Prudential Framework for Resolution of Stressed Assets: New Dispensation for dealing with NPAs

By Vinod Kothari []; Abhirup Ghosh []

With the 12th Feb., 2018 having been struck down by the Supreme Court, the RBI has come with a new framework, in form of Directions[1], with enhanced applicability covering banks, financial institutions, small finance banks, and systematically important NBFCs. The Directions apply with immediate effect, that is, 7th June, 2019.

The revised framework [FRESA – Framework for Resolution of Stressed Accounts] has much larger room for discretion to lenders, and unlike the 12th Feb., 2018 circular, does not mandate referral of the borrowers en masse to insolvency resolution. While the RBI has reserved the rights, under sec.  35AA of the BR Act, to refer specific borrowers to the IBC, the FRESA gives liberty to the members of the joint lenders forum consisting of banks, financial institutions, small finance banks and systemically important NBFCs, to decide the resolution plan. The resolution plan may involve restructuring, sale of the exposures to other entities, change of management or ownership of the borrower, as also reference to the IBC.


The resolution timelines have 2 components – a Review Period and Resolution Period.

The first period, of 30 days, starts immediately in case of borrowers having aggregate exposure of Rs 2000 crores or more from the banking system, and in case of borrowers with aggregate exposure of Rs 1500 crores to Rs 2000 crores, it starts from 1st Jan 2020. For borrowers with aggregate borrowings of less than Rs 1500 crores, there is no defined timeline as of now – thereby leaving all small moderate loan sizes out of the scope of the FRESA.

During the review period, the lenders will have presumably agreed on the resolution plan. The plan itself has 6 months of implementation.

The 6 months’ implementation timeline is not a hard timeline. If the timeline is breached, the impact is additional provisioning. If the implementation fails the 6 month deadline, there is an additional provision of 20% for period upto 1 year from the end of the review period, and 35% for period beyond 1 year.

Directions are centered around banks

Though the FRESA has made applicable to scheduled commercial banks, AIFIs, small finance banks and NBFCs, however, the same revolves around banks and financial institutions. For the framework to get triggered, the borrower must be reported as default by either an SCB, AIFI or small finance bank. The provisions under the paragraph shall not get triggered with an NBFC declaring an account as default.

Similarly, for reckoning the amount outstanding credit for determining the reference date for implementation, only the credit exposures of the SCBs, AIFIs and small finance banks have to be considered.

It seems these Directions have been made applicable to NBFCs, only to bind them by the proceedings under FRESA, in case of borrowers having multiple lenders.

Mechanics of the FRESA

On an account being declared as default, the lenders will, within a period of 30 days, have to review the account and decide the course of action on the account. That is, during this period, an RP will have to be prepared. The lenders can either resolve the stress under this framework or take legal actions for resolution and recovery.

If the lenders decide to resolve the stress under this framework, ICA must be signed among them. The ICA must provide for the approving authority of the RP, the rights and duties of the majority lenders, safety and security of the dissenting lenders.

Upon approval of the RP, the same must be implemented within a period of 180 days in the manner prescribed in the Directions. After the implementation, the same must be monitored during the monitoring period and the extended specified period, discussed below.

Implementation conditions for RPs

The implementation of RPs also comes with several conditions. The pre-requisites of implementing an RP are:

  1. Where there are multiple lenders involved, approval of 75% of the lenders by value and 60% of the lender by number must have been obtained.
  2. The RPs must be independently rated – where the aggregate exposure is ₹ 1 billion or above, at least from 1 credit rating agency; and where the aggregate exposure is ₹ 5 billion or above, at least from 2 credit rating agencies. The rating obtained from the CRAs must be RP4 or better[2].
  3. The borrower should not be in default as on 180th day from the end of Review Period.
  4. An RP involving restructuring/ change in ownership, shall be deemed to be implemented only if,
    1. All the legal document have been executed by the lenders in consonance with the RP;
    2. The new capital structure and/ or changes in the terms and conditions of the loans get duly reflected in the books of the borrower;
    3. The borrower is not in default with any of the lenders

Restructuring with several covenants

Restructuring was no brainer earlier and was the device to keep bad loans on the books without any action.

