consider security interest, its value, and priority under section 30(4) when determining the distribution of resolution proceeds. Additionally, the amendments introduced provisions mandating a minimum payment of liquidation value to dissenting FCs of a resolution plan under section 30(2)(b).92 The decision of the NCLAT was challenged before the Supreme Court of India and certain stakeholders also challenged provisions of the above-mentioned amendments. The Apex Court in the case of Essar Steel reaffirmed the traditional rights of secured creditors under the Code and clarified the legal principles applicable to security interest under the law. The Court recognized age-long norms regarding the rights and standing of secured creditors and upheld the distribution mechanism amongst secured creditors that respected the priority and value of their security. However, despite the unequivocal verdict in Essar Steel, numerous judicial rulings under the IBC have diluted the rights of secure creditors in insolvency proceedings in a manner contravening the well-established doctrine of security interest priority. In India Resurgence ARC Private Limited v. M/S Amit Metaliks Limited93 (India Resurgence), the Supreme Court, among other findings, determined that it would be appropriate for the CoC to exercise its commercial discretion in ensuring payment to all secured creditors in proportion to their admitted claims, irrespective of the value of their security.

ould be appropriate for the CoC to exercise its commercial discretion in ensuring payment to all secured creditors in proportion to their admitted claims, irrespective of the value of their security. The Court emphasized the discretionary nature 91 Standard Chartered Bank v. Satish Kumar Gupta, 2019 SCC OnLine NCLAT 388. 92 Insolvency and Bankruptcy (Amendment) Act, 2019. 93 2021 SCC online SC 409.

20 indicated by the use of ‘may’ instead of ‘shall’ in section 30(4), implying that these provisions were intended merely as guidelines for the CoC when deliberating on the distribution modalities under a resolution plan. Consequently, the order of priority amongst creditors under section 53(1) of the IBC including the consideration of priority and value of a secured creditor’s security interest was not deemed obligatory. Unfortunately, the India Resurgence ruling has been invoked in various cases to rationalize the disbursement of resolution proceeds without regard for the inter-se priority among secured creditors and their security arrangements.94 Additionally, it has been cited to assert that determining the payment amounts to different classes of creditors falls within the commercial discretion of the CoC and consequently, dissenting secured creditors are precluded from demanding higher payments based on the value of their held security interest.95 This disregard for the value and precedence of security interest held by creditors has also been similarly applied to cases of liquidation by the NCLAT. In Technology Development Board v. Mr.

rest.95 This disregard for the value and precedence of security interest held by creditors has also been similarly applied to cases of liquidation by the NCLAT. In Technology Development Board v. Mr. Anil Goel & Ors.96 (TDB), the NCLAT was tasked with determining whether the inter-se priority among secured creditors would persist once a secured creditor has waived its security interest in accordance with section 52. The NCLAT concluded that secured creditors who relinquish their security interest will be remunerated under section 53(1)(b) regardless of the extent of their charge and noted that “once a secured creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) whereunder all secured creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs.” An appeal against the NCLAT’s order has been filed in the Supreme Court of India, resulting in a current stay on the judgment.97 Despite this halt, the NCLAT has maintained a similar stance in subsequent cases. In Oriental Bank of Commerce v. Anil Anchalia, Liquidator of M/s.

dia, resulting in a current stay on the judgment.97 Despite this halt, the NCLAT has maintained a similar stance in subsequent cases. In Oriental Bank of Commerce v. Anil Anchalia, Liquidator of M/s. Bala Techno Industries Ltd.,98 the NCLAT ruled that a secured FC forfeiting its security interest cannot claim precedence over other creditors during the distribution of proceeds in liquidation. Consequently, once a creditor surrenders its security, it stands to receive payment proportionately alongside other secured creditors, disregarding the hierarchy of charges. This decision of the NCLAT is also under appeal before the Supreme Court of India.99 To address the concerning interpretations stemming from these judgments, the Insolvency Law Committee (ILC) has issued multiple clarifications in its reports of March 2018 and February 2020. These clarifications emphasized the imperative of honouring inter-creditor 94 Small Industries Development Bank of India v. Vivek Raheja, RP, M/s. Gupta Exim (India) Pvt. Ltd Company Appeal (AT)(Insolvency) No. 570 of 2022; ICICI Bank Ltd. v. BKM Industries Ltd. and Anr. Company Appeal (AT) (Insolvency) No. 405 of 2023, Decided on 06-Nov-23; Canara Bank v. Sri. Nitin Vishwanath Panchal RP- I.A. No.520/2021 with I.A. No.663/2021 in CP(IB) No.384/7/HDB/2018; Decided on 13 March 2023. 95 Union Bank of India v. Mr. Rajender Kumar Jain, RP of M/s Kudos Chemie Ltd. & Ors.; Comp. App. (AT) (Ins.) No. 665 of 2022); Paridhi Finvest Pvt. Ltd. v. Value Infracon Buyers Association and Anr. - Company Appeal (AT) (Insolvency) No.

Kumar Jain, RP of M/s Kudos Chemie Ltd. & Ors.; Comp. App. (AT) (Ins.) No. 665 of 2022); Paridhi Finvest Pvt. Ltd. v. Value Infracon Buyers Association and Anr. - Company Appeal (AT) (Insolvency) No. 654 of 2022; Decided on 09-Feb-24. 96 [2021] NCLAT, Company Appeal (AT) Insolvency No. 731 of 2020. 97 Kotak Mahindra Bank Limited v. Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021]. 98 NCLAT, CA (AT) 547/2022. 99 Oriental Bank of Commerce v. Anil Anchalia and Anr. Civil Appeal No. 4664/ 2022.

21 and subordination agreements when distributing proceeds to secured creditors under section 53(1) of the IBC. Subsequently, the IBBI Colloquium Report echoed this sentiment, expressly recommending the insertion of an explanation in section 53(2) to affirm the continued applicability of valid inter-creditor/subordination agreements during liquidation. This proactive step serves to establish the legislative intent of the statute, even in instances where courts overlook such fundamental aspects. Notably, the statement of objects and reasons of the Insolvency and Bankruptcy Code (Amendment) Bill, 2019100 also mentions that amendments to section 30 were necessary on account on critical gaps in the IBC highlighted by various stakeholders that suggested that equal treatment of creditors with different pre-insolvency entitlements would adversely affect the cost and availability of credit. The doctrine of priority extends beyond national borders and is universally recognized as a fundamental principle governing security interest.

ld adversely affect the cost and availability of credit. The doctrine of priority extends beyond national borders and is universally recognized as a fundamental principle governing security interest. It is well established that an effective insolvency regime should uphold creditor rights established prior to insolvency proceedings, ensuring their precedence throughout the process. This commitment to priority fosters certainty, transparency, and predictability in commercial relationships101 which in turn reduces the risk premiums associated with extending credit. Such stability is vital for facilitating economic development and growth.102 Prominent international practices suggest that rights of secured creditors are respected within insolvency proceedings and to the extent that different creditors have struck fundamentally different commercial bargains with the debtor (e.g., through the granting of security), differential treatment of creditors that are not similarly situated may be necessary as a matter of equity.103 Accordingly, modern insolvency laws commonly recognize the rights of secured creditors prior to insolvency when borrowers undergo reorganization or liquidation. For instance, in the United States, section 510(a) of Chapter XI of the US Code, which governs bankruptcy, affirms the validity of subordination agreements during bankruptcy proceedings. This provision applies to both reorganization and liquidation proceedings under the US Code.

which governs bankruptcy, affirms the validity of subordination agreements during bankruptcy proceedings. This provision applies to both reorganization and liquidation proceedings under the US Code. Section 510(a) states that “a subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable non-bankruptcy law.” Subordination agreements typically involve the prioritization of payouts and the ability to enforce collateral, and these provisions have been largely upheld by American bankruptcy courts. Without a corrective action, the dilution of the rule of priority under the Code could result in adverse economic consequences across numerous cases. This scenario would allow a creditor secured by a weak or subordinate security to receive benefits equal to those of a creditor with a strong and valuable security and exclusive rights. In the short term, this dilution of the rule of priority has already caused chaos and unpredictability in the outcomes of CIRP and liquidations under the Code. In the long term, the flawed interpretation of the Code, disregarding the rule of priority, will blur the meaningful distinction between security held by lenders.

IRP and liquidations under the Code. In the long term, the flawed interpretation of the Code, disregarding the rule of priority, will blur the meaningful distinction between security held by lenders. This would, in turn, deter lenders from financing long-term infrastructure projects. 100 https://ibbi.gov.in//uploads/legalframwork/630af836c9fbbed047c42dbdfd2aca13.pdf . 101 World Bank, Principles for Effective Insolvency and Creditor/Debtor Rights (2015), https://www.insolindia.com/ uploads_insol/resources/files/the-world-bank-principles-for-effective-insolvency-and-creditordebtor-regime-1024.pdf. 102 UNCITRAL, supra note 30. 103 International Monetary Fund’s Report on Orderly & Effective Insolvency Procedures.

22 Acknowledging the pre-existing entitlements of secured creditors is essential for maintaining an equitable balance among all stakeholders. Without recognition of the inter-se priority of creditors and the value of security interest, lenders will adopt conservative approaches and undervalue security interest in their commercial decisions. Consequently, the availability and cost of credit in the market will be affected, potentially causing a ripple effect across the economy. Precedents following the India Resurgence judgment contravene internationally established legal principles regarding the rights and treatment of secured creditors in insolvency proceedings.

economy. Precedents following the India Resurgence judgment contravene internationally established legal principles regarding the rights and treatment of secured creditors in insolvency proceedings. This undermines the foundational principles upon which the credit industry operates and could have a detrimental impact on the overall financial stability of the economy. The ongoing debate surrounding the inter-se rights of secured creditors has been complemented by a significant legal battle over the precedence of crown dues versus dues of secured FCs, catalysed by the Supreme Court’s landmark judgment in State Tax Officer v. Rainbow Papers Limited104 (Rainbow Papers). The report of the BLRC highlights a pivotal distinction between the IBC and its predecessors. Specifically, the IBC strategically prioritizes government dues below those of secured and unsecured FCs in the hierarchy of claims during liquidation proceedings. This deliberate prioritization aligns with the overarching objectives of the IBC, aimed at fostering entrepreneurship and bolstering credit availability.105 However, the Rainbow Papers judgment is perceived as a notable departure from this policy stance. In this case, the Supreme Court ruled that tax authorities or statutory creditors would be regarded as secured creditors, even in instances where security interest is established by operation of statute. Moreover, it asserted that a resolution plan neglecting statutory demands payable to any State Government or legal authority would inevitably face rejection.

t is established by operation of statute. Moreover, it asserted that a resolution plan neglecting statutory demands payable to any State Government or legal authority would inevitably face rejection. Additionally, the CoC, inclusive of FCs, could not prioritize their own dues at the expense of statutory dues owed to the government or any government authority. This judgment garnered widespread criticism not only for contradicting the policy objectives of the statute but also for being in direct conflict with the definitions of ‘security interest’ and ‘transaction’ provided within the IBC. In essence, the IBC stipulates that a security interest must be “created in favour of, or provided for a secured creditor by a transaction”.106 This transaction should involve a written agreement or arrangement for the transfer of assets, funds, goods, or services involving the CD.107 Consequently, a creditor can be classified as a ‘secured creditor’ only when both parties have expressly documented their intention to create ‘security interest’ in favour of such creditor.

he CD.107 Consequently, a creditor can be classified as a ‘secured creditor’ only when both parties have expressly documented their intention to create ‘security interest’ in favour of such creditor. Clearly, security interest formed through operation of law falls outside the scope of these definitions, and any interpretation to the contrary would have far-reaching effects on the balance of rights and interests of secured creditors, OCs, and even the Central and State Governments. While the Supreme Court, in a particular instance, declined to consider the precedent of Rainbow Papers citing the failure of the judgments to acknowledge the ‘waterfall mechanism’ 104 (2023) 9 SCC 545. 105 Bankruptcy Law Reform Committee dated November 2015. 106 Insolvency and Bankruptcy Code 2016, § 3(31). 107 Insolvency and Bankruptcy Code, 2016, § 3(33).

