Diwan Advocates

Restructuring and Insolvency Practice

A consortium of lenders is owed Rs 800 crore by a steel company. The promoters have tried to sell the business for two years. No buyer has emerged at a price that covers the debt. One of the lenders files under Section 7. The NCLT admits the application. The moratorium kicks in. A resolution professional takes charge. The promoters lose control of the company they built over twenty years. The lenders, who thought they were secured, discover that the resolution plan that emerges from the CoC pays them sixty paise on the rupee. This is not a failure of the system. This is the system working as designed.

A trade creditor supplied raw materials worth Rs 40 lakh to a manufacturer that has now stopped paying. The creditor has a Section 9 application ready. But the manufacturer's bank has already filed under Section 7, the CIRP has been admitted, and the moratorium is in place. The trade creditor's only route now is to file a claim with the resolution professional and wait to see what the resolution plan offers operational creditors.

Insolvency law is where the interests of every stakeholder collide under a tight statutory timeline. Financial creditors, operational creditors, promoters, employees, government authorities, and resolution applicants all want different outcomes, and the law has a specific answer for each of them. Getting the right advice at the right moment in the process determines how much of that outcome you actually receive.

At Diwan Advocates, we advise across the full insolvency and restructuring landscape: financial creditors initiating and managing CIRP, operational creditors filing and protecting their claims, corporate debtors and promoters navigating the process, resolution applicants structuring and submitting plans, and parties seeking to restructure before formal insolvency begins.

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 replaced a fragmented insolvency framework spread across the Companies Act, SICA, and the Presidency Towns Insolvency Act with a single consolidated statute. It created the National Company Law Tribunal as the adjudicatory authority, the Insolvency and Bankruptcy Board of India as the regulator, and a time-bound resolution process designed to preserve the going concern value of distressed businesses.

The Code has been significantly amended since 2016, with major changes in 2018, 2019, and 2021 addressing the pre-packaged insolvency framework, personal insolvency, the treatment of home buyers as financial creditors, and the liability of resolution applicants for prior offences of the corporate debtor. The jurisprudence from the Supreme Court and NCLAT has been equally significant, with landmark decisions reshaping the rights of secured creditors, the role of the CoC, and the scope of the moratorium.

Corporate Insolvency Resolution Process

Initiating CIRP: Sections 7, 9, and 10

A financial creditor can file under Section 7 on the basis of a default by the corporate debtor. The threshold for default is Rs 1 crore. The NCLT must admit or reject the application within 14 days. Once admitted, the moratorium begins immediately and the resolution professional is appointed.

An operational creditor, meaning a supplier of goods or services, a contractor, or a government authority owed statutory dues, can file under Section 9. Before filing, the operational creditor must serve a demand notice and wait 10 days. If the corporate debtor disputes the debt in a genuine manner, the NCLT may reject the application. Operational creditors have no vote in the CoC but can submit claims and receive their entitlement under the resolution plan.

The corporate debtor itself can initiate CIRP under Section 10. This voluntary route requires a special resolution of shareholders and is used where the board and promoters accept that the business needs a structured resolution. Voluntary CIRP is relatively rare but can be the right approach where an early start preserves more value than waiting for a creditor to file.

The Moratorium

From the date the NCLT admits the CIRP application, no suit or proceeding can be instituted or continued against the corporate debtor, no enforcement action can be taken against its assets, no recovery can be initiated against it, and it cannot transfer or encumber its assets. The moratorium is automatic and applies to all creditors, including secured creditors and government authorities. It does not apply to proceedings against guarantors, which can continue in parallel.

The Resolution Professional

The resolution professional manages the affairs of the corporate debtor during the CIRP. The promoters and directors lose control of the company on the appointment of the RP. The RP takes custody of all assets, books, and records, constitutes the Committee of Creditors, invites resolution plans, and facilitates the process. The RP can avoid certain transactions made before the CIRP: preferential transactions within two years before the commencement date, undervalued transactions within two years, and fraudulent transactions at any time.

The Committee of Creditors

The CoC consists of all financial creditors. Each member's vote is proportionate to their share of the total financial debt. Operational creditors are not members but are entitled to be heard. The CoC approves or rejects resolution plans by a vote of at least 66 percent of the voting share. It can also decide to liquidate the corporate debtor by a 66 percent vote if no viable plan is found. The CoC's commercial wisdom is given significant deference by the courts, and the NCLT's role is to ensure process compliance, not to second-guess commercial decisions.

Resolution Plans

Any person other than a wilful defaulter or a disqualified promoter can submit a resolution plan. The plan must provide for payment of CIRP costs in full as a first priority, payment to operational creditors not less than what they would receive in liquidation, and payment to dissenting financial creditors not less than their liquidation value. Once the NCLT approves the plan, it is binding on the corporate debtor, its employees, members, creditors, guarantors, and all other stakeholders. All prior claims not provided for in the plan are extinguished.

The Supreme Court in Ghanashyam Mishra and Sons v. Edelweiss ARC (2021) confirmed that this extinguishment applies to income tax and other government dues as well. A resolution applicant acquires a clean slate on plan approval, subject only to what the plan itself provides.

Liquidation

If no resolution plan is approved within the CIRP period, or if the CoC votes to liquidate, the NCLT passes a liquidation order. The resolution professional becomes the liquidator. The corporate debtor's assets are sold and the proceeds distributed according to the waterfall in Section 53.

Section 53 Waterfall

The order of priority is: CIRP costs and liquidation costs first, then secured creditors (up to the extent of their security) alongside workmen's dues for 24 months, then employee dues for 12 months, then unsecured financial creditors, then government dues, then remaining secured creditor claims above security value, then remaining debts, then preference shareholders, then equity shareholders. A secured creditor who opts out of the waterfall and enforces their security separately under SARFAESI relinquishes their right to participate in the waterfall for the shortfall, unless they first relinquish the security to the liquidation estate.