The FRESA provides that upon restructuring, the account [having an aggregate exposure of more than Rs 100 crores] will be upgraded to standard status only on investment grade by at least one rating agency (two in case of aggregate exposure of Rs 500 crores and above). Also, after restructuring, the account should at least pay off 10% of the aggregate exposure.

Prudential norms in case of restructuring/ change in ownership

  1. In case of restructuring –
    1. Upon restructuring, the account will be immediately be downgraded to sub-standard and the NPAs shall continue to follow the asset classification norms as may be applicable to them.
    2. The substandard restructured accounts can be upgraded only after satisfactory performance during the following period:
      1. Period commencing from the date of implementation of the RP up to the date by which 10% of the outstanding credit facilities have been repaid (monitoring period); or
      2. 1 year from the date of commencement of the first payment of interest or principal, whichever is later.
    3. However, for upgradation, fresh credit ratings, as specified above,  will have to be obtained.
    4. If the borrower fails to perform satisfactorily during this period, an additional provision of 15% will have to be created by all the lenders at the end of this period.
    5. In addition to above, the account will have to be monitored for an extended period upto the date by which 20% of the outstanding credit facilities have been repaid. If the borrower defaults during this period, then a fresh RP will have to be required. However, an additional 15% provision will have to be created at the end of the Review Period.
    6. Any additional finance approved under the RP, shall be booked as “standard asset” in the books of the lender during the monitoring period, provided the account performs satisfactorily. In case, the account fails to perform satisfactorily, the same shall be downgraded to the same category as the restructured debt.
    7. Income in case of restructured standard assets should be booked on accrual basis, in case of sub-standard assets should be booked on cash basis.
    8. Apart from the additional provisioning mentioned above, the lenders shall follow their normal provisioning norms.
  2. In case of change of ownership, the accounts can be retained as standard asset after the change in ownership under FRESA or under IBC. For change in ownerships under this framework, following are the pre-requisites:
    1. The lenders must carry out due diligence of the acquirer and ensure compliance with section 29A of the IBC.
    2. The new promoter must acquire at least 26% of the paid up equity capital of the borrower and must be its single largest shareholder.
    3. The implementation must be carried out within the specified timelines.
    4. The new promoter must be in control of the borrower.
    5. The account must continue to perform satisfactorily during the monitoring period, failing which fresh review period shall get triggered. Also, it is only upon satisfactory performance during this period that excess provisions can be reversed.
  3. Reversal of additional provisions:
    1. In case, the RP involves only payment of overdues, the additional provisions may be reversed only of the borrower remains not in default for a period of 6 months from the date of clearing the overdues with all its lenders.
    2. In case, the RP involves restructuring/ change in ownership outside IBC, the additional provisions created against the exposure will be reversed upon implementation of the RP.
    3. In case, the lenders initiate insolvency provisions against the borrower, then half of the provisions created against the exposure will be reversed upon submission of application and the remaining amount may be reversed upon admission of the application.
    4. In case, the RP involves assignment/ debt recovery, the additional provision may be reversed upon completion of the assignment/ debt recovery.


Project loans where date of commencement of commercial operations (DCCO) has been deferred, will be excluded from the scope of the circular.

Hierarchy of periods

  • Review period – 30 days for preparing the resolution plan
  • Implementation period – 6 months from the end of the review period – for implementing the resolution plan
  • Monitoring period for upgradation – 1 year from date of commencement of first payment of interest or principal or reduction of aggregate exposure by 10%, whichever is later
  • Specified period – until the aggregate exposure is repaid by at least 20% – if there is a default, a fresh resolution plan will be required.

