Insolvency and bankruptcy
under the Code.

Most of the useful work in this practice happens before anything is filed. A company approaching distress still has options: refinancing, asset sales, a standstill with its lenders, a restructuring negotiated quietly with the banks that matter. Those options close quickly once a petition is admitted and the board’s powers are suspended. Exposure attaches to decisions taken inside that window. Under Section 66(2) a director who knew or ought to have known that there was no reasonable prospect of avoiding insolvency, and who did not exercise due diligence in minimising the potential loss to creditors, may be ordered to contribute to the assets of the corporate debtor. Paying one creditor ahead of the others, or transferring an asset at a price that cannot be supported, raises a separate question, since preferential, undervalued and extortionate credit transactions, and transactions defrauding creditors, can be avoided under Sections 43 to 51 once proceedings commence. Fraudulent and wrongful trading under Sections 66 and 67 are different provisions, and they operate against directors rather than against a transaction. The material that answers those allegations has to be created at the time. This means board minutes recording why a payment was made, a valuation obtained at the time, and a record of the advice taken and followed. Accounts written up after an application has been filed carry very little weight.

Resignation does not end either the exposure or the obligation to hand over records.

The Insolvency and Bankruptcy Code, 2016 sets out a structured process before the National Company Law Tribunal. A financial creditor applies under Section 7 and an operational creditor under Section 9, and a corporate debtor resisting admission relies most often on a pre-existing dispute, which frequently decides an operational creditor petition on its own. Admission brings a moratorium under Section 14, halting enforcement, suits and asset transfers, and management vests in an interim resolution professional while the board’s powers stand suspended. What follows runs to a statutory timetable, which may be extended and from which time may be excluded in defined circumstances. Claims are filed and substantiated, classification between financial and operational debt is contested, the committee of creditors votes on a resolution plan, and objections to plan approval are heard by the tribunal. A resolution applicant has to consider eligibility under Section 29A, the structure of the plan, and diligence into a target whose records are usually incomplete. Where resolution fails the process moves to liquidation, to the distribution waterfall under Section 53 and to the treatment of security interests.

Two routes are easy to overlook. Chapter III-A of Part II provides a pre-packaged process for corporate debtors classified as micro, small and medium enterprises, under which existing management remains in control. Proceedings against personal guarantors run alongside the corporate process. Where promoters have given guarantees, this affects the bargaining position of both sides.

Insolvency is not always the right instrument. Filing under the Code to put pressure on a solvent debtor is a tactic that has been discouraged. Where the object is recovery, a secured creditor may act under the SARFAESI Act, 2002 without going to court in defined circumstances, and banks and financial institutions may proceed before the Debts Recovery Tribunal. A secured creditor also gives something up on admission, since the moratorium stops its own enforcement for the duration and turns it into one voice in a collective process. Which route can reach assets that exist is the question, and it is answered by diligence into the assets rather than by a preference for a forum. Claims are prepared and substantiated on the same material.

The Code puts parties in very different positions, and the same facts are read differently depending on the position. A financial creditor decides whether to file under Section 7 or to restructure outside the process. An operational creditor weighs a demand notice under Section 8 against an ordinary recovery suit. A corporate debtor resists admission, or starts the process itself under Section 10. A resolution applicant prices a distressed asset. A member of the committee of creditors has to separate the commercial decision from the procedural one. Employees and workmen sit on the operational side, and their claims are often filed late or without the records a resolution professional needs to verify them. Promoters and personal guarantors have exposure that usually continues well after the corporate process has ended.

Allottees in a real estate project count as financial creditors, but an application by them must be brought jointly by the minimum number of allottees of the same project fixed by the second proviso to Section 7(1). A group of buyers therefore has to organise itself before an application can be filed at all.

Most outcomes under the Code are decided in the committee of creditors rather than in the tribunal. The committee is constituted from financial creditors, with voting share allocated by the value of admitted debt, and related party financial creditors are excluded from representation and from voting, subject to the provisos to Section 21(2). Ordinary decisions are taken by the voting share Section 21(8) requires, and approval of a resolution plan by the higher voting share Section 30(4) requires. A creditor may therefore hold enough voting share to block a plan without holding enough to carry one, and lenders who would ordinarily have no dealings with each other have to reach a common position. Where the creditors in a class reach the number Section 21(6A) specifies, as with allottees or holders of listed debt, the class votes through an authorised representative, and that changes the mechanics of persuasion. Working out where voting share sits, and where it may move once claims are verified or debt is assigned, is frequently the main part of the strategy. Debt is also traded during a process, usually for that reason.

The resolution professional is the other important party. The professional runs the process rather than deciding it: collating and verifying claims, taking custody of assets, keeping the company trading as a going concern, preparing the information memorandum, inviting and evaluating expressions of interest, and putting plans before the committee. Verification is the stage at which a defective claim has the greatest consequence. A claim submitted in the wrong form, or without proof of the debt, or filed after the announced date, may be admitted at a reduced value or not admitted at all, and the consequence follows the creditor through voting, through distribution and through any challenge to the plan.

Section 12 fixes the period for completing the resolution process, measured from admission, with an extension available on the terms that section allows and time consumed in litigation capable of exclusion in defined circumstances. The outer limit in the proviso has been read as directory rather than mandatory. Processes regularly run past it. Advice that assumes the statutory period will be met tends to price a distressed asset wrongly, and advice that treats the period as meaningless understates the pressure the timetable puts on everyone involved.

A small number of distinctions decide more matters than the arguments on the merits. The first is between financial debt and operational debt: it settles who sits on the committee of creditors, and misclassification at the claim stage is far easier to prevent than to reverse. The second is that the Code addresses debt and default, not damages, so an unliquidated claim makes a poor foundation for an application however strong it may be in a suit, though a damages claim that has crystallised in a decree or an award may stand differently. The third is that a moratorium protects the corporate debtor alone. Section 14(3)(b) provides that the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor, so a guarantee may be enforced while the corporate process runs.

Close to these sits the evidentiary record of default. A financial creditor’s application is materially stronger where default is evidenced by a record with an information utility, or by account statements together with a clear acknowledgement of debt. An operational creditor’s position depends heavily on the correspondence exchanged before the demand notice was issued.

For an investor, a corporate insolvency process is an acquisition route with an unusual risk profile. The plan binds stakeholders, but the purchase is made to a timetable, on incomplete records and without seller warranties. Eligibility under Section 29A is assessed before a bid is developed.

Approval does not conclude the matter. Under Section 31(1) as amended, a plan approved by the tribunal binds the corporate debtor, its employees, members, creditors and guarantors, and it binds the Central Government, State Governments and local authorities to whom statutory dues are owed. That effect rests on the amendment and on the decisions interpreting it. The treatment of tax and other government claims is therefore addressed when the plan is being drafted, and not once it is being challenged. Implementation is then monitored, often through a committee constituted for that purpose, and an appeal lies to the National Company Law Appellate Tribunal within the period Section 61(2) allows, on the grounds the Code specifies.

Where a debtor or a creditor sits outside India, the position is less settled. The Code contains enabling provisions for agreements with foreign countries and for letters of request to foreign courts. Coordination with a foreign proceeding is handled case by case, by reference to where the assets sit, which court can reach them, and whether a foreign officeholder will be recognised here.