23 outlined in the IBC,108 the NCLT in one instance has nonetheless applied the ratio of Rainbow Papers which resulted in the classification of the State Tax Department as a secured FCs, citing the existence of a charge or encumbrance on the property of the CD in accordance with the Rainbow Papers judgment.109 However, such interpretation runs counter to the legislative intent, as evident from the preamble to the IBC itself, which highlights that the reordering of the priority of government dues payment was a deliberate legislative policy.

counter to the legislative intent, as evident from the preamble to the IBC itself, which highlights that the reordering of the priority of government dues payment was a deliberate legislative policy. Consequently, government dues are intended to be afforded a lower priority than secured dues under section 53 of the IBC. The challenge with judgments that diverge from established legal norms lies in their inconsistent application across various benches of the NCLT. This inconsistency results in numerous appeals and delays in the resolution process. Rectifying these legal developments through judicial precedents can be a time-consuming process. Meanwhile, the adverse effects of these precedents can reverberate throughout banks, financial institutions, and the broader Indian economy. To pre-empt any detrimental repercussions on the debt market and the economy, the MCA should contemplate proposing urgent amendments to the Code. These amendments would serve to clarify the law, ensuring its effective implementation and alignment with its objectives. By explicitly incorporating the doctrine of priority and providing clarity regarding the treatment of sovereign dues under the Code, these clarifications would mitigate prolonged litigation and foster necessary legal clarity. Withdrawal of CIRP applications under section 12A Many contemporary socio-economic laws enacted by legislative bodies delineate overarching principles and policy directives. Due to constraints imposed by time considerations, legislatures often refrain from delving into intricate details.

nacted by legislative bodies delineate overarching principles and policy directives. Due to constraints imposed by time considerations, legislatures often refrain from delving into intricate details. Hence, delegated legislation is established to afford flexibility, adaptability, efficiency, and room for experimentation. Hence, the practice of empowering the executive to enact subordinate legislation within defined parameters has evolved as a pragmatic necessity to meet the demands of modern welfare states.110 Most statutes in India provide for the delegation of authority to create rules, regulations, bye- laws, or other statutory instruments, which are implemented by designated subordinate bodies. This form of legislation, termed delegated or subordinate legislation, operates within the parameters set by the legislature’s delegated powers. It is well-established that subordinate legislation is supplementary to the statute itself; thus, any rules, regulations, or bye-laws must operate within the legal framework established by the delegation. Subordinate legislation must also remain consistent with the law under which it was authorized and must not exceed the policy and standards outlined within the law. Moreover, if the legislative policy is clearly defined or a standard is set, judicial intervention should be restrained, recognizing that the legislature holds the discretion to determine the extent of delegation required in a specific context.111 108 Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors Civil Appeal No.

islature holds the discretion to determine the extent of delegation required in a specific context.111 108 Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors Civil Appeal No. 7976 of 2019, Judgment dated 17 July 2023. 109 Parag Sheth (Liquidator of Sai Infosystem (India) Limited v. The Collector (Ahmedabad) & Ors. (IA No. 157/AHM/ 2022 In CP(IB) 164/AHM/2017); order dated 9 November 2022. 110 Gwalior Rayon Mills Mfg. (Wing.) Co. Ltd. v. Asst. Commissioner of Sales Tax and Others, All India Reporter 1974 SC 1660 (1667). 111 Rojer Mathew v. South Indian Bank Ltd. and Ors.; 2019 INSC 1236.

24 The IBC employs the terms ‘prescribed’ and ‘specified’ to authorize the making of subordinate legislation. According to section 3(26) of the IBC, ‘prescribed’ means prescribes by rules established by the Central Government. Conversely, under section 3(32), ‘specified’ refers to delineations outlined by regulations established by the Board, with the term ‘specify’ construed accordingly.

blished by the Central Government. Conversely, under section 3(32), ‘specified’ refers to delineations outlined by regulations established by the Board, with the term ‘specify’ construed accordingly. Notably, certain provisions within the IBC explicitly grant authority to the Central Government, stating, for instance, “the Central Government may, by notification, specify...” This signifies that the power to enact subordinate legislation resides expressly with the Central Government. The IBBI’s authority to create regulations is further explained in section 240 of the IBC. Section 240(1) grants the IBBI broad regulatory discretion, allowing it to make regulations that must meet two essential criteria: the regulations must be consistent with the IBC and its subordinate rules, and the regulations should carry out the provisions of the Code. This provision provides the IBBI with the flexibility to ensure regulatory coherence while adhering strictly to framework of the IBC. Section 240(2) further elaborates on the IBBI’s regulatory domain specifying the matters for which IBBI may make regulations. Section 12A of the IBC allows for the withdrawal of an application admitted under sections 7, 9, or 10 of the IBC, subject to the approval of a 90% voting share of the CoC, in such manner as specified.

ction 12A of the IBC allows for the withdrawal of an application admitted under sections 7, 9, or 10 of the IBC, subject to the approval of a 90% voting share of the CoC, in such manner as specified. Thus, when interpreted alongside the definition in section 3(32) of the IBC and section 240(1), it distinctly conveys two key points: (i) CIRP applications once admitted, can only be withdrawn with the approval of a 90% voting share of the CoC, and (ii) the authority to enact subordinate legislation under section 12A rests with the IBBI and such legislation cannot exceed the legislative scope of the IBC and the ruled made thereunder. However, in blatant disregard of this legislative intent, Regulation 30A of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 (CIRP Regulations) outlines the procedure for withdrawal of applications under section 12A without the requisite CoC approval as provided under section 12A of the IBC. Notably, Regulation 30A (1) commences with the phrase “an application for withdrawal under Section 12A may be made to the Adjudicating Authority,” unmistakably suggesting that the regulation itself exceeds the scope of the law as no provision within the IBC grants the IBBI the authority to enact subordinate legislation pertaining to withdrawals under section 12A de hors the approval of 90% voting share of the CoC. However, despite such assertive exertions of authority, courts have consistently permitted withdrawals prior to the establishment of the CoC.

12A de hors the approval of 90% voting share of the CoC. However, despite such assertive exertions of authority, courts have consistently permitted withdrawals prior to the establishment of the CoC. Remarkably, courts have sanctioned withdrawals under the premise that Regulation 30A furnishes a comprehensive framework for entertaining withdrawal applications before the formation of the CoC, and in the absence of a CoC, there exists no obligation to hear other parties112 or seek the consent of the CoC, as mandated by section 12A of the IBC.113 The Supreme Court has also affirmed that the statement of objects and reasons of the IBC, in conjunction with Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules), empowers the NCLT to issue orders in the interest of justice, including orders allowing an applicant to withdraw its application and facilitating 112 Abhishek Singh v. Huhtamaki PPL Ltd. & Anr, SLP (Civil) No. 6452 of 2021, Order dated 28 March 2023. 113 Asif Abdullah Dalwai v. Arun Bagaria, IRP of Windals Auto Pvt. Ltd. & Anr; Comp. App. (AT) (Ins.) No. 958 of 2021, order dated 11 January 2022, Punjab National Bank Vs. Mr. Harshad S Deshpande, RP;I.A. 1990 of 2021 & I.A. 2440 of 2021 in C.P. (IB) 2390/MB/2019 , Order dated 1 December 2021.

ns.) No. 958 of 2021, order dated 11 January 2022, Punjab National Bank Vs. Mr. Harshad S Deshpande, RP;I.A. 1990 of 2021 & I.A. 2440 of 2021 in C.P. (IB) 2390/MB/2019 , Order dated 1 December 2021.

25 unimpeded business operations for a corporate entity. 114 Moreover, the exercise of inherent powers has been expanded to conclude that Regulation 30A is designed to give effect to the provisions of the IBC and must be interpreted in harmony with the IBC’s provisions. Consequently, the provisions of Regulation 30A must be enforced unless they contravene any provisions of the IBC.115 Such judicial precedents are inconsistent with the spirit of the law. The legislative intent behind permitting withdrawals only upon securing the approval of 90% of the CoC by voting share, is encapsulated in the BLRC Report. The report emphasizes that the structure of the IBC ensures that “all key stakeholders will participate to collectively assess viability.”116 The law must guarantee that all creditors capable and willing to restructure their liabilities are part of the negotiation process, and the liabilities of creditors not involved in the negotiation process must also be addressed in any negotiated solution.117 Consequently, once CIRP commences, it becomes a collective endeavour involving all creditors of the debtor, thereby discouraging individual actions for settlement enforcement to the detriment of the broader interests of all creditors. Thus, the consequence of section 12A is significant and impacts all stakeholders of the CD.

g individual actions for settlement enforcement to the detriment of the broader interests of all creditors. Thus, the consequence of section 12A is significant and impacts all stakeholders of the CD. An approval of 90% of the CoC by voting share is essential for this decision, which also helps mitigate future concerns of fraudulent preference. The ILC in its March 2018 report, also elucidates the legislative intent of section 12A and recommends amending Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (CIRP Rules) to allow withdrawal post-admission only if approved by the CoC with a 90% voting share. It explicitly recommends that Rule 11 of the NCLT Rules should not be applied in this context during the early stages of the CIRP. The legislature’s intent regarding the application of Rule 11 of the NCLT Rules to procedures under the IBC can also be gathered on a reading of Rules 10(1)) of the CIRP Rules. Rule 10(1) of the CIRP Rules selectively applies certain NCLT rules to the IBC but conspicuously omits Rule 11.

ures under the IBC can also be gathered on a reading of Rules 10(1)) of the CIRP Rules. Rule 10(1) of the CIRP Rules selectively applies certain NCLT rules to the IBC but conspicuously omits Rule 11. Consequently, these judicial precedents directly allow transgression of the collective nature of a CIRP by permitting individual settlements with the CD. It is firmly established that inherent powers cannot bypass the mandatory provisions of a law.118 The inherent powers of the court cannot be exercised when there exists an express provision of law applicable to the case.119 These powers are intended for exceptional circumstances and are not meant to allow courts to disregard procedural laws or to absolve parties from the consequences of their own errors, nor can they be employed to enable evasion of laws specifically prescribing deadlines for certain actions in support of a case. Consequently, the inherent powers of the court cannot be invoked to circumvent the provisions of law.120 There are numerous instances under the IBC where courts have declined to exercise 114 Ashok G. Rajani v. Beacon Trusteeship Ltd. & Ors; Civil Appeal No. 4911 of 2021; Decided on 22 September 2022. 115 Sintex Plastics Technology Ltd. v. Mahatva Plastic Products and Building Materials Pvt. Ltd. and Ors.; Company Appeal (AT) (Ins.) No. 729 & 730 of 2022; Decided on 3 January 2023. 116 Bankruptcy Law Reform Committee dated November 2015, para 3.4.2. 117 Id. 118 Manilal Mohanlal Shah and Ors. v. Sardar Sayed Ahmed Sayed Mahamad and Ors. AIR2010SC53. 119 GLAS Trust Company LLC v. BYJU Raveendran & Ors.

rm Committee dated November 2015, para 3.4.2. 117 Id. 118 Manilal Mohanlal Shah and Ors. v. Sardar Sayed Ahmed Sayed Mahamad and Ors. AIR2010SC53. 119 GLAS Trust Company LLC v. BYJU Raveendran & Ors. (2024 SCC OnLine SC 3032) 120 Mcdowell and Company Ltd. v. Wine Link L-1 Licensee, O.M.P. No. 138 in Civil Suit No. 2 of 2003; Decided on 29 October 2004.

