Restructuring, reorganisation, insolvency and liquidation are governed by separate legislations in India but monitored and enforced through a single adjudicatory mechanism.
The Companies Act 2013 governs the restructuring and reorganisation of corporate entities. The Insolvency and Bankruptcy Code 2016 (IBC) deals with insolvency resolution and liquidation. The National Company Law Tribunal (NCLT) is the quasi-judicial authority that approves restructuring, reorganisation, insolvency or liquidation under both the legislations.
Companies Act enables restructuring and reorganisation between a company and its shareholders or creditors. It covers restructuring transactions such as compromises, mergers, demergers, and amalgamations and reorganisation processes such as consolidations, divisions, buybacks, or reductions in share capital. The proposed scheme should be filed before the NCLT by the company, creditor, member, or liquidator (if the company is being wound up).
The NCLT will call for a meeting of the shareholders or the creditors, as the case may be, to consider and approve the scheme. In the case of creditors, a meeting can be dispensed with if the creditors with at least 90% value of the debt approve. When a meeting is convened the threshold for approving the scheme is 75% of the value of the shares or the debts. Thereafter, the NCLT will sanction the scheme, which will be binding on the company, shareholders, and creditors. The NCLT has sufficient powers to supervise the scheme’s implementation and make such modifications to enable its proper implementation.
The insolvency and liquidation of corporate debtors is resolved through the Corporate Insolvency Resolution Process (CIRP) under the IBC. Financial creditors, operational creditors, or corporate debtors can initiate a CIRP by applying to the NCLT. The trigger point for CIRP is a debt default with a value of more than INR 10 million (approximately USD 117000) by the corporate debtor. The NCLT monitors the CIRP through a Resolution Professional (RP) who manages and administers the affairs of the Corporate Debtor. It is a creditor-driven process where all the significant decisions regarding the resolution are determined by a Committee of Creditors (CoC).
The objective of the CIRP is to protect the value of the Corporate Debtor’s assets and revive the Debtor through a Resolution Plan formulated and accepted by the Creditors. The CIRP is a timebound process. It must be completed within 180 days of the NCLT admitting the insolvency petition.
If the CIRP cannot be completed within the specified timeframe or if the NCLT rejects the resolution plan proposed by the CoC, the NCLT will order liquidation of the corporate debtor. The RP will be appointed as the liquidator, and the creditors will assume the role of a monitoring committee. The Liquidator will realise all the assets of the Corporate Debtor and distribute the proceeds as per the waterfall mechanism provided in the IBC.
During a restructuring exercise, the Companies Act enables a transferee company to negotiate and acquire shares of the transferor company’s shareholders who dissent from a scheme or contract approved by the majority shareholders. The majority that approves the scheme should constitute shareholders with 90% of the shares in value. In such a scenario, the transferee company may offer to purchase the shares of the dissenting shareholders.
The transferee company must notify the dissenting shareholders about the purchase offer within two months of the transferor company’s shareholders’ approval of the scheme or contract. The shares of the dissenting shareholders are to be transferred to the transferee company on the same terms enjoyed by the majority shareholders. In case of any grievance, the dissenting shareholders may approach the NCLT, and the Tribunal may modify the applicable terms.
In a CIRP, the IBC provides that the dissenting financial creditors who vote against the resolution plan placed before the CoC are entitled to receive amounts that shall not be less than the amount payable to such creditors in the event of a liquidation of the corporate debtor, the waterfall mechanism under the IBC. Further, dissenting creditors have the right to be paid in priority over those members of the COC who voted in favour of the resolution plan.
The Reserve Bank of India (RBI) abolished the consensual restructuring mechanism under the erstwhile Corporate Debt Restructuring (CDR) after introducing IBC. Currently, IBC is the preferred mode of insolvency resolution.
The Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced as an informal, out-of-court process under the IBC framework. It allows a Corporate Debtor and its creditors to negotiate and agree on a resolution plan before formal insolvency proceedings. The PPIRP is used for micro, small, and medium enterprises (MSMEs) with default amounts between INR 10 lakh and INR 1 crore.
The Corporate Debtor and creditors work together to draft a resolution plan. Once the required majority of creditors who hold 66% in value of the debts approve the plan, it is submitted to the NCLT for ratification. Unlike a CIRP, during the PPIRP period, the management of the Corporate Debtor would vest in the board of directors of the Corporate Debtor and not with the RP.
Under the IBC, creditors are broadly classified into financial creditors, operational creditors, secured creditors, and unsecured creditors.