Other provisions of the FRESA

Some common instructions from the earlier directions have been retained in this framework as well, namely:

  1. Identification of an account under various special mention accounts. Where the default in account is between 1-30 days, the same must be treated as SMA-0. Where the default is between 31-60 days, it must be reported as SMA-1. Where the default is between 61-90 days, it must be reported as SMA-2.
  2. Reporting requirements to CRILC for accounts with aggregate exposure of ₹ 50 million will continue.
  3. The framework requires the lenders to adopt a board approved policy in this regard.
  4. For actions by the lenders with an intention to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties. Further, references under IBC can also be made.
  5. Disclosures under notes to accounts have to be made by the lenders with respect to accounts dealt with under these Directions.
  6. The scope of the term “restructuring” has been expanded under the Directions.
  7. Sale and leaseback transaction involving the assets of the borrower shall be treated as restructuring if the following conditions are met:
    1. The seller of the assets is in financial difficulty;
    2. Significant portion, i.e. more than 50 per cent, of the revenues of the buyer from the specific asset is dependent upon the cash flows from the seller; and
    3. 25 per cent or more of the loans availed by the buyer for the purchase of the specific asset is funded by the lenders who already have a credit exposure to the seller.
  8. If borrowings/export advances (denominated in any currency, wherever permitted) for the purpose of repayment/refinancing of loans denominated in same/another currency are obtained:
    1. From lenders who are part of Indian banking system (where permitted); or
    2. with the support (where permitted) from the Indian banking system in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc., such events shall be treated as ‘restructuring’ if the borrower concerned is under financial difficulty.
  9. Exemptions from restrictions on acquisition of non-SLR securities with respect to acquisition of non-SLR securities by way of conversion of debt.
  10. Exemptions from SEBI (ICDR) Regulations with respect to pricing of equity shares.

Withdrawal of earlier instructions

The following instructions, earlier issued by the RBI have been withdrawn with immediate effect:

Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum (JLF) as mandatory institutional mechanism for resolution of stressed accounts.


[2] The Directors lay down various categories ratings. RP4 resembles debt facilities carrying moderate risk with respect to timely servicing of financial obligations.

Comments on draft Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations

Comments on Draft Insolvency and Bankruptcy Board of India (Liquidation Process) Amendment Regulations, 2019

Concerns on Going Concern: Proposed amendments in Liquidation Regulations need relook

–  Vinod Kothari


The possibility of going concern sales in liquidations, visualised by Adjudicating Authorities in several early cases, got a regulatory recognition vide IBBI (Liquidation Process) (Second Amendment) Regulations, 2018. Since then, there has been a lot of work on how exactly will going concern sale work in liquidation. Our previous write- ups on going concern sale are Liquidation sale as going concern: The concern is dead, long live the concern! and Enabling Going Concern Sale in Liquidation. IBBI itself has organised several meetings around this; there have been meetings organised by other groups such as Society of Insolvency Practitioners of India (SIPI).


Recently, the IBBI released a draft of the amendments to the Liquidation Regulations[1], which includes regulatory amendments pertaining to going concern sale as well.


This Note highlights the need to have a relook at these proposed amendments, in context of going concern sale.

Read more

Schemes of Arrangement in Liquidation: A New Ray of Hope?

-By Vinod Kothari


The recent rulings of appellate judicial and quasi-judicial authorities in India permitting the pursuit of schemes of arrangement even after initiation of liquidation proceedings may have sounded surprising to many. However, the history of schemes of compromise and arrangement is indeed replete with examples of such arrangements seeking to bail out an entity that is otherwise doomed to be liquidated. Since India stands out in the world, having enacted section 29A of the Insolvency and Bankruptcy Code, 2016, which disqualifies a promoter from submitting resolution plans or acquiring the assets of the entity in liquidation, the issue causing a lot of debate is – how does the possibility of a scheme of arrangement co-exist with this principle of promoter disqualification? Or, if the promoters, disqualified from either heading a resolution exercise or acquiring assets in liquidation, can find a surrogate route in schemes of arrangement, is there a potential of negating the very objective of insertion of section 29A?