In practice, liquidation recoveries for unsecured and subordinated creditors are very low. Promoting a viable resolution plan over liquidation is almost always the better commercial outcome for all but the most senior creditors.

Personal Insolvency and Guarantor Liability

Part III of the Insolvency and Bankruptcy Code, 2016 governs insolvency of individuals and partnership firms. For personal guarantors to corporate debtors, insolvency proceedings are heard by the NCLT, the same forum that handles the corporate CIRP. For other individuals, insolvency proceedings are heard by the Debt Recovery Tribunal.

A lender can file for personal insolvency of a guarantor simultaneously with or after filing CIRP against the corporate debtor. The personal guarantor cannot claim that the lender must first exhaust its remedies against the corporate debtor before proceeding against the guarantor. The moratorium in the personal insolvency proceeding can, however, stay SARFAESI enforcement against the guarantor's personal assets, which is a critical intersection for secured lenders managing both proceedings at once.

Promoters who have given personal guarantees to lenders face the real prospect of losing personal assets in insolvency proceedings even after the corporate debtor has gone through CIRP. We advise promoters on understanding and managing this exposure, and lenders on using personal insolvency proceedings as an effective recovery tool.

Pre-Packaged Insolvency: The Faster Route

The pre-packaged insolvency resolution process, introduced by the IBC Amendment Act, 2021, is available to MSMEs with defaults up to Rs 1 crore. It allows the corporate debtor to negotiate a resolution plan with creditors before filing with the NCLT, reducing the disruption and cost of a full CIRP. The promoter submits a base resolution plan that is approved by at least 66 percent of the unrelated financial creditors before the NCLT application is made.

The NCLT then has a compressed timeline to approve the plan. If the base plan does not maximise value, the RP can invite competing plans. The pre-pack process preserves management continuity during the resolution period, which is a significant advantage over the standard CIRP route where the promoter loses control from day one. We advise MSME borrowers and their creditors on whether the pre-pack route is appropriate and on structuring the negotiation before filing.

Restructuring Before Insolvency: Out-of-Court Options

The best restructuring outcomes are often achieved before a formal insolvency filing. An out-of-court restructuring avoids the costs, the loss of management control, the reputational damage, and the uncertainty of the CIRP process. It also gives the parties more flexibility to structure a solution that works commercially, without the constraints of the IBC's waterfall and plan approval thresholds.

One-Time Settlements

A borrower with a stressed account can approach the lender for a one-time settlement: a negotiated payment of less than the full outstanding amount in exchange for a full discharge. RBI guidelines require banks to have a board-approved OTS policy and to ensure that OTS terms are documented transparently. From the borrower's perspective, an OTS requires raising the settlement funds quickly, which often involves a combination of asset sales, new equity, and negotiation with other lenders.

Schemes of Arrangement

A solvent company that needs to restructure its capital, merge with another entity, or implement a financial reorganisation can do so through a scheme of arrangement under Sections 230 to 234 of the Companies Act, 2013. The scheme requires approval by a prescribed majority of creditors and shareholders in each class, and then sanction by the NCLT. A scheme can achieve a debt restructuring, a merger, a demerger, or a capital reduction in a single court-supervised process.

Distressed M&A: Acquiring Through the IBC

Acquiring a company through the IBC resolution process is one of the most complex transactions in Indian M&A. The resolution applicant bids for the entire business of the corporate debtor, inheriting its employees, contracts, assets, and liabilities subject only to what the approved plan specifies. Done well, it is an opportunity to acquire a business at a significant discount to its going concern value. Done badly, it is an acquisition with hidden liabilities, broken relationships, and a business that cannot function on day one.

Due Diligence in a CIRP

Due diligence in an IBC process is compressed, sometimes to a few weeks, and conducted on the basis of information made available by the RP rather than by the corporate debtor. The information memorandum prepared by the RP is the primary source. Legal due diligence must cover pending litigation, regulatory proceedings, PMLA attachments, environmental liabilities, title to key assets, material contracts and their change of control provisions, and the corporate debtor's tax position.

Plan Structuring and Submission

The resolution plan must address payment to all creditor classes, treatment of employees, the proposed management structure, and the sources of funds for implementation. A plan that is commercially viable but does not meet the minimum payment thresholds for operational creditors or dissenting financial creditors will be rejected by the NCLT. We structure resolution plans that satisfy the legal requirements while reflecting the commercial logic of the acquisition.

Cross-Border Insolvency

India adopted the UNCITRAL Model Law on Cross-Border Insolvency through Part Z of the Insolvency and Bankruptcy Code which is awaiting notification. Until it is notified, cross-border insolvency in India is handled through bilateral arrangements and the courts' inherent jurisdiction. Indian courts have recognised foreign insolvency proceedings in some cases and declined in others.

For companies with operations or creditors in multiple jurisdictions, the absence of a formal cross-border framework creates significant uncertainty. An Indian company in CIRP may have assets abroad that the resolution professional cannot access. A foreign insolvency representative may not have standing to apply to Indian courts for recognition or assistance. We advise on the practical management of cross-border insolvency situations in the current framework and on structuring transactions to minimise cross-border risk.

Why Diwan Advocates for Restructuring and Insolvency?

Legislative Reference Index

In insolvency, the position you hold at the end depends almost entirely on the advice you received at the beginning.

Diwan Advocates gets you the right advice at the right moment.

Diwan Advocates  |  Delhi, India