26 their inherent powers when the statute contains explicit provisions either permitting or prohibiting certain actions.121 As illustrated in the aforementioned cases, the utilization of such broad discretionary powers increases instances of judicial interference in situations where it may not be warranted, thereby exacerbating delays and fuelling further litigation. This stands in stark contrast to the overarching scheme of the IBC, which envisions a circumscribed role for the AA and specifies circumstances in which the intervention of the AA would be permissible. The IBC aims to streamline insolvency proceedings by establishing clear guidelines and limiting judicial intervention to circumstances deemed essential for the fair and efficient resolution of insolvency cases. However, the expansive interpretation and application of discretionary powers by the courts risk deviating from this intended framework, potentially hindering the expeditious resolution of insolvency matters and undermining the objectives of the IBC. CONCLUSION In the realm of insolvency law, comprehensiveness is paramount to effectively address the multifaceted challenges that arise when individuals or entities face financial distress.

the IBC. CONCLUSION In the realm of insolvency law, comprehensiveness is paramount to effectively address the multifaceted challenges that arise when individuals or entities face financial distress. By facilitating the turnaround of viable businesses, the law can preserve jobs, promote economic stability, and maximise the assets for creditors. While the law should be comprehensive to address a wide range of circumstances judicial innovation should be applied judiciously and limited to scarce circumstances. Courts may play a crucial role in interpreting and applying insolvency law, resolving disputes, and adapting legal principles to new challenges. However excessive judicial innovation can lead to uncertainty and inconsistencies, undermining the effectiveness of the insolvency regime. Over the last 8 years, the judiciary has played a significant role in the fortification of the IBC. Notably, its intervention has been instrumental in addressing critical challenges due to legislative void. For instance, the collapse of Infrastructure Leasing and Financial Service, a systemically important financial entity demonstrated the judiciary’s nimbleness by crafting an ad-hoc framework and respond adeptly to urgent situations.

frastructure Leasing and Financial Service, a systemically important financial entity demonstrated the judiciary’s nimbleness by crafting an ad-hoc framework and respond adeptly to urgent situations. The insolvency resolution of Jet Airways122 illustrated the first instance on cross-border cooperation highlighting the judiciary’s role in facilitating effective coordination with conflicting international proceedings. Moreover, the NCLT’s adept utilisation of precedents from the United States and United Kingdon to tackle intricate issues like group indebtedness has not only proven effective in the case of Videocon Industries123 but also for numerous other subsequent group companies under the IBC. However, despite the initiation of these cases years ago, little progress has been made to address the legislative gaps. India has yet to enact a comprehensive law encompassing a complete framework for the insolvency resolution of financial firms critical to economic stability. Moreover, in an era where the global economy is shaped by digital transformation and intricate corporate structures proliferate multiple jurisdictions thereby facilitating borderless businesses 121 Sarda Mines Pvt. Ltd. v. Shailendra Ajmera Liquidator of Kwality Ltd.; I.A. 5208/2021 in Company Petition No. (IB)- 1440 (ND)/2018, Order dated 22 May 2022. 122 Jet Airways (India) Ltd v. State Bank of India (Company Appeal (AT)(Insolvency) No. 707 of 2019). 123 State Bank of India v. Videocon Industries Limited (MA 1306/ 2018 in CP No. 02/2018).

122 Jet Airways (India) Ltd v. State Bank of India (Company Appeal (AT)(Insolvency) No. 707 of 2019). 123 State Bank of India v. Videocon Industries Limited (MA 1306/ 2018 in CP No. 02/2018).

27 transactions, India still lacks legislations on cross-border insolvency and group insolvency. These deficiencies compel the judiciary to resort to ad-hoc frameworks. Expeditious legislative action in response to erroneous judicial interpretations stemming from gaps in the law is not unprecedented. A notable instance occurred with the amendments to Section 30 of the IBC vide the Insolvency and Bankruptcy (Amendment) Act, 2019 on August 6, 2019. This ensued promptly, a mere 32 days after the NCLAT judgment on July 4, 2019 which posited that security interest was inconsequential during CIRP and proscribed the CoC from considering their value and inter-se priority while deciding the distribution scheme under a resolution plan. The amendment aimed to elucidate that such considerations were indeed germane for the CoC when effectuating distributions under a resolution plan and upheld the exercise of commercial wisdom of the CoC to decide the distribution of resolution proceeds. Thus, the path to instilling predictability in the law necessitates the complementing of judicial innovations and interpretations with suitable legislative amendments. There is pressing need for further amendments to follow a principle- based approach guided by the rule of law. Such an approach will be outcome oriented and quickly adapt to changes.

ive amendments. There is pressing need for further amendments to follow a principle- based approach guided by the rule of law. Such an approach will be outcome oriented and quickly adapt to changes.

ABSTRACT The Insolvency and Bankruptcy Code, 2016 (IBC/Code) is a landmark legislation with the potential to impact every borrower. This paper focuses on Part III of the IBC, which deals with natural persons, proprietorships, and personal guarantors for corporate debt. Through the paper, the authors attempt to estimate the potential consequences of the Fresh Start Process (FSP) defined under this Part. The IBC lays out economic criteria that can qualify (or disqualify) an applicant for FSP. Under FSP, a borrower must be asset-light, have a low income, and hold minimal outstanding debt to qualify. These thresholds determine the applicability of the process once the IBC is fully notified. Thus, empirical estimates regarding the effects of the provisions on the Indian credit market are crucial to deciphering the impact of the IBC, more specifically, the FSP. We start by comparing the contemplated processes and outcomes of IBC with other similar legislations, like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (2002), Provincial Insolvency Act (1920), and Presidency Town’s Insolvency Acts (1909). The authors then proceed to estimate how many borrowers are likely to qualify under the FSP.

urity Interest Act (2002), Provincial Insolvency Act (1920), and Presidency Town’s Insolvency Acts (1909). The authors then proceed to estimate how many borrowers are likely to qualify under the FSP. They use the Centre for Monitoring Indian Economy’s (CMIE) Consumer Pyramids Household Survey (CPHS) conjoined (using a nearest neighbour model and the Hungarian Algorithm) with the All-India Debts and Investments Survey (AIDIS) for 2019 to estimate how many households qualify under FSP. They perform the analysis for the entire country, except a few states and union territories with relatively sparse population. Thus, the research is intended as a methodological contribution through which the impact of the IBC across borrower groups can be measured.
INTRODUCTION The Code was introduced in an environment where formal sector lenders, especially banks, struggled with low asset quality. The IBC was intended “to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the ASSESSING THE BORROWER-LEVEL IMPACT OF THE INSOLVENCY AND BANKRUPTCY CODE: A STUDY OF THE FRESH START PROCESS Natasha Agnes D’cruze, Dwijaraj Bhattacharya, Shree Harini V and Indradeep Ghosh 02

the ASSESSING THE BORROWER-LEVEL IMPACT OF THE INSOLVENCY AND BANKRUPTCY CODE: A STUDY OF THE FRESH START PROCESS Natasha Agnes D’cruze, Dwijaraj Bhattacharya, Shree Harini V and Indradeep Ghosh 02

30 Assessing the Borrower-level Impact of the Insolvency and Bankruptcy Code: A Study of the Fresh Start Process stakeholders”.1 It has been almost 8 years, but not all stakeholders are still covered. Currently, the act is operational (i.e., notified by the government) for corporate debtors (CDs) and individuals (natural persons) who are guarantors of corporate debtors. Most natural persons, including non-limited liability entities like partnerships, proprietorships, etc., are still outside the scope of the remedies proposed by the IBC, since Part III of the IBC, which deals with such debtors, is not notified in its entirety. Though there is no official declaration regarding why some sections of the code are not notified, it is possible to conjecture that they have to do with the rather complex issue of natural persons. In the case of Part III of the IBC, a human subject in distress becomes a key consideration. Policymakers must, therefore, contend not only with how Part III will impact credit markets but also with the ethical question of whether a natural person deserves relief in some form and, if so, why.

olicymakers must, therefore, contend not only with how Part III will impact credit markets but also with the ethical question of whether a natural person deserves relief in some form and, if so, why. The three processes outlined in the Code provide us a glimpse into the minds of the policymakers, especially highlighting how they envision answering this ethical question. The three processes under which a natural person (or her creditor) may seek shelter are: a) The Insolvency Resolution Process (IRP), b) The Bankruptcy Process, and c) The Fresh Start Process (FSP). The first two processes form part of a continuum, whereby any debtor (or their creditor) can file for an IRP and apply for bankruptcy if such an IRP fails. The third process, FSP, is unique. It is targeted towards low-income borrowers who are asset-light and have minimal outstanding debt, i.e., the most vulnerable borrowers. For such qualifying2 individuals, the FSP proposes a scenario where their debts can be wiped clean, i.e., “discharged”. In this paper, the authors situate the FSP in the historical arc of insolvency and bankruptcy regimes and processes, and then present a methodology (and insights therefrom) through which the impact of the FSP can be measured at a borrower level. SITUATING THE FRESH START PROCESS IN A HISTORICAL CONTEXT For as long as credit has existed, there have been borrowers unable to repay their monetary debts, and an attempt to recover the debts has always led to acrimony.

TART PROCESS IN A HISTORICAL CONTEXT For as long as credit has existed, there have been borrowers unable to repay their monetary debts, and an attempt to recover the debts has always led to acrimony. In classical antiquity, creditors could repossess the debtor’s person, i.e., debt slavery was common, and the practice was rooted in customs rather than formal laws (Levinthal, 1918). Between the 1st and 16th century AD, a second phase of insolvency practices developed; debt slavery received formal legal sanction, but certain sections of the society (members of higher political standing) were granted immunity from such a punishment. With the dawn of enlightenment, rational-legal principles began to take centre stage, and by the mid-16th century, formal law offered some protection to the debtor in default but also empowered the state (more precisely, its embodiment, the crown) to impose the death penalty (Carlos, 2019; Bhattacharya & Ghosh, 2022) Across these three phases, the purpose of the law (or the custom) was to enable the creditor to reclaim their debt. Further, another common feature unites these three phases - the lenders and borrowers were mostly singular entities3 and natural persons. However, there *The paper is written under the auspices of the Dvara Research-Insolvency Law Academy chair on personal insolvency. 1 Per the long title of the IBC, 2016 2 Specific qualification criteria are discussed in the next section. 3 one person would be lending to another rather than a consortium of persons lending to one or more people

title of the IBC, 2016 2 Specific qualification criteria are discussed in the next section. 3 one person would be lending to another rather than a consortium of persons lending to one or more people

31 were exceptions to this rule, i.e., some institutions did lend and borrow. After the 10th century, institutions like the church and the crown(s) often received or disbursed credit. The terms of such credit were, however, governed by bilateral agreements between the lender and the borrower rather than a codified national-level law. Starting from the turn of the 19th century, the modern era marks a significant departure from the earlier phases. Natural persons no longer occupy centre stage, neither as creditors4 nor as borrowers.5 With the invention of “companies”, and with such companies receiving the lion’s share of credit (earlier for trade and manufacturing, and later for services), they emerge as the key focus for insolvency and bankruptcy regimes (Bhattacharya & Ghosh, 2022). Axiomatically, we know that corporations are different from natural persons. The former can be carved into pieces and liquidated. The latter, on the other hand, have inalienable rights. Therefore, modern-day insolvency and bankruptcy regimes have attempted to move beyond the express purpose of enabling creditors to reclaim their debt. Now, they aim to balance the rights of the debtors against the creditors. In India, the Presidency Towns Insolvency Act (1909) and the Provincial Insolvency Act (1920) attempted to do this before Part III of the IBC sought to replace them with new provisions.