Another major question is: unlike the erstwhile Companies Act, 1956 regime where both schemes of arrangement and winding up were to occur under the same law and before the same forum, schemes of arrangement are now under the Companies Act, and liquidation under the Code. Therefore, if a scheme of arrangement has been suggested, should liquidation proceedings in the meantime stand stayed, as otherwise the very existence of a chance of revival through the scheme route will get nullified if liquidation achieves some milestones? Further, is it alright for the jurisprudence relating to the apparent overlap and, to an extent, conflict between arrangement and liquidation to develop on its own, or should the lawmakers interfere and write the law, instead of waiting for long winding route of litigation to reach a finality? This post seeks to address these issues, and seek answers for the various questions.

Schemes of arrangement for companies in winding up

Not only is it possible for schemes of compromise or arrangement to be presented for companies in liquidation, it may be interesting to note that the entire concept was originally intended, both in UK and India (and other countries drawing inspiration from the UK law), to be a bail-out device for companies otherwise headed for winding up. In fact, as far back as in the Indian Companies Act, 1913, section 153 pertaining to compromise or arrangement defines the word “company”, relevant to this section, as a company “liable to be wound up under this Act”. The definition continued in section 390 (a) of the Companies Act, 1956.

To a lay person, a “company liable to be wound up” meant a company that was either on the brink of bankruptcy, or was already into liquidation (since section 391 explicitly permitted a scheme to be presented by the liquidator, if the company was in winding up). It was only due to judicial interpretation of the expression “company liable to be wound up” that the expression includes every company which may be wound up under the Act following the procedure laid for winding up; healthy companies could also be covered under the chapter pertaining to schemes of compromise or arrangement. The ruling of the Bombay High Court in Khandelwal Udyog and Acme Manufacturing Co Ltd., (1977) 47 Com Cases 503, marked a departure from the principle earlier held by the same court in Seksaria Cotton Mills Ltd. v. A.E. Naik, (1967) 37 Com Cases 656, that the provision was meant only for a company on the brink of bankruptcy.

There have been numerous instances in India, and many in UK, where companies which have been in liquidation for years altogether have been ordered to be revived based on schemes of arrangement. Meghal Homes P. Ltd. v. Shree Niwas Girni K.K. Samiti, (2007) 139 Com Cases 418, is a case where the company was ordered to be wound up in 1984 and the scheme of arrangement was proposed in 1994.

Key differences between schemes of arrangement and resolution under Code

There are several significant differences between schemes of arrangement under corporate laws and resolution procedures under the Code. First, resolution schemes have practically no shareholders’ involvement. The structure of the Code seems to be exclude shareholders’ participation in resolution schemes, on the understanding that commencement of insolvency passes control from shareholders to the creditors. Indian law has gone to the extent of explicitly disabling the promoters (mostly majority shareholders) from proposing any resolution plan [section 29A(c) of the Code], or acquiring any assets of the company under liquidation [proviso to section 35(1)(f) of the Code]. On the contrary, schemes of arrangement under section 230(1) of the Companies Act, 2013 explicitly mandates meetings of creditors (and every class of creditors) and shareholders to be called separately, and an approval of the scheme by a supermajority vote in each of them. It may be noted that the need for approval by both shareholders and creditors depends on whether the arrangement involves the interests of shareholders as well as creditors (note the words in section 230 “as the case may be”). Most revival schemes of a company under liquidation will involve shareholders’ interest as well – hence, approval by both shareholders and creditors will be mandatory in case of a revival scheme.

Second, the supermajority approval requirement under section 230(6) has both a head count requirement as well a super-majority vote by value. The specific majority requirement, which was there in the 1956 Act as well, ensures that the supermajority in value does not completely cram-down the minority. Therefore, creditors of small value and small shareholders also wield the power to hold back the consent of larger creditors and shareholders. (See, however, an article by my colleague arguing that the head-count test was consciously dropped based on recommendations of JJ Irani Committee).