Financial creditor means any person to whom the Corporate Debtor owes a financial debt. A financial debt, along with interest, if any, is disbursed against consideration for the time value of money.
An operational creditor is a person to whom the Corporate Debtor owes an operational debt. Operational debt includes a claim concerning the provision of goods or services, including employment, or a debt regarding the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority.
A secured creditor means a creditor in favour of whom security interest is created. An unsecured creditor does not hold any security interest in relation to the debt.
A security interest means a right, title, interest, or claim to property created in favour of or provided for a secured creditor by a transaction that secures payment or performance of an obligation. It includes mortgage, charge, hypothecation, assignment, encumbrance, or any other agreement or arrangement securing payment or performance of any obligation of any person. A performance guarantee is not a security interest under the IBC.
During liquidation, a secured creditor can either relinquish the security interest to the liquidation estate and receive proceeds from the sale of the assets by the liquidator or realise its security interest and apply the proceeds to recover the debts due to it. If the secured creditor relinquishes the security interest, such creditor will rank second in the hierarchy of the waterfall mechanism along with the workmen, if any, of the Corporate Debtor. If the secured creditor realises the security interest, it will rank lower than the unsecured creditors in the waterfall mechanism for the distribution of proceeds.
Financial and operational Creditors can initiate CIRP against Corporate Debtors by applying to the NCLT. The CIRP is a creditor-driven process because once the Corporate Debtor is admitted into insolvency, the CoC manages its affairs through the RP.
The NCLT will declare a moratorium to preserve the value of the assets of the Corporate Debtor and to ensure the progress of the CIRP is streamlined. The moratorium prohibits the following:
The Companies Act provides a comprehensive framework for arrangements and compromises between companies and their creditors or members. These provisions govern restructuring mechanisms, mergers, amalgamations, and demergers. Here’s an overview of the procedure:
A. Application to the Tribunal
a. The process begins with an application to the NCLT by:
b. The application must disclose:
B. Directions for Meetings
a. Upon receiving the application, the NCLT may order the company to convene meetings of:
b. The NCLT also directs:
C. Approval in Meetings
a. The proposed scheme must be approved by creditors or members holding at least 75% in value of the claims or shares, present and voting at the meeting.
b. Voting may occur in person, by proxy, or via postal ballot/e-voting.
D. Filing of Report
The chairperson of the meeting submits a report to the NCLT on the meeting’s outcome, including voting results.
E. Sanction of the Scheme by NCLT
a. The NCLT examines the scheme and ensures:
b. Upon approval, the compromise or arrangement becomes binding on:
F. Stamp Duty and Filing with Authorities
Once approved, the company files the certified copy of the NCLT order with the Registrar of Companies (RoC) and pays any applicable stamp duty.
G. Key Considerations
a. Listed companies must comply with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and obtain SEBI/stock exchange approvals.
b. Fast-Track Mergers: Certain classes of companies (e.g., small companies, and wholly-owned subsidiaries) can undergo a simplified merger process without NCLT intervention.
This streamlined process facilitates corporate restructuring while protecting stakeholders’ interests and maintaining transparency.
CIRP is the process by which a financially distressed corporate debtor (CD) undergoes insolvency resolution in a time-bound manner. Its aim is to revive the business while protecting creditor interests.
Key Steps in the CIRP include:
A. Initiation of CIRP:
B. Admission by NCLT:
C. Appointment of an IRP:
D. Formation of the CoC:
The CoC, comprising financial creditors, is responsible for making key decisions during the CIRP.
E. Resolution Plan:
F. Outcome of CIRP:
Liquidation is the process of winding up a corporate debtor when resolution is unachievable. The aim is to fairly distribute the debtor’s assets among stakeholders and dissolve the company.
Triggers for Liquidation:
Key Steps in Liquidation include:
A. Appointment of a Liquidator:
B. Formation of the Liquidation Estate:
The liquidator consolidates all assets of the corporate debtor into a liquidation estate for distribution.
C. Claims and Stakeholder Rights:
Creditors submit claims, and the liquidator verifies them.
D. Distribution of Assets:
Assets are distributed as per the following waterfall mechanism under the IBC:
E. Dissolution:
Currently, the provisions of the IBC apply only to corporate debtors and their assets based in India. However, considering the expanding trade and financial relations that transcend national boundaries, the IBC enables the Government of India to enter into an agreement with the government of any country outside India to enforce its provisions. The NCLT can issue letters of request to the courts of the country with which a bilateral agreement has been entered into to address the fate of Corporate Debtors’ assets located outside India.
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Sidharth S. Kumar
Senior Associate
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