he creditors. In India, the Presidency Towns Insolvency Act (1909) and the Provincial Insolvency Act (1920) attempted to do this before Part III of the IBC sought to replace them with new provisions. However, those earlier acts remain in force since the majority of Part III of the IBC is yet to be notified.6 Apart from procedural aspects – such as the identification of the forum having jurisdiction over the subject, the presence of a moratorium, the time-bound nature of the processes, the need for an insolvency resolution professional, etc., – the key difference between the British- era statutes and the IBC is the FSP. It is a low-cost quasi-bankruptcy process applicable for low-income, asset-light debtors holding minimal debt. It allows for a complete discharge of their debt provided they satisfy specific economic and procedural criteria. Thus, the FSP process mimics the gate-kept bankruptcy process whereby the debtor may get a complete discharge from their obligations (Bhattacharya & Ananth, 2021). In the present form, an individual (debtor) applying for FSP under the IBC must satisfy four economic criteria, as specified in sections 80(2)(a) 80(2)(c) and 80(2)(e) of the IBC. These include the income criterion (the debtor must have annual income not exceeding 60,000), the asset criterion (the aggregate value of the debtor’s assets ought not to exceed 20,000), the debt criterion (the eligible debt owed by the individual must not exceed 35,000) and an extension of the asset criterion, whereunder for a debtor to be eligible, they must not own a “dwelling unit”.

debt criterion (the eligible debt owed by the individual must not exceed 35,000) and an extension of the asset criterion, whereunder for a debtor to be eligible, they must not own a “dwelling unit”. Further, the IBC specifies that these criteria should be jointly applied, meaning that a debtor would qualify for the FSP if they satisfied all four (IBC, 2016). The criteria, however, leave significant scope for interpretation in their definitions. For instance, it is unclear which income streams would be considered income under the income criterion. For an individual operating a proprietorship, all revenues from the business venture are essentially personal income and that aggregate number is very likely to exceed the ceiling, thus making most ineligible for the remedy. Furthermore, it is unclear whether 4 replaced by banks, and banking institutions 5 replaced by corporates 6 since section (243) of the IBC which repeals the Presidency Towns Insolvency Act (1909) and the Provincial Insolvency Act (1920) has not been notified, these laws remain in-force. Natasha Agnes D’cruze, Dwijaraj Bhattacharya, Shree Harini V and Indradeep Ghosh

wns Insolvency Act (1909) and the Provincial Insolvency Act (1920) has not been notified, these laws remain in-force. Natasha Agnes D’cruze, Dwijaraj Bhattacharya, Shree Harini V and Indradeep Ghosh

32 direct benefits transfers by the government will be considered income. If they are, that would even further reduce the eligible debtor numbers. The asset criterion and its extension present several dilemmas also. How do we ascertain the value of household goods? Who should be considered the owner if the asset is a common asset? Regarding the ownership of a dwelling, how should structures that are not wholly residential but used for residential purposes be treated (e.g. a hut on agricultural land used as the residence and storage unit for grains)? Thus, estimating the impact of the IBC, especially the FSP, using an as is interpretation of Part III must be accompanied by a set of assumptions that seek to resolve interpretive concerns such as the ones identified in the previous paragraph. The following section discusses these assumptions and the data sources (and their transformations) in detail. DATA SOURCES AND METHODS In India, no pan-national official data source simultaneously captures an individual’s income, the assets owned by them and their debts. These data reside in fragmented silos. For income, the official data resides within the income tax department. However, with only 7.4 crore people filing income tax returns in 2022-23 and given the widespread informal economy in the country, the data is neither comprehensive nor adequately representative.

nt. However, with only 7.4 crore people filing income tax returns in 2022-23 and given the widespread informal economy in the country, the data is neither comprehensive nor adequately representative. For data on debt owed by the individual, the hurdles are similar. Credit Information Companies (CICs) capture the cumulative credit outstanding for individuals and businesses, but the data only represents formal credit, thus reducing representativeness and comprehensiveness. Most importantly, however, neither of the above data sources is public. Finally, capturing the asset ownership of an individual through any consolidated database is virtually impossible. So, official data sources are of little help, and reliance must be placed on nationally representative surveys for estimation efforts. Currently, two such surveys exist – the All-India Debt and Investment Survey (AIDIS), conducted by the National Sample Survey Organisation (NSSO) and the Consumer Pyramids Household Surveys (CPHS), conducted by the Centre for Monitoring Indian Economy (CMIE). Both surveys have their limitations. AIDIS is a sample survey that captures quantitative information on assets and liabilities but not income. Further, most of the relevant data for our analysis is captured at a household level and not at the individual level, which ought to be the unit of analysis given the construct of the FSP. The CPHS, on the other hand, provides complementary details, like the quantum of income and ownership of debt, at an individual level.

ought to be the unit of analysis given the construct of the FSP. The CPHS, on the other hand, provides complementary details, like the quantum of income and ownership of debt, at an individual level. And also, across most asset segments such as household durables, jewellery, vehicles, etc., the CPHS data only indicates whether a particular asset type is owned or not, and not its value (if owned). Thus, from CPHS, we may only learn that a household has jewellery, but not how much it is worth. The qualification criteria for FSP, however, are based on values. Thus, neither the CPHS dataset nor the AIDIS dataset can be used in isolation to estimate the number of borrowers the FSP will cover. However, together, both datasets complement each other. The CPHS dataset presents select insights at an individual level and captures income. In contrast, the AIDIS dataset captures granular details on asset ownership and debt owed, though at a household level. Thus, a combined analysis of both datasets is critical, necessitating us to adopt an approach to match households from one dataset to another.

t ownership and debt owed, though at a household level. Thus, a combined analysis of both datasets is critical, necessitating us to adopt an approach to match households from one dataset to another.

33 Matching the datasets Matching observations between datasets is a common yet intricate challenge, especially when dealing with sample surveys representing the same universe. This task becomes particularly complex since the AIDIS (for the year 2019) and CPHS (for the year 2019) datasets have a multitude of variables, both categorical and continuous. These variables must be taken into account simultaneously for any accurate matching. This objective can, therefore, be recast as a classification problem. To elucidate, let us consider there are three households, “a1”, “a2”, and “a3” from the AIDIS dataset and “c1”, “c2” and “c3” from the CPHS dataset. Further, let us consider there are three variables common between the two datasets, “V1”, “V2”, and “V3”. The values of each variable for the different households are given below in Tables 1 (A) and 1(B). Table 1(A): Snippet from AIDIS dataset Table 1(B): Snippet from CPHS dataset Household V1 V2 V3 Household V1 V2 V3 a 1 Male 7 15000 c1 Male 7 15000 a2 Male 5 30000 c2 Female 12 150000 a 3 Female 6 45000 c3 Female 6 48000 Datasets like the AIDIS and CPHS often contain variables like the gender of the head of the household, the number of members in the family and the income (at a given frequency). Thus, we can assume V1, V2, and V3 represent these categories.

19,361.3 10,36,296 34,570 87,000 2,67,659 Value of Assets 1,06,416 23,67,650 85,67,444 2,72,175 8,95,000 23,76,150 Home Ownership12 1,06,416 0.83 NA NA NA NA 12 Home ownership is a categorical value. The mean is represented since it presents the ratio of number of people who own a residential property (from the data it appears that 94% of the sample owns a residential property).

41 While the summary statistics presented above are for the sample, the estimation results have been calculated for the population level by applying appropriate weights, as described in the previous section. Table-6 presents how many households qualify under each of the four criteria laid out for the FSP. Table 6: Number of households qualifying for FSP under each of the eligibility criteria Qualifying Households (from Matched Dataset)13 FSP Criterion-1: Annual Income < 60,000 45,02,187 FSP Criterion-2: - Outstanding debt amount < 35,000, but > 0 2,17,58,764 FSP Criterion-3: - Value of Assets < 20,000 40,24,937 FSP Criterion-4: No home ownership 92,89,643 Combining all criteria 1,50,408 Combining all four criteria, the authors find that only 1,50,408 out of the 26,56,71,317 households with outstanding debt qualify for FSP. This represents 0.057% of all households. The number of qualifying households across each state is represented in Appendix C.

out of the 26,56,71,317 households with outstanding debt qualify for FSP. This represents 0.057% of all households. The number of qualifying households across each state is represented in Appendix C. Table- 7 presents the number and proportions of qualifying households at the state level. Table 7: Share of households qualifying for FSP under the income criteria State Count Qualifying HHs Base weights (Income criterion) used Total % Andhra Pradesh 14198806 22525.75 0.1586 CMIE CPHS Assam 12200471 1115 0.0091 AIDIS Bihar 17748050 554.83 0.0031 CMIE CPHS Chandigarh 252275.0938 0 0.0000 CMIE CPHS Chhattisgarh 5672758.5 0 0.0000 CMIE CPHS Delhi 4922844 0 0.0000 AIDIS Goa 308249.5 0 0.0000 CMIE CPHS Gujarat 12531386 12.5 0.0001 CMIE CPHS Haryana 5414255.5 0 0.0000 CMIE CPHS Himachal Pradesh 1716132.75 0 0.0000 CMIE CPHS Jammu & Kashmir 2272021.25 0 0.0000 CMIE CPHS 13 The following results have been calculated only for households that have reported owing some debt.

PHS Himachal Pradesh 1716132.75 0 0.0000 CMIE CPHS Jammu & Kashmir 2272021.25 0 0.0000 CMIE CPHS 13 The following results have been calculated only for households that have reported owing some debt.

42 Jharkhand 6516384.5 198.5 0.0030 CMIE CPHS Karnataka 13810240 304.5 0.0022 CMIE CPHS Kerala 8910524 2663.25 0.0299 CMIE CPHS Madhya Pradesh 14949053 6806 0.0455 CMIE CPHS Maharashtra 24223068 3692.5 0.0152 CMIE CPHS Meghalaya 770592 546 0.0709 AIDIS Odisha 10015405 63726.63 0.6363 CMIE CPHS Puducherry 288658 0 0.0000 CMIE CPHS Punjab 6019335 515.25 0.0086 CMIE CPHS Rajasthan 13273183 0 0.0000 CMIE CPHS Sikkim 555504 2175 0.3915 AIDIS Tamil Nadu 19161852 27230.17 0.1421 CMIE CPHS Telangana 9276134 0 0.0000 CMIE CPHS Tripura 1261376 0 0.0000 AIDIS Uttar Pradesh 35141980 10009.25 0.0285 CMIE CPHS Uttarakhand 1947767 0 0.0000 CMIE CPHS West Bengal 22313012 8332.58 0.0373 CMIE CPHS Total 265671317.1 150407.71 0.0566 The estimates reveal that Odisha (with 63,727 households), Tamil Nadu (27,230 households), and Andhra Pradesh (22,526 households) are the states with the highest number of households that qualify for FSP. Together, these states account for 75% of the total number of qualifying households per the income criterion. These states also constitute 77% of the total outstanding debt that qualifies for FSP.

P. Together, these states account for 75% of the total number of qualifying households per the income criterion. These states also constitute 77% of the total outstanding debt that qualifies for FSP. Further, there are twelve states without any qualifying households. The estimation results thus suggest that there are pockets of concentration where FSP may have a higher uptake, assuming the ratio of qualifying households vis-à-vis households that seek refuge remains constant across regions, states, and cultures. The authors also explore an alternative estimation approach. Earlier, they had used four criteria (given in Table-8). However, after replacing criterion-1, i.e., “the income of the household must be less than 60,000 annually”, with “expenditure of the household must be less than 60,000 annually”, they find that the number of households that qualify for FSP increases from 1,50,408 to 4,42,802. The authors construct this scenario (by replacing income with expenditure) since most measures of poverty focus on the expenditure of the individual or household rather than income. Table-8 provides the number of households that qualify for this revised criteria.

enditure) since most measures of poverty focus on the expenditure of the individual or household rather than income. Table-8 provides the number of households that qualify for this revised criteria.

