Rajiv Choubey explores the evolution of law surrounding insolvency and bankruptcy, and how regulations designed to protect sick companies had been misused until the IBC was enacted

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), was a new dawn for India’s legal system. The code has been a game changer in the way Indian promoters (majority shreholders) and companies function and approach borrowings and debt. The government of India started this reform in the early 1990s, and via the dismantling of the Controller of Capital Issues (CCI) and removal of all kinds of controls and restrictions on pricing, timing and design of capital issues, corporate India subsequently witnessed a rise in fundraising activity.

While many of these companies were doing well, they were reporting losses year after year, leading to an erosion of their net worth. Many of these were industrial companies and in accordance with provisions of the Sick Industrial Companies Act (SICA) had to be mandatorily referred to the Board for Industrial & Financial Reconstruction (BIFR), a quasi-judicial body. Under section 22 of SICA, once a reference was made to BIFR and an inquiry was pending, or any scheme was under implementation, the board was empowered to grant a stay of all legal proceedings, including a proceeding for the winding up, or for execution, distress or the like, against any of the properties of the company or the appointment of a receiver.

Further, no lawsuit for the recovery of money or for the enforcement of any security against such a company, or of any guarantee in respect of any loans or advance granted to the company would proceed, except with the consent of the board.

While many companies suffering genuine industrial weakness were revived, saving jobs and debts due to the creditors, many ingenious promoters misused the protection provided under section 22 of SICA.

Under SICA, despite defaults and delays in payments of interest and loans, the promoter/s and management continued to own the assets and run the business as they wished.

A committee, headed by noted economist Omkar Goswami, was set up to examine and make recommendations regarding the various aspects of industrial sickness and corporate restructuring. It observed in its report: “There are sick companies, sick banks, ailing financial institutions and unpaid workers. But there are hardly any sick promoters. There lies the heart of the matter.”

To address the issue of recovery of money by banks and financial institutions, the government brought in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which was then replaced with the Securitization and Reconstruction of Financial Assets & enforcement of Securities Interest Act, 2002. However, it could not address the need for restructuring of loans, non-performing accounts and debt in a timely manner. The Supreme Court, in Swiss Ribbons Pvt Ltd v Union of India, concluded that earlier experiments in terms of legislation had failed – “trial” having led to repeated “errors” – ultimately leading to enactment of the IBC.

The IBC provides defined timelines and requires that any resolution plan/process must be completed within 270 days (180 days plus a maximum extension of 90 days).

With the IBC regime, once a resolution process is admitted by the National Company Law Tribunal (NCLT) and an insolvency resolution professional (IRP) is appointed, the promoters and the management are dispossessed of the assets, as well as management control. The board is suspended and the IRP is expected to manage the enterprise in the best interests of all its stakeholders. The creditors and lenders become de jure (entitled to claim) and also the de facto owners of the assets. We have seen the promoters of Electrosteel, Bhushan Steel, Monnet Steel and Amtek losing their stake and control, and then new promoters coming in, and we are likely to see more of it in the cases that are in the pipeline.

This has brought about a change in the approach of promoters and companies with regard to borrowing, debt and dues, be it to financial creditors or operational creditors.


The IBC jurisprudence is still developing and there may have been delays in many cases, as is evident from the fact that out of the 12 large non-performing accounts identified by the Reserve Bank of India (RBI) in June 2017, only four cases have been resolved to date. The rest remain unresolved, though more than 550 days have passed since being admitted by the NCLT.

The government, Insolvency and Bankruptcy Board of India (IBBI), NCLT, and National Company Law Appellate Tribunal (NCLAT), the High Courts and even the Supreme Court have intended to resolve these cases with urgency and priority, and the government introduced a number of amendments to address many of the contentious issues.

One of the early issues faced under the IBC was “whether a dispute exists only if there is a suit or arbitral proceedings pending, or does it include something more?” In other words, whether the definition of the term “dispute” is inclusive or exclusive as per section 5(6), read with section 8 of the code.

The NCLT held that the definition of the term “dispute” is not exhaustive, but illustrative. The NCLAT, in Kirusa Software Private Ltd v Mobilox Innovations Private Ltd, held that the term “dispute” is an inclusive one, and the definition of the term cannot be restricted to a pending suit or arbitral proceeding.

