What Global Corporations should know about India's Bankruptcy Code

Navigating the complex world of insolvency and bankruptcy can be a challenging task as different countries have different insolvency and bankruptcy regimes. In India the same is governed under the provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC” and “Code”). The present article aims at providing a brief overview of India’s insolvency and bankruptcy regime and highlighting some of the relevant aspects of IBC.

IBC was enacted to provide one stop solution for resolving insolvencies related issues in India. It creates a consolidated framework for dealing with the insolvency and restructuring procedures of corporate entities, partnership firms and individuals. Certain important terms under the IBC which executives or senior management personnel need to understand are as follows:

• Voluntary Insolvency: Voluntary insolvency refers to a situation where a debtor company voluntarily initiates insolvency proceedings due to its inability to pay off its debts. Under the IBC, Section 10 provides the process allows the corporate debtor to voluntarily file for insolvency by submitting a petition before the National Company Law Tribunal (“NCLT”).

• Operational Creditor: An operational creditor is a person or entity to whom a debt is owed in relation to the supply of goods or services or a lease. These creditors typically do not provide financial assistance but are involved in the day-to-day operations of the business. Section 8 and 9 of the IBC outlines the process for operational creditors to invoke Corporate Insolvency Resolution Process.

• Financial Creditor: A financial creditor is a person or entity that provides financial debt to the debtor company. They are typically lenders who have extended credit facilities or loans to the company. The financial creditor has a more prominent role in the insolvency process due to the larger and more secured financial interests involved. Section 7 of the IBC allows financial creditors to invoke the Corporate Insolvency Resolution Process when the company defaults on a financial debt.

• Corporate Insolvency Resolution Process (CIRP): CIRP is a mechanism for addressing the insolvency of a corporate debtor under the provisions of IBC. Once CIRP is initiated, the assets of the debtor company are placed under a moratorium by the NCLT for a period of six months, preventing their disposal. During this time, measures are undertaken to address the debts, which may include restructuring the company, settling the liabilities, or liquidating assets.

• Liquidation Process: If a company fails to pay its debt  through CIRP, the company may then be referred to liquidation. During liquidation, the company’s assets and the proceeds are used to settle outstanding debts with creditors.

Key features

Some notable features of IBC are as under:

Time-bound Process:  Section 12, IBC mandates a 180-day timeline (extendable by 90 days) for the resolution of insolvency cases, ensuring quick and efficient resolution.  CIRP must be completed within 330 days, including any extensions and legal proceedings.

Creditor-Driven Process: The Code gives primary decision-making power to the Committee of Creditors (CoC) overseeing the process and approving resolution plans. The Committee of Creditors is a group of financial creditors formed during the CIRP under the IBC.

Insolvency Resolution Professional: An independent Resolution Professional is appointed to manage the distressed company’s affairs, taking control of assets, preparing a resolution plan, and facilitating negotiations.

Adjudicating Authority (NCLT): The NCLT is the adjudicating authority for insolvency cases, ensuring judicial oversight and speedy decision-making.

Moratorium Period (Section 14, IBC): Once insolvency proceedings are initiated, a moratorium is imposed, preventing any legal action or asset liquidation, thereby preserving the company’s value during resolution.

Priority of Claims: The Code establishes a clear hierarchy for debt repayment, prioritizing secured financial creditors over unsecured creditors, with operational creditors being paid afterwards.

Resolution vs. Liquidation: The Code focuses on resolution over liquidation. If a viable resolution plan is not found, the company may enter liquidation, where assets are sold to repay creditors.

Cross-Border Insolvency Framework: The IBC incorporates provisions for cross-border insolvency under the UNCITRAL Model Law, facilitating international cooperation for global companies involved in insolvency.

Focus on Corporate Debt Restructuring: The IBC promotes corporate debt restructuring rather than liquidation, allowing for negotiations on terms like debt repayment, debt-for-equity swaps, and business reorganization.

Punitive Measures for Fraudulent Transactions: The Code includes provisions to identify and punish fraudulent transactions, preventing defaulting companies from transferring assets or evading creditors before insolvency proceedings.

The IBC has provisions regarding cross border insolvency. Some provisions that are necessary to be in the know-how of the executives and management personnel of Multinational Corporations are as follows:

The Insolvency and Bankruptcy Code, 2016 (IBC):

• Section 234: Under Section 234, the Central government to enter into bilateral agreements with other countries in order to enforce the provisions of the IBC.

   

• Section 235: Under Section 235, the NCLT or any other relevant adjudicating authority is authorised to provide assistance to foreign judicial bodies in matters relating to insolvency.

Model law on cross-border insolvency: The UNCITRAL Model Law on Cross-Border Insolvency, developed by the United Nations Commission on International Trade Law (UNCITRAL), plays a pivotal role in the field of international trade law. Established in 1966 as a subsidiary body of the United Nations General Assembly, UNCITRAL is tasked with facilitating commercial transactions between countries through the formulation of model laws and conventions. The Model Law on Cross-Border Insolvency was adopted following its approval by the United Nations General Assembly on May 30, 1997. It aims to promote cooperation and coordination in cross-border insolvency cases, ensuring equitable treatment of creditors and efficient administration of proceedings involving multiple jurisdictions. India adopted this Model Law on May 17, 2022, marking a significant step towards harmonizing its insolvency framework with global standards and strengthening its integration into international trade.

The Supreme Court of India: The Supreme Court of India in its decision in Macquire Bank V. Shilpi Cable Technologies, the Supreme Court ruled that foreign and domestic creditors have equal rights under the IBC. The said case involved a foreign operational creditor (Macquarie Bank) being denied the initiation of a Corporate Insolvency Resolution Process (CIRP) due to non-compliance with Section 9(3)(c) of the Code, which requires a certificate from a domestic financial institution confirming unpaid debts. This requirement disadvantaged foreign creditors without accounts in Indian financial institutions. However, the Supreme Court's interpretation of the said provision made it clear that foreign creditors have the same rights as domestic creditors under the Code, and there is no difference between them.

Recognition of foreign proceedings: The Model law empowers foreign representatives to seek the recognition of foreign proceedings from a court in the domestic country in order to avail appropriate relief in relation to the foreign proceeding. Along with this, the foreign representative may be mandated to specify pending foreign and domestic insolvency proceedings against the corporate debtor that are known to them. This is to ensure that the Adjudicating Authority has complete information about the foreign proceedings along with any proceedings under the Code pending against the corporate debtor.

The Insolvency and Bankruptcy Code (IBC) has revolutionized how India handles business insolvency, providing a more efficient, creditor-friendly process. For global companies, it's important to understand the IBC’s rules, especially regarding cross-border transactions. Whether acting as creditors or investors, foreign companies need to be aware of procedural requirements and deadlines to manage risks and protect their interests. As India continues to update its insolvency laws, staying informed—particularly about cross-border insolvency—will be essential for international businesses operating in India.

About the authors: Nishant Rewalia is an Associate and Amol Rana is a Trainee Associate at Ahlawat & Associates.

If you would like your Deals, Columns, Press Releases to be published on Bar & Bench, please fill in the form available here.