43 Table 8: Number of households qualifying for FSP under the revised criteria (expenditure- based) Qualifying Households (from Matched Dataset)14 FSP Revised Criterion-1: Annual Expenditure < 60,000 1,04,05,050 FSP Criterion-2: - Outstanding debt amount < 35,000, but > 0 2,17,58,764 FSP Criterion-3: - Value of Assets < 20,000 40,24,937 FSP Criterion-4: No home ownership 92,89,643 Combining all criteria (and replacing income with expenditure) 4,42,802 Combining the revised criteria (replacing income with expenditure), they find that only 4,42,802 households out of the 26,56,71,317 households with outstanding debt qualify for FSP, i.e., only 0.166% of households qualify for FSP. Table-9 presents the state-level qualifications. Under the revised criteria, Odisha still has 1,03,537 qualifying households, which is the highest in the country. It is followed by West Bengal with 96,159 and Uttar Pradesh with 54,641 qualifying households. These three states together account for 57% of the total number of qualifying households and 56% of the total qualifying outstanding debt, considering the expenditure criterion (alongside asset, debt and home ownership criteria). In this scenario, the number of states with zero qualifying households comes down to six. The number of qualifying households across each state is represented in Appendix D.

home ownership criteria). In this scenario, the number of states with zero qualifying households comes down to six. The number of qualifying households across each state is represented in Appendix D. Table-9 presents the number and proportions of qualifying households at the state level. Table 9: Share of households qualifying for FSP under the expenditure criteria State Count Qualifying HHs Base weights (Income criterion) used Total % Andhra Pradesh 14198806 43708 0.3078 CMIE CPHS Assam 12200471 44566 0.3653 AIDIS Bihar 17748050 11563 0.0651 CMIE CPHS Chandigarh 252275 418 0.1657 CMIE CPHS Chhattisgarh 5672759 69 0.0012 CMIE CPHS Delhi 4922844 0 0.0000 AIDIS Goa 308250 137 0.0444 CMIE CPHS Gujarat 12531386 1755 0.0140 CMIE CPHS 14 The following results have been calculated only for households that have reported owing some debt.

44 Haryana 5414256 2266 0.0418 CMIE CPHS Himachal Pradesh 1716133 0 0.0000 CMIE CPHS Jammu & Kashmir 2272021 0 0.0000 CMIE CPHS Jharkhand 6516385 2659 0.0408 CMIE CPHS Karnataka 13810240 8314 0.0602 CMIE CPHS Kerala 8910524 1013 0.0114 CMIE CPHS Madhya Pradesh 14949053 1816 0.0121 CMIE CPHS Maharashtra 24223068 175167 0.0723 CMIE CPHS Meghalaya 770592 0 0.0000 AIDIS Odisha 10015405 103537 1.0338 CMIE CPHS Puducherry 288658 0 0.0000 CMIE CPHS Punjab 6019335 5946 0.0988 CMIE CPHS Rajasthan 13273183 426 0.0032 CMIE CPHS Sikkim 555504 1262 0.2272 AIDIS Tamil Nadu 19161852 34779 0.1815 CMIE CPHS Telangana 9276134 7051 0.0760 CMIE CPHS Tripura 1261376 0 0.0000 AIDIS Uttar Pradesh 35141980 54641 0.1555 CMIE CPHS Uttarakhand 1947767 3201 0.1643 CMIE CPHS

mil Nadu 19161852 34779 0.1815 CMIE CPHS Telangana 9276134 7051 0.0760 CMIE CPHS Tripura 1261376 0 0.0000 AIDIS Uttar Pradesh 35141980 54641 0.1555 CMIE CPHS Uttarakhand 1947767 3201 0.1643 CMIE CPHS West Bengal 22313012 96159 0.4310 CMIE CPHS Total 265671317 442802 0.1667 DISCUSSION The estimates reveal that only 1.5 lakh out of the 26 crore households with debt qualify under all four criteria laid down by the IBC. The number of qualifying households increases to 4.4 lakhs if the authors replace the income criterion with a similar criterion for expenditure. Thus, as discussed earlier, only 0.05% of the households qualify for the FSP in India. If the expenditure criterion were to be considered, then that would allow 0.16% of the total households to qualify for FSP. This three-fold increase in the proportion of qualifying households (when considering the expenditure criterion also implies that the debt that must be written off increases from 264 crore to 705 crore. The 705 crore may appear to be a substantial amount in isolation; however, it amounts to a mere 0.86% of the credit outstanding of micro-finance institutions, specifically entities licensed as Non-Banking Financial Companies (NBFC-MFIs) (MFIN, 2023). If they consider the banking sector (RBI, 2023), it amounts to only 0.05% of total unsecured personal loans.

ecifically entities licensed as Non-Banking Financial Companies (NBFC-MFIs) (MFIN, 2023). If they consider the banking sector (RBI, 2023), it amounts to only 0.05% of total unsecured personal loans.

45 Under the existing criteria (contained in the IBC), Odisha has the highest number of qualifying households, 63,727. This forms a minuscule fraction of the state’s total population of households, only 0.63%. For the states with the second and third highest number of qualifying households, Tamil Nadu (27,230) and Andhra Pradesh (22,526), the qualifying households only represent 0.14% and 0.15% of the total populations, respectively. The state with the highest proportion of qualifying households is Sikkim (2,175 households), amounting to 0.39% of the total population. Thus, in a scenario where all qualifying households seek refuge under the FSP (per the current criteria), there are no states where even 1% of the households will be covered under the IBC. Appendices C and E, present the number of qualifying households and the quantum of qualifying debt (that has to be written off in case all qualifying households seek refuge under the FSP) at a state level, respectively. In the case of the income criteria, the maximum qualifying debt belongs to Odisha, followed by Andhra Pradesh and Tamil Nadu. A closer study of the number of qualifying households and the outstanding debt suggests that the average outstanding debt per household varies significantly across states (See Appendix B for further details).

study of the number of qualifying households and the outstanding debt suggests that the average outstanding debt per household varies significantly across states (See Appendix B for further details). For example, Andhra Pradesh and Tamil Nadu have similar numbers of households qualifying for FSP (22,526 and 27,230 households, respectively). However, the amount of qualifying debt differs significantly. For Andhra Pradesh, the qualifying debt is 63.7 crore and for Tamil Nadu (despite having more qualifying households), the qualifying debt is 39.9 crore. Thus, the average qualifying debt per household for Andhra Pradesh ( 28.2 thousand) emerges to be almost twice that of Tamil Nadu ( 14.6 thousand). The authors posit that two factors contribute to this disparity. First, some states have a higher degree of credit penetration in the low-income segments. Second, some states have a higher degree of over indebtedness. Thus, it is not necessary that as the number of qualifying households increases, the qualifying debt must increase in similar proportions. The scenario remains similar, even when considering the constructed expenditure criteria (alongside the asset, debt and home ownership criteria). Using the expenditure criteria, Odisha still has the highest number of qualifying households. According to this criteria, the share of households that qualify for FSP from the state increases to 1.03% of the total population. The constructed criteria lead to West Bengal having the second-highest number of eligible households, constituting 0.43% of its total population.

the state increases to 1.03% of the total population. The constructed criteria lead to West Bengal having the second-highest number of eligible households, constituting 0.43% of its total population. Uttar Pradesh follows as the state with the third-highest number of eligible households, comprising 0.15% of its total population qualifying for the FSP. Appendices D and F present the number of qualifying households and qualifying debts for each state, respectively. Under the constructed expenditure criteria, we again observe that states like Andhra Pradesh and Tamil Nadu have a similar number of qualifying households, but a sizeable difference in the qualifying debt. West Bengal and Odisha also follow a similar trend. States with lesser populations are also not immune to the differentiated average household debt, as is evidenced by Himachal Pradesh and Uttarakhand. While the estimates provide an insight into the total number of households that may qualify under different scenarios and the debt that correspondingly must be written off, there are a few limitations of the study that we must acknowledge. The results are at a household level

t may qualify under different scenarios and the debt that correspondingly must be written off, there are a few limitations of the study that we must acknowledge. The results are at a household level

46 and not at an individual level. The IBC defines FSP as a process whereunder an individual may seek refuge. However, one key factor inhibits estimations at the individual level. We can leverage the matched dataset to obtain individual-level income and outstanding debt, but we cannot obtain asset ownership (including home ownership) details. This hurdle arises since there is no singular approach through which assets may be apportioned between the household members. The authors consider a household (of four members) that owns a few utensils, a gas stove, a refrigerator, and a bicycle. The head of the household is a 55-year-old male who works as a casual labourer. His wife, aged 50, works seasonally during harvest, and two adult children are in college. Assuming they don’t own a house, how can we decide who owns the household assets? One approach is to consider who are the beneficiaries. In this example, all the members are. Alternatively, we may inquire who purchased the items initially. This approach may work when cases are adjudicated one at a time, but it is hardly implementable during a sample survey. Another is apportioning the assets according to the current or historical income patterns. In this example, it would mean that we take the income ratio of the head of the household and his wife and then apportion the assets in that ratio.

rding to the current or historical income patterns. In this example, it would mean that we take the income ratio of the head of the household and his wife and then apportion the assets in that ratio. It may work if we can trace this ratio for a long enough period, but it does not account for disproportionate gifts. We can consider many alternate approaches, but none truly capture the nuances. Thus, the limitation around apportioning assets is unlikely to be mitigated ex-ante, i.e., before the section is notified and there is enough jurisprudence to guide estimations. It is also important to recognise that the authors have only estimated the number of households that will qualify under FSP and not the number of households likely to seek refuge under it. It is well documented that households tend to make sacrifices, ranging from skipping festivals to skipping meals and pulling children out of school before they turn delinquent. The stigma and shame associated with being delinquent will likely magnify when they try to seek a formal discharge from their debts. Shaping this belief system is the underlying culture that the individual subscribes to. Thus, even if the number of eligible individuals increases, it does not mean everyone will start seeking refuge under the FSP. Further, the bankruptcy process, defined under the IBC, presents an interesting alternative to the FSP. In both FSP and bankruptcy, the final outcome is that the debtor is discharged from their repayment obligation, though the process of achieving this differs.

ts an interesting alternative to the FSP. In both FSP and bankruptcy, the final outcome is that the debtor is discharged from their repayment obligation, though the process of achieving this differs. In the case of the bankruptcy process, the debtor’s assets are attached to an estate administered by a bankruptcy trustee. The trustee is responsible for selling such assets to recover the dues from the borrower and repay her creditors. Thus, in case of bankruptcy, an alienation of assets is posited to occur. However, such alienation of assets is not absolute, as specific assets are excluded from being attached to the bankruptcy estate. Section 79(14) of the IBC lists these excluded assets; however, it does not assign any value to most. The first two sub-sections read as under: …unencumbered tools, books, vehicles and other equipment as are necessary to the debtor or bankrupt for his personal use or for the purpose of his employment, business or vocation and unencumbered furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his immediate family.

his employment, business or vocation and unencumbered furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his immediate family.