The Supreme Court provided much needed clarity on the expression “existence of dispute” and put to rest the confusion regarding the meaning of term “dispute”. It held that the term is inclusive and cannot be restricted to a pending suit or arbitral proceeding. The Supreme Court also read the word “and” in section 8(2)(a) of the code as “or”, because if a genuine dispute arose a few days before the filing of the insolvency application, it would cause extreme hardship to the corporate debtor resulting in the initiation of corporate insolvency resolution process (CIRP). Section 8(2)(a) reads: “The corporate debtor shall … bring to the notice of the operational creditor (a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute…”

Another issue raised under the IBC was whether section 7 of the code is unconstitutional, being in violation of principles of natural justice, since it does not afford any opportunity of a hearing to a corporate debtor before admission of an application for initiation of CIRP. Calcutta High Court, in SreeMetaliks Limited and Anr v Union of India and Anr, considered the question and held that since the NCLT and NCLAT are constituted under the Companies Act, 2013, and the procedure before these authorities is guided by section 424 of the Companies Act, it mandates following the principles of natural justice.

The court further observed that even though the NCLT is not bound to follow the Civil Procedure Code (CPC), it can regulate its procedure subject to provisions of section 424 of the Companies Act, which require adherence to the principles of natural justice.

Another question in cases where a settlement or compromise between the corporate debtor and creditor has been reached is whether an application for CIRP filed under sections 7, 9 or 10 of the code and admitted by NCLT can be withdrawn. The NCLAT, in the matter of Lokhandwala Kataria Construction Pvt Ltd v Nisus Finance & Investment Manger LLP, held that, reading the provisions of rule 8, an application can be withdrawn only before its admission. Once an application is admitted, neither the NCLAT nor the NCLT has the power to allow withdrawal of an application.

However, this case was appealed before the Supreme Court, which, exercising its power under article 142 of the Constitution of India, permitted the withdrawal of the application. As it was not feasible for the Supreme Court to intervene in every case where the parties had reached a compromise, the government brought in an amendment permitting the withdrawal of such applications.

Section 12A was introduced in the form of an amendment to the IBC through which withdrawal of an ongoing CIRP applications has now been permitted on the approval by 90% (previously it was 75%) of members of the committee of creditors (CoC). This amendment gives another chance to corporate debtors.

Creditors may consider taking this route in cases where they believe that recovery value can be maximised through a route other than the IBC. The CoC voting threshold has been reduced from 75% to 66% for major decisions such as: (1) applying for an extension for the CIRP period from 180 to 270 days; (2) appointment and replacement of an IRP; (3) approving a resolution plan; (4) certain actions requiring approval of CoC; and (5) passing a resolution for liquidation. This facilitates quick decision making and improves prospects for approval of a viable resolution plan.

A major amendment to the code has been to section 5(8), by adding clause (f), i.e., any amount raised from an “allottee” in a “real estate project” shall come under the definition of financial debt pursuant to explanation inserted to section 5(8)(f) of the code. Home buyers and other real estate buyers, who were not recognized either as financial or operational creditors, are now treated as financial creditors. The Supreme Court, in the matter of Chitra Sharma & Ors v Union of India & Ors, exercising its power under article 142 of the Constitution, directed that the 180-day CIRP period be revived starting from the day of the order, and the CoC shall be reconstituted to include home buyers in the category of financial creditors.

The government introduced section 29(A), where certain persons (undischarged insolvent, wilful defaulter, a corporate debtor under the management or control of such a person, or of which such person is a promoter) are not eligible to submit a resolution plan unless the person pays off all overdue amounts with interest and charges relating to the non-performing accounts. As a result, the banks have started receiving money from potential debtors who pay in anticipation of a default.

Section 2 relating to application of the code was amended to include personal guarantors to corporate debtors by replacing subclause (e). Section 14(3)(b) was also amended to address the issue that the moratorium during the CIRP shall not apply to a guarantor in a contract of guarantee to the corporate debtor (guarantees granted by promoter guarantors or other group companies, which are not undergoing a CIRP), as such a moratorium would have unduly benefited persons who have given personal guarantees in connection with a loan.

Further, the Supreme Court, in State of Bank of India v Ramakrishnan & Anr, held that the moratorium under section 14 will not be available to personal guarantors. The court held that: “It is obvious that parliament, when it enacted section 14, had this history in mind and specifically did not provide for any moratorium along the lines of section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, in section 14 of the Code.” Again, the amendment brought in by the government and the judgment of the Supreme Court will go a long way to strengthen the insolvency law.

Another contentious issue has been the question of the application of the Limitation Act to CIRP. The issue was a vexed one, as the NCLAT, in Neelkanth Township and Construction Pvt Ltd v Urban Infrastructure Trustees Ltd, held that: “There is nothing on record that Limitation Act 1963 is applicable to IB Code, 2016, and [the] debtor failed to lay hand [on] what provision … suggests such applicability. IB Code is not an Act for recovery of claims but relates to CIRP proceedings. If there is a debt including interest and is in continuing course of action, the argument that it is time-barred by limitation is baseless.”