47 Thus, all assets essential for the debtor’s vocation will likely be protected, irrespective of their value. The third exclusion on personal ornaments allows the competent authority to set a value beyond which assets will not be excluded. The sub-section reads ‘any unencumbered personal ornaments of such value, as may be prescribed, of the debtor or his immediate family which cannot be parted with, in accordance with religious usage’. Under the Insolvency and Bankruptcy (Application to Adjudicating Authority for Bankruptcy Process for Personal Guarantors to Corporate Debtors) Rules, 2019, personal jewellery worth up to 1,00,000 is excluded. Similarly, unencumbered single dwelling units having a value of up to 20,00,000 in urban areas are excluded. In rural areas, single dwelling units having a value of up to 10,00,000 are excluded. Thus, the quantum of asset protection under the bankruptcy process is significantly greater than that of the FSP. This suggests that households that do not meet the current thresholds present in the FSP may file for the IRP and later bankruptcy and reap similar benefits as prescribed under the FSP.

t of the FSP. This suggests that households that do not meet the current thresholds present in the FSP may file for the IRP and later bankruptcy and reap similar benefits as prescribed under the FSP. Thus, the incentive structures poise such households to not act in good faith during the IRP so that they can reap similar benefits (as the FSP) during the bankruptcy process. This possibility that some may reap the benefits of FSP, despite not qualifying for it, begs the question: are the current FSP thresholds appropriate? To answer, the motive of the parliament when enacting the law must be deciphered. Though there is no stated motive for the FSP, a closer reading of the Code may provide some insights. Since the fundamental objective of the Code is to balance the rights of creditors and debtors, higher thresholds for FSP may erode significant creditor value (which in turn can impact the credit market, but such a discussion is beyond the scope of this paper). Conversely, the low thresholds may indicate an intent to cover the poorest of the poor. This can be discussed in two contexts: minimum wages and minimum per capita consumption expenditure. In India, Nagaland has the lowest minimum wage. At 5280 per month, it corresponds to 62,760 annually (Dezan Shira & Associates, 2023). In Delhi, the minimum wage is 17,494 (monthly) or approximately 2,10,000 annually (The Mint, 2023). Setting the FSP thresholds lower than the minimum wage suggests an intent to protect the most vulnerable. The question, however, remains.

monthly) or approximately 2,10,000 annually (The Mint, 2023). Setting the FSP thresholds lower than the minimum wage suggests an intent to protect the most vulnerable. The question, however, remains. Does the code adequately protect all that needs protection? One approach that the parliament may consider is replacing the income criterion with an expenditure-based criterion. If there is only one earning member in a household of four, the member must consume items worth 74,463 annually to ensure that the household stays above India’s poverty line (Bhattacharya & Ananth, 2021). For the alternate estimate, the authors assumed household expenditure thresholds to be 60,000 and found that only 17 out of 7708 households in the sample qualify for FSP. CONCLUSION The inclusion of FSP suggests that the framers of the IBC envisioned it to embody the evolving moral standard of insolvency regimes. The Code makes a visible effort to distinguish and protect natural persons. Despite this intent, the fact that majority of the Part III of the code is still not notified underscores that resolving the tussle between moral hazard and debtor protection is an arduous task. The methodology suggested in this paper allows policymakers to estimate the impact of the FSP, aiding in the process of resolving the tussle.

n moral hazard and debtor protection is an arduous task. The methodology suggested in this paper allows policymakers to estimate the impact of the FSP, aiding in the process of resolving the tussle.

48 Appendix A: State-wise number of residual households State AIDIS sample CMIE CPHS Residual Residual dataset size sample size Andhra Pradesh 4710 8080 3370 CMIE CPHS Assam 3577 1755 1822 AIDIS Bihar 7708 9382 1674 CMIE CPHS Chandigarh 190 456 266 CMIE CPHS Chhattisgarh 2281 4799 2518 CMIE CPHS Delhi 1650 1375 275 AIDIS Goa 235 1064 829 CMIE CPHS Gujarat 5095 9066 3971 CMIE CPHS Haryana 2181 5538 3357 CMIE CPHS Himachal Pradesh 1054 1280 226 CMIE CPHS Jammu & Kashmir 1603 2588 985 CMIE CPHS Jharkhand 2830 4710 1880 CMIE CPHS Karnataka 5750 9717 3967 CMIE CPHS Kerala 3610 4786 1176 CMIE CPHS Madhya Pradesh 6164 9200 3036 CMIE CPHS Maharashtra 10181 19834 9653 CMIE CPHS Meghalaya 1368 1040 328 AIDIS Odisha 4080 6761 2681 CMIE CPHS Puducherry 359 1140 781 CMIE CPHS Punjab 2691 6760 4069 CMIE CPHS Rajasthan 5978 10886 4908 CMIE CPHS Sikkim 858 816 42 AIDIS Tamil Nadu 7075 10938 3863 CMIE CPHS Telangana 2999 5830 2831 CMIE CPHS Tripura 2304 1192 1112 AIDIS Uttar Pradesh 13769 22868 9099 CMIE CPHS Uttarakhand 1136 2042 906 CMIE CPHS West Bengal 8559 10502 1943 CMIE CPHS Total 109995 174405

Telangana 2999 5830 2831 CMIE CPHS Tripura 2304 1192 1112 AIDIS Uttar Pradesh 13769 22868 9099 CMIE CPHS Uttarakhand 1136 2042 906 CMIE CPHS West Bengal 8559 10502 1943 CMIE CPHS Total 109995 174405

49 Appendix B: Detailed table (non-rounded) on the share of qualifying households under FSP (income and expenditure criteria) Note: The figures presented in the table above are for the population-level. It lays out the number of households that qualify for FSP for every criterion, namely, home ownership, total income, asset value, and outstanding debt. We also do a similar calculation for total expenditure. We then calculate the final number of households that would qualify if all the criteria were to be applied. Although the calculations under outstanding debt and final income and expenditure criteria only account for households that owe some debt, for the other calculations we present the figures for households that currently do not owe any debt as there is a chance that they may become indebted in the future

50 Appendix C: State-wise number of qualifying HHs (Income criterion) Appendix D: State-wise number of qualifying HHs (Expenditure criterion) Appendix E: State-wise amount of qualifying debt in INR Crores (Income criteria) Appendix F: State-wise amount of qualifying debt (Expenditure criteria)

ber of qualifying HHs (Expenditure criterion) Appendix E: State-wise amount of qualifying debt in INR Crores (Income criteria) Appendix F: State-wise amount of qualifying debt (Expenditure criteria)

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53 ABSTRACT This research delves into the intricate workings of the Insolvency and Bankruptcy Code, 2016 (IBC/Code) in India, scrutinizing its efficacy in achieving the delicate balance envisioned for substantial recovery rates. Recent insolvency cases have raised concerns as substantial reductions, known as “haircuts,” impact outstanding debts, particularly affecting banks relying on public funds. The study highlights the persistent challenge of a growing ratio of non-performing loans and disappointingly low recovery rates within the context of public-funded banks. The lack of clear signs of successful settlement, restructuring, or recovery exacerbates the issue, prompting a call for a more robust resolution framework. The broader implications on the interests of the public underscore the urgency for an effective system. The IBC adopts the “haircut” methodology to determine debt recovery for creditors during resolution. This reduction in outstanding debt value is based on an assessment of the insolvent company’s resolution plan feasibility. Acknowledging the financial distress of the insolvent company, creditors agree to a reduction in debt value by accepting haircuts. The impact on creditors hinges on variables like the company’s financial health, asset value, and the efficacy of the resolution plan.

ditors agree to a reduction in debt value by accepting haircuts. The impact on creditors hinges on variables like the company’s financial health, asset value, and the efficacy of the resolution plan. Notable cases, such as Bhushan Steel and Amtek Auto, illustrate instances where creditors willingly accept haircuts to facilitate company revitalization and optimize overall recovery. According to CRISIL Ratings, the recovery rates under the Code experienced a decline, dropping from 43% to 32% between March 2019 and September 2023. Concurrently, the average resolution time has seen an escalation from 324 to 653 days, surpassing the stipulated timeframe of 330 days. While the haircut approach is designed with the intention of ensuring fairness for all involved parties, it falls short of guaranteeing uniform sharing of losses. Certain stakeholders may bear a disproportionate impact based on specific circumstances, potentially leading to conflicts and objections regarding the fairness of the process. There exists the risk that the haircut approach might incentivize moral hazard. Creditors, foreseeing substantial debt reduction through insolvency proceedings, may engage in riskier lending practices, banking on the expectation that their losses will be mitigated through haircuts. This introduces a potential threat to the overall stability of the financial system. EVALUATING THE EFFECTIVENESS OF IBC IN BALANCING RECOVERY RATES BY MINIMISING THE AMBIT OF HAIRCUT METHOD 03

uts. This introduces a potential threat to the overall stability of the financial system. EVALUATING THE EFFECTIVENESS OF IBC IN BALANCING RECOVERY RATES BY MINIMISING THE AMBIT OF HAIRCUT METHOD 03

54 Another potential concern is the likely increase in ambiguity and difficulty in valuation due to the haircut procedure. The determination of the appropriate haircut hinges on factors such as the financial condition of the bankrupt company, the valuation of its assets, and the feasibility of the resolution plan. These assessments can be intricate, and divergent perspectives among stakeholders may lead to delays and even legal disputes. This research aims to uncover factors contributing to higher haircuts, exploring their legal connections with relevant sections of the IBC and their effects on financial institutions. By examining the intricacies of the IBC, legal nuances, and the practical implications of haircuts, the study aspires to provide insights into enhancing the recovery process and fortifying the financial stability of institutions involved. The interdisciplinary approach of this research involves an in-depth analysis of legal provisions, case studies, and financial data. It seeks to shed light on the intricacies of the insolvency resolution process, emphasizing the need for a nuanced understanding of the factors influencing the determination of haircuts.

ancial data. It seeks to shed light on the intricacies of the insolvency resolution process, emphasizing the need for a nuanced understanding of the factors influencing the determination of haircuts. Ultimately, the research aspires to contribute valuable insights that can inform policy decisions, foster improvements in the insolvency framework, and promote financial stability in the Indian context. RESEARCH PROBLEM This research addresses the potential impact of the Haircut Method on the banking system within the framework of the IBC. It seeks to understand the factors influencing the rate of haircut and examine the interconnections between various sections of the IBC that indirectly affect haircuts, potentially influencing the broader economy. The Haircut Method has the potential to result in substantial losses for banks, potentially leading to a credit crunch and impacting overall financial stability. Conversely, it may also serve as a mechanism to balance firm resolution and credit repayment. Therefore, it’s crucial to comprehend the challenges banks face in implementing the Haircut Method and explore possible solutions to effectively manage insolvent companies.

tion and credit repayment. Therefore, it’s crucial to comprehend the challenges banks face in implementing the Haircut Method and explore possible solutions to effectively manage insolvent companies. By delving into these issues, this research aims to contribute valuable insights to the existing literature concerning the Haircut Method’s impact on the banking system and the factors influencing haircut rates. RESEARCH OBJECTIVES 1. What are the key factors that influence the “haircut rate” in corporate insolvency resolution process (CIRP) under the IBC? 2. How does the use of the haircut method under the IBC impact the financial institutions? METHODOLOGY The research will utilize an analytical research methodology, primarily employing a case analysis approach. The study aims to examine the Conglomerates which have undergone the resolution process under the IBC and have experienced a substantial haircut, either exceptionally high or exceptionally low. The case analysis will entail a thorough examination of the companies’ financial statements, resolution plans, public documents and other pertinent documents. The results will be conveyed through a descriptive analysis of the case studies. Evaluating the Effectiveness of IBC in Balancing Recovery Rates by Minimising the Ambit of Haircut Method

documents. The results will be conveyed through a descriptive analysis of the case studies. Evaluating the Effectiveness of IBC in Balancing Recovery Rates by Minimising the Ambit of Haircut Method

55 LITERATURE REVIEW The enactment of the IBC in India in 2016 stands as a pivotal milestone in the nation’s legal landscape, addressing critical issues surrounding insolvency and bankruptcy with a comprehensive framework. Designed to streamline the resolution process, safeguard creditor rights, and foster transparency and efficiency, the IBC has sparked widespread academic and professional discourse, prompting in-depth analyses of its implementation, impact, and future trajectory. Scholars have delved into various facets of the IBC, scrutinizing its legislative structure, core provisions, objectives, and underlying principles. Through comparative studies and assessments against international best practices, researchers have identified areas for refinement and enhancement within the code. Central to academic inquiry is the examination of the insolvency resolution procedure outlined in the IBC, encompassing the roles of Insolvency Professionals (IPs), resolution timelines, and implications for stakeholders. Evaluations of the process’s efficacy and efficiency have yielded insights into its successes and challenges, informing ongoing refinements and reforms. A key focus of the literature is the emphasis placed by the IBC on preserving creditor rights and their active participation in the resolution process.

ges, informing ongoing refinements and reforms. A key focus of the literature is the emphasis placed by the IBC on preserving creditor rights and their active participation in the resolution process. Mechanisms such as the committee of creditors (CoC) have come under scrutiny, with researchers evaluating their decision- making authority and safeguards for creditor interests. Judicial interpretations of the IBC through landmark court decisions provide further insights into its evolving jurisprudence and implications for future insolvency cases. Furthermore, scholars have explored the potential of the IBC to address critical issues such as delays in resolution, cross-border insolvency, and stakeholder coordination. These explorations offer valuable perspectives on the code’s future evolution and its role in fostering a resilient and dynamic business environment. In the realm of banking, publications such as “The Corporate Insolvency Regime and Its Implications for the Indian Banking System” by former Reserve Bank of India Chief General Manager Shri Ajay Kumar Chowdary have shed light on how insolvency laws impact financial institutions.

nd Its Implications for the Indian Banking System” by former Reserve Bank of India Chief General Manager Shri Ajay Kumar Chowdary have shed light on how insolvency laws impact financial institutions. The analysis underscores the critical interplay between insolvency frameworks, financial stability, and the resolution of distressed businesses. Moreover, the literature underscores the imperative of efficient corporate insolvency frameworks in addressing non-performing assets (NPAs) and ensuring stable financial markets. Scholars have examined how the IBC has accelerated the resolution process, providing a structured approach to addressing troubled businesses within defined timelines. Studies also highlight the pivotal role of banks in the insolvency resolution process, examining their financial implications and challenges in assisting distressed businesses. Furthermore, the literature evaluates the broader financial stability implications of India’s corporate insolvency legislation, assessing its efficacy in mitigating systemic risks and preserving market integrity.

he literature evaluates the broader financial stability implications of India’s corporate insolvency legislation, assessing its efficacy in mitigating systemic risks and preserving market integrity.

56 Additionally, researchers delve into mechanisms for conflict resolution and the existing institutional framework, including the role of institutions such as the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI). These discussions offer valuable insights into the operational dynamics of the insolvency resolution process and avenues for institutional strengthening. Case studies of successful resolutions under the IBC provide nuanced insights into the factors contributing to their efficacy. Scholars analyze factors such as effective financial restructuring, management response, cooperative negotiations, and the pivotal role of IPs and the CoC in facilitating successful outcomes. Moreover, discussions on regulatory and legal frameworks, including the role of regulatory bodies such as the IBBI and the NCLT, shed light on the efficacy and effectiveness of the insolvency regime. Industry-specific case studies further enrich the discourse, offering insights into sector-specific challenges and opportunities in resolving distressed businesses. In conclusion, the literature surrounding the IBC provides a rich tapestry of insights into its implementation, impact, and future directions.

es and opportunities in resolving distressed businesses. In conclusion, the literature surrounding the IBC provides a rich tapestry of insights into its implementation, impact, and future directions. Through rigorous analysis and empirical studies, scholars continue to contribute to the ongoing evolution of India’s insolvency landscape, fostering a more resilient and dynamic business environment. HAIRCUT METHOD AND IBC 2016 What are Hair Cuts under IBC? Lenders often undergo “haircuts” as part of resolution plans approved under the Code, indicating a shortfall in creditor recovery compared to their initial claims submitted during the borrower’s insolvency resolution procedure. While the extent of these haircuts may seem substantial in certain cases, it’s important to note that many of these insolvency proceedings were initiated after the asset had already been classified as a non-performing asset (NPA) on the lender’s books. An NPA designation implies that the asset no longer yields interest. In the context of the IBC, a “haircut” denotes a decrease in the value of an asset, representing the variance between the loan amount and the actual value of the collateral utilized by lenders or creditors in such scenarios. This discrepancy places the burden on lenders or creditors and reflects their assessment of the risk associated with a potential decline in the asset’s value.

lenders or creditors in such scenarios. This discrepancy places the burden on lenders or creditors and reflects their assessment of the risk associated with a potential decline in the asset’s value. Conversely, loan recovery signifies the disparity between the borrower’s actual debt and the amount eventually resolved with the bank.1 Alternatively, the lender calculates notional interest on the NPA account and incorporates it into the claims once insolvency proceedings commence.2 This tactic is justified as NPAs necessitate funding from obligations incurring expenses rather than generating interest. While creditors’ recovery is estimated as a percentage of their claims, even if these claims are not acknowledged on the lender’s balance sheet, this factor must be considered when determining the “haircut.” While concerns regarding haircuts are valid, there should also be 1 “Haircut” under Insolvency Laws – Mirza & Associates, Advocates & Attorneys, (2022), https://www.mirzaand associates.com/haircut-under-insolvency-laws/ 2 https://ibbi.gov.in/uploads/resources/cf9e3f8a658e837ba704fc8594670a68.pdf.

– Mirza & Associates, Advocates & Attorneys, (2022), https://www.mirzaand associates.com/haircut-under-insolvency-laws/ 2 https://ibbi.gov.in/uploads/resources/cf9e3f8a658e837ba704fc8594670a68.pdf.

57 alignment with the company’s intrinsic value. A company’s valuation hinges on various factors such as market reputation, client base size, workforce quality, proprietary software, and operational processes. Employee departures due to loan defaults, client defections to competitors, goodwill erosion—all contribute to a gradual decline in a company’s worth. According to the Financial Stability Report by the Reserve Bank of India (RBI), detailed analysis of CIRPs in India as of March 31, 2023, under the IBC. Here are the key insights: 1. Closure of CIRPs by Stakeholder and Outcome  Among CIRPs initiated by operational creditors (OCs), 53% were closed due to appeal, review, settlement, or withdrawal, accounting for 72% of all closures.  A significant number of CIRPs ended in resolution (678), with financial creditors (FCs) realizing 169% of the liquidation value under resolution plans, compared to only 32% of their claims.  Out of the 678 resolved cases, 249 corporate debtors (CDs) were either pending before the erstwhile Board for Industrial and Financial Reconstruction (BIFR) or were defunct. 2. Outcome of CIRPs  45% of closed CIRPs resulted in liquidation orders, 15% in resolution plans, and the remaining 40% were settled.

Industrial and Financial Reconstruction (BIFR) or were defunct. 2. Outcome of CIRPs  45% of closed CIRPs resulted in liquidation orders, 15% in resolution plans, and the remaining 40% were settled. The economic value of many CDs had been eroded significantly before admission to CIRP, with assets valued at only about 7% of the outstanding debt amount By March 2023, a total of 6,571 CIRPs had been initiated, out of which 4,515, or approximately 69%, were concluded. Among the closed CIRPs, 21% were terminated through appeals, reviews, or settlements, while 19% were withdrawn. Notably, 45% culminated in liquidation orders, while only 15% resulted in the approval of resolution plans. Given that OCs are not part of the CoC, which evaluates resolution plans, it falls upon FCs within the CoC to ensure OCs receive their due share of claims to maintain financial stability. Oversight by FCs, solely focused on maximizing their recovery from resolution applicants, may have an adverse effect on the viability of OC’s businesses, thereby impacting the long- term prospects of the CD. PROS AND CONS OF HAIRCUT METHOD Haircut method benefits The implementation of the haircut approach presents an opportunity to swiftly and efficiently address distressed debt situations. By accepting a reduction in the principal owed to them, creditors can expedite the recovery process, allowing them to recoup at least a portion of their funds. This proactive measure not only facilitates the more effective utilization of available resources but also alleviates strain on the economy.

llowing them to recoup at least a portion of their funds. This proactive measure not only facilitates the more effective utilization of available resources but also alleviates strain on the economy.

58 Moreover, the haircut approach fosters viability and feasibility by mandating realistic and attainable resolution plans from potential buyers or investors. This strategic move contributes to the financial restructuring of insolvent companies, thereby reducing the burden of debt and enhancing the prospects of their revival. Such initiatives hold promising implications for the future growth and sustainable development of these companies. Furthermore, the interests of stakeholders are safeguarded through the implementation of the haircut approach, which strives to strike a balance between the claims of creditors and shareholders. By acknowledging the imperative need for debt recovery while also recognizing the financial challenges faced by the company, this strategy aims to mitigate the impact on any single group. By distributing the losses equitably through a reduction in the debt’s value, the approach seeks to minimize adverse effects and promote a more harmonious resolution process. The problems with the haircut approach One significant drawback of implementing the haircut approach is its potential to halve creditors’ recovery, significantly impacting their financial stability.

The problems with the haircut approach One significant drawback of implementing the haircut approach is its potential to halve creditors’ recovery, significantly impacting their financial stability. For creditors, especially smaller ones or those heavily reliant on the retrieved funds, this shortfall can pose significant challenges. While the haircut method aims for fairness among all parties involved, its execution may not ensure uniform loss sharing. Depending on the circumstances, certain stakeholders might bear a disproportionate burden, leading to conflicts and objections regarding the process’ equity. Additionally, there’s a risk that the haircut approach could inadvertently foster moral hazard. Creditors might adopt riskier lending practices in anticipation of substantial debt reductions through insolvency proceedings, potentially destabilizing the overall financial system. Moreover, the haircut procedure might exacerbate ambiguity and complexity in valuation processes. Determining the appropriate haircut necessitates a thorough assessment of the bankrupt company’s financial status, asset valuation, and the feasibility of the resolution plan.

in valuation processes. Determining the appropriate haircut necessitates a thorough assessment of the bankrupt company’s financial status, asset valuation, and the feasibility of the resolution plan. These assessments can be intricate, and disagreements among stakeholders may result in delays or even legal disputes. Despite potential drawbacks, the haircut approach offers various benefits within insolvency and bankruptcy proceedings, including expeditious debt resolution and the promotion of viability. Striking a balance between debt recovery and the rehabilitation of insolvent companies is crucial for effectively employing the haircut approach. Mitigating the potential negatives of this technique requires meticulous case evaluation and transparency throughout the resolution process. Case analysis The resolution of Essar Steel India Limited (ESIL) in June 2017 marked a watershed moment in India’s financial landscape. As the largest among the initial 12 accounts referred to insolvency under the Code by the RBI, ESIL’s resolution has reverberated across various dimensions of the financial ecosystem. Beyond being the single largest resolution under the IBC, it yielded banks their highest-ever return on a stressed asset, both in terms of the dollar amount and the percentage of money recovered by creditors. On August 2, 2017, ESIL commenced its journey into the CIRP, with Satish Kumar Gupta

eturn on a stressed asset, both in terms of the dollar amount and the percentage of money recovered by creditors. On August 2, 2017, ESIL commenced its journey into the CIRP, with Satish Kumar Gupta

59 assuming the role of Interim Resolution Professional (IRP), later affirmed as the Resolution Professional by the CoC. The resolution process subjected the IBC, as a stressed asset resolution mechanism, to rigorous testing, navigating the complexities of ESIL’s large and intricate account. Two rounds of litigation culminated in the Supreme Court, affirming the legitimacy, efficacy, and transparency of the CIRP. Moreover, the journey saw the establishment of legal precedents and the clarification of crucial IBC-related matters, enriching the insolvency regime. Amidst occasional competing goals, the ESIL case provides invaluable insights for the IBC ecosystem, showcasing the positive roles played by various stakeholders in maximizing asset value. The narrative of the case is replete with both moments of clarity and challenges, reflecting the dynamic nature of insolvency resolution. The genesis of ESIL’s financial distress can be traced to several factors, including debt- fueled expansion of plant facilities and reliance on natural gas for production. However, fluctuations in petrol production in India disrupted ESIL’s fuel supply chain, forcing it to procure petrol at inflated spot prices. Additionally, increased input costs, particularly gas, compounded ESIL’s financial woes.