The Supreme Court declined to interfere with the orders of the NCLAT. Later, on the NCLAT, in Speculum Plast Private Limited v PTC Techno Private Limited, tried to put to rest the question of the applicability of the Limitation Act to the corporate insolvency resolution process under the IBC. It held that the Limitation Act shall not apply to the IBC, however, the NCLT may take into account the doctrine of laches (which holds that legal right will not be enforced or allowed if there is a long delay in asserting that right) while considering an application for initiating the insolvency process.

This issue has been resolved after inserting section 238A into the code, extending the provisions of the Limitation Act to applications made under IBC 2016.

One hotly contested case has been Ultratech Cement’s acquisition of Binani Cements under CIRP, where initially the resolution plan of Rajputana Properties (part of Dalmia Bharat Cement Group) was approved by the CoC. This case led to a multiplicity of proceedings and finally the NCLAT judgment was upheld by the Supreme Court as the appeals and even review filed by Rajputana were dismissed. The NCLAT’s judgment rejected the initial resolution plan of Rajputana on the ground of it being discriminatory, and approved the resolution plan of Ultratech.

NCLAT further held that the objective of the IBC was to provide time-bound resolution plans and for maximization of value of assets of the corporate debtor, promotion of entrepreneurship, availability of credit, and the balance of the interests of all stakeholders.

However, the question which remains to be addressed is that, under a process, can the rules of the game be changed after the game i.e. CIRP has started. However, the decision of the Supreme Court in the NCLAT judgment in the Binani case, has held that this is allowed.


The Supreme Court, in its latest judgment on 25 January 2019, in the matter of Swiss Ribbons, hearing writ petitions filed assailing the constitutional validity of various provisions of the code, held that: “We have also seen that the working of the code is being monitored by the central government, by expert committees that have been set up in this behalf. Amendments have been made in the short period in which the code has operated, both to the code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.”

This judgment of the Supreme Court will go a long way in establishing the insolvency and bankruptcy framework of India, as it has settled many of the contentious issues raised in these writ petitions.


The Reserve Bank of India (RBI) set up an Internal Advisory Committee (IAC), which was to focus on large stressed accounts and accordingly take consider the accounts that were classified partly or wholly as non-performing from among the top 500 exposures in the banking system. The IAC identified for resolution 12 large accounts, which were initiated by the banks.

According to the IBBI report, the total outstanding claims for these 12 accounts was ₹3.45 trillion (US$4.84 billion) against liquidation value of ₹732 billion. Of these, the resolution plans in respect of two corporate debtors – Electrosteel Steels and Bhushan Steel – were approved by the NCLT.

The resolution plans of two more corporate debtors – Monnet Ispat and Energy and Amtek Auto – were approved in the third quarter of 2018. Against the liquidation value of ₹23.65 billion, the claimants of Monnet Ispat and Energy realized ₹29 billion, accounting for 25.41% of their admitted claims. Against the liquidation value of ₹41.3 billion, the claimants of Amtek Auto realized ₹43.85 billion, accounting for 34.23% of their admitted claims. In respect of Lanco Infratech, an order for the liquidation of corporate debtor has been passed.

According to a newsletter published by the IBBI for the third quarter of 2018, 1,198 corporations were undergoing the insolvency resolution process. Until June 2018, 34 CIRPs had yielded resolution. Realization by financial creditors in comparison to liquidation value in respect of corporate debtors was 114.8%, while the realization by them in comparison to their claims was 26.28%.

The IBBI newsletter states that until 30 June 2018, a total of 136 CIRPs had ended in liquidation. During the third quarter of 2018, 75 CIRPs ended in liquidation, taking the total number of CIRPs resulting in liquidation to 212. A further 260 cases have been ordered to be liquidated. In 66 resolution cases, realization by creditors was around ₹800 billion.

According to the the NCLT database, in 4,452 cases disposed at pre-admission stage, the amount settled was about ₹2 trillion.


The year 2019 continues to be a dynamic year for the IBC as bankers and financial institutions are expected to initiate insolvency cases beyond the 12 large non-performing accounts as mandated by the RBI. The threat of insolvency will trigger heightened M&A activity as bankers will be approaching, and in many cases have already started approaching, potential buyers or suitors for stressed assets.

For the promoters, the writing on the wall is very clear, that they either work out a plan in discussions with the lenders or they lose control of the company. This is a major shift.

The bankruptcy law also provides an exit for promoters who genuinely get into trouble. In India, it is far easier to start businesses than to close down or exit them. Businesses go through cycles of ups and downs, and when promoters or businesses do not succeed, they need to be either restructured or wound up. Under the IBC this is now possible.

RAJIV CHOUBEY is an in-house counsel with ACC Limited and is working as director of legal. The views expressed are personal.