production in India disrupted ESIL’s fuel supply chain, forcing it to procure petrol at inflated spot prices. Additionally, increased input costs, particularly gas, compounded ESIL’s financial woes. The company’s strategic shift towards reducing reliance on natural gas through Corex production modules at Hazira and transitioning to coal-based electricity further strained its finances. Overleveraging, compounded by incomplete capital expenditure projects due to liquidity issues, exacerbated ESIL’s financial predicament.3 Resolving creditor claims during the CIRP presented its own set of challenges. Of the Rs 82,541 crore in claims made, Rs 54,565 crore were verified and accepted. The complexity of creditor claims, including disputes and procedural issues, underscored the intricacies of insolvency resolution under the IBC. International distressed investors and asset reconstruction companies played a significant role in the resolution process, further adding to its complexity. In conclusion, the ESIL case serves as a compelling narrative of resilience and adaptation in the face of financial adversity. It highlights the importance of stakeholder cooperation, judicial clarity, and procedural efficiency in navigating complex insolvency scenarios.

nce and adaptation in the face of financial adversity. It highlights the importance of stakeholder cooperation, judicial clarity, and procedural efficiency in navigating complex insolvency scenarios. As the IBC continues to evolve, the ESIL case stands as a testament to the efficacy and transformative potential of India’s insolvency framework. During the CIRP of Essar Steel India Limited (ESIL), an intriguing trend emerged where more than 15% of FC’s claims were transferred to international distressed investors and Edelweiss Asset Reconstruction Company (EARC), as reported in a DNA article dated July 19, 2018, titled “Foreign money lapped up Essar Steel Loans from Banks.” Additionally, HDFC Bank and Axis Bank opted to allocate their claims to SC Lowy, Bank of Baroda, Laxmi Vilas Bank, and others, whereas Bank of Baroda and IDBI Bank transferred theirs to Deutsche Bank. This redistribution of claims reflected a strategic maneuver to optimize the resolution process. Moreover, after the CoC greenlit the resolution plan and filed it in the NCLT, State Bank of India (SBI) embarked on a strategy to expedite insolvency resolution by initiating the sale of its financial assets in January 2019. 3 CASE-STUDY-of-Successfull-Resolutions-Under-IBC.pdf, https://www.iiipicai.in/wp- content/uploads/2021/11/ CASE-STUDY-of-Successfull-Resolutions-Under-IBC.pdf (last visited Apr 29, 2023).

ary 2019. 3 CASE-STUDY-of-Successfull-Resolutions-Under-IBC.pdf, https://www.iiipicai.in/wp- content/uploads/2021/11/ CASE-STUDY-of-Successfull-Resolutions-Under-IBC.pdf (last visited Apr 29, 2023).

60 4 Case Note: Judgement Of The Supreme Court In The Essar Steel Case - Insolvency/Bankruptcy - India, https:// www.mondaq.com/india/insolvencybankruptcy/1058270/case-note-judgement-of-the-supreme-court-in- the-essar- steel-case (last visited May 1, 2023). However, this proactive move was eventually abandoned, underscoring the complexity and fluidity of the resolution process. Despite efforts to streamline creditor claims, a significant proportion were rejected due to disputes or non-compliance with the IBC’s requirements, prompting disgruntled creditors to resort to litigation. Notably, HDFC Bank secured a foreign judgment against ESIL in a London Court regarding its External Commercial Borrowings (ECB), leading to a subsequent re-filing of a higher claim amount with the Resolution Professional. However, this amended claim was rejected for non-compliance with IBC regulations, triggering further legal actions. Particularly, claims assigned to third parties necessitated proper stamping in accordance with sections 5 (7) and 5 (20) of the Code, highlighting the importance of adherence to procedural requirements.

ticularly, claims assigned to third parties necessitated proper stamping in accordance with sections 5 (7) and 5 (20) of the Code, highlighting the importance of adherence to procedural requirements. A related party creditor, failing to appropriately stamp its claim for Rs 5,325 crore with ESIL as both a financial and operational creditor, later rectified the oversight by agreeing to cover the difference in stamp duty paid and providing duly stamped documents to the Resolution Professional. This intricate stance of creditor claims, and legal intricacies underscores the complexity of the insolvency resolution process and the importance of adherence to regulatory frameworks. THE JUDGEMENT ANALYSIS In the comprehensive analysis of the Supreme Court’s judgment, it becomes evident that the apex court meticulously upheld the supremacy of financial creditors in decisions concerning the assets, liabilities, and operations of the corporate debtor. By delineating the limited circumstances under which judicial intervention may occur, the court ensured a balanced approach to resolution proceedings.

ilities, and operations of the corporate debtor. By delineating the limited circumstances under which judicial intervention may occur, the court ensured a balanced approach to resolution proceedings. Moreover, by discerning between operational and financial creditors, as well as secured and unsecured creditors, the Supreme Court aptly applied the principle of “equality among equals,” thereby ensuring fair treatment for all stakeholders. The potential ramifications of the National Company Law Appellate Tribunal (NCLAT) Order were highlighted, with the court warning of dire consequences for the Indian banking industry, including an influx of stressed assets into liquidation rather than resolution through the CIRP. The Supreme Court’s decision to extinguish all past claims, including undecided claims, provided a sense of relief to resolution applicants who had been hesitant to invest in insolvent companies due to the specter of prolonged litigation proceedings. Additionally, the emphasis on timely resolution, typically within 330 days, addressed concerns that had plagued earlier regulations governing the resolution of stressed assets.4 The authors of the judgment believe that the Supreme Court’s decision offers an effective mechanism for settlement through the CIRP under the IBC, aligning with the economic and financial principles of the banking industry.

ent believe that the Supreme Court’s decision offers an effective mechanism for settlement through the CIRP under the IBC, aligning with the economic and financial principles of the banking industry. However, the court refrained from offering a definitive opinion on the acceptability of invoking guarantees against a corporate bankrupt’s former promoters’ post-acquisition by a successful resolution applicant, leaving room for further legal interpretation.

61 With the Supreme Court’s approval of the sale of Essar Steel, it is anticipated that banks will recover over 90% of their dues, amounting to over 40,000 crore, significantly bolstering the financial position of weak public sector banks. OCs are also expected to receive a substantial portion of their dues, estimated at close to 1,200 crore. This development underscores the success of the CIRP in minimizing the haircut for creditors, despite the corporate debtor being sold. It serves as a testament to the effectiveness of the resolution process and highlights the importance of exploring alternatives to insolvency resolution when feasible. How this case shows the key factors that affect the rate of Haircuts? Upon careful examination of this case, it becomes apparent that it holds the distinction of being the inaugural instance under the IBC to undergo the insolvency procedure.

ffect the rate of Haircuts? Upon careful examination of this case, it becomes apparent that it holds the distinction of being the inaugural instance under the IBC to undergo the insolvency procedure. Furthermore, it demonstrates a remarkably low percentage of haircut, estimated to be approximately 8-10%, which starkly contrasts with the average haircut rate of around 55%. Several pivotal factors have contributed significantly to this minimal haircut, thereby underscoring a path of success amidst challenging circumstances: The proactive approach adopted by Essar Steel’s creditors emerges as a critical factor. Rather than awaiting the transition of stressed assets into NPAs, they initiated insolvency proceedings and expedited the approval of a resolution plan. This strategic maneuver not only averted potential losses but also secured a substantial recovery of 40,000 crore. Had Essar Steel not taken this proactive stance, the resulting haircut would likely have been considerably higher, given the inherent risks associated with NPAs. The presence of multiple bidders, including industry giants like ArcelorMittal and Numetal, injected a sense of competition into the process. This heightened competition led to an increase in the valuation of Essar Steel’s assets, consequently driving down the haircut rate for creditors.

l, injected a sense of competition into the process. This heightened competition led to an increase in the valuation of Essar Steel’s assets, consequently driving down the haircut rate for creditors. The robust bidding environment facilitated by these interested parties significantly contributed to the favorable outcome for creditors. Essar Steel’s stature as a large, well-established steel producer with substantial assets, notably including a 10-million-tonne-per-year steel facility in Gujarat, played a pivotal role in mitigating the haircut. The considerable value of these assets served as a protective shield for creditors, thereby reducing potential losses and enhancing recovery prospects. The resolution procedure for Essar Steel was characterized by its relative efficiency, with the Supreme Court actively intervening to resolve disputes and ensure a timely resolution. This proactive judicial involvement streamlined the process, thereby minimizing the costs and delays typically associated with protracted insolvency proceedings. The expeditious resolution facilitated by the judiciary significantly contributed to reducing creditor haircuts. Effective management of liquidity issues by experienced professionals further bolstered the resolution process.

n facilitated by the judiciary significantly contributed to reducing creditor haircuts. Effective management of liquidity issues by experienced professionals further bolstered the resolution process. By proactively addressing liquidity concerns and implementing strategic measures to manage cash flow effectively, Essar Steel successfully navigated through challenging financial terrain, safeguarding creditor interests and minimizing haircut rates. In essence, the success of Essar Steel’s insolvency resolution can be attributed to a combination of proactive creditor engagement, competitive bidding dynamics, substantial asset value,

62 efficient judicial intervention, and adept liquidity management strategies. This case serves as a guiding beacon within the IBC landscape, illustrating the potential for favorable outcomes even amidst complex financial distress scenarios. CIRP OF AMTEK AUTO Facts of the case Navigating the intricate corporate structure of Amtek Auto, the Corporate Debtor (CD), presented the foremost challenge in ensuring its operational continuity as a Going Concern (GC). With direct holdings in numerous global subsidiaries across Japan, Thailand, Spain, Germany, and various states in India, the CD operated as a network of autonomous entities, largely beyond central control. Absence of a standardized Management Information System (MIS) compounded the issue, as each unit maintained its own reporting format, resulting in over 15 disparate excel sheets for daily performance evaluation.

standardized Management Information System (MIS) compounded the issue, as each unit maintained its own reporting format, resulting in over 15 disparate excel sheets for daily performance evaluation. Consequently, this decentralized approach fostered isolated operations among units, leading to organizational inconsistency. Moreover, the CoC, comprising over 90 major lenders, exerted significant influence. The COVID-19-induced lockdown from March to May 2020 further exacerbated challenges, causing a sharp decline in sales during the first quarter of fiscal year 2021. Despite this, subsequent to the lockdown, a rapid revenue recovery resembling a V-shaped rebound was observed. Dinkar Venkata Subramanian, supported by colleagues Mukul Dalmia and Riya Goel, elucidates the journey of Amtek Auto Ltd.’s CIRP in collaboration with IIIPI. Initiated by the NCLT on July 24, 2017, under section 7 of the Code, Mr. Subramanian was appointed as the IRP, later confirmed as the Resolution Professional. Beyond the domestic footprint encompassing 15 plants across Haryana, Himachal Pradesh, Maharashtra, Madhya Pradesh, and Tamil Nadu, Amtek’s global operations in Japan, Thailand, Spain, Germany, and elsewhere added complexity to the CIRP initiation. This case study is structured into three phases: pre-CIRP performance, CIRP performance, and post-CIRP performance, each posing distinctive hurdles necessitating innovative solutions.

IRP initiation. This case study is structured into three phases: pre-CIRP performance, CIRP performance, and post-CIRP performance, each posing distinctive hurdles necessitating innovative solutions. Through a descriptive analysis, the study outlines the evolution of Amtek Auto’s resolution process, highlighting the challenges surmounted to achieve a successful conclusion in July 2020. Process for Corporate Insolvency Resolution (CIRP)