Third, it is important to note that section 230 requires consent of every “class of creditors”. As to what is meant by a class in this context and the difficulties in identifying a class has been discussed elaborately in State Bank of India and others v. Altstom Power Boilers, 116 Comp. Cas 1 (2003). (Palmer’s Company Law also discusses as to what constitutes a class for the purpose of compromises and arrangements. These were discussed in the landmark Supreme Court ruling in Miheer N Mafatlal v Mafatlal Industries Limited (1996)). Generally speaking, secured creditors, preferential creditors and unsecured creditors will form different classes. It may also be argued that one of the ways of recognising classes, in case of a company under bankruptcy, is their position in the waterfall under section 53 of the Code.

Fourth, the creditors’ or members’ meetings under section 230 cannot be reduced to a farce by only recognising the votes of only those members who are able to make it to the meeting – because the law explicitly recognises voting by proxies in such meetings. Additionally, requirements imposed by the Securities and Exchange Board of India (SEBI) in case of listed entities have put several additional safeguards, including mandatory facility of e-voting in such meetings, and a separate recognition of votes of “independent shareholders” (see Annex I Para I(A) point 9 of SEBI Circular dated 10 March 2017).

Can section 230 scheme be a surrogate route for ineligible promoters?

One of the most important questions concerning schemes of arrangement is – do the schemes permit the promoters to do what they are not able to do by virtue of section 29A – submit and approve schemes of revival whereby the promoters will perpetuate their stay in the company? The object of introducing section 29A in the Code, unusual in insolvency laws around the world, is to debar existing promoters of the company in default to perpetuate their stay in the company by submitting resolution plans. The sweep of the section is indeed very wide – it is not only limited to promoters of the company in question, but also any other defaulter company. Section 29A has blocked the submission of resolution plans in several high profile insolvency cases in the country, and it will be illogical to allow the submission of revival plans by promoters or controlling shareholders who cannot submit resolution plans by virtue of section 29A.

On the other hand, it may be argued that section 230 is a provision under the Companies Act, which has no equivalent of section 29A. In any case, the scheme of arrangement has the supermajority vote, not only of the shareholders, but also each of class of creditors. If the company in question is a listed entity, the shareholders’ consent must at least meet simple majority by disregarding the votes of promoter-shareholders. Thus, if the creditors and shareholders, in their separate meetings, have anyways reposed faith in the scheme as proposed, should the company not be allowed to come out of the Code and be revived under the Companies Act? After all, a section 230 compromise is not a resolution plan and in any case if the National Company Law Tribunal (NCLT), who would be sitting for approving such scheme, is able to see that the so-called scheme for a revival is an abuse of the process of law, the NCLT may always turn the scheme down. But there does not seem to be sufficient reason to have a generalised disqualification for promoters or shareholders in proposing the scheme.

At the same time, the NCLT also needs to be careful in ensuring that the scheme does not become a device to hold the process of liquidation in limbo and perpetuate the stalemate. Very often, the interest of promoter-shareholders lies in prolonging the uncertainty – when they see that the ultimate is their exit from the management, they try to prolong the stalemate. This is a real risk that NCLTs presiding over the schemes of arrangement will have to safeguard against.

Mechanics of schemes of arrangement during liquidation

How would a scheme of arrangement work during liquidation? The scheme may be proposed by shareholders, or creditors, or the liquidator himself. Typically, the initiation of an application before the NCLT under section 230 happens by the board of directors approving a scheme and making an application for convening a meeting of shareholders and members. During liquidation, since the directors relinquish their offices, there is no scope for the board submitting a scheme. Presumably, the mechanics may be for a substantial shareholder block proposing the liquidator to put a scheme before the NCLT. Creditors, of course, may propose the same directly to the NCLT. If the liquidator sees prima facie strength in the scheme, the liquidator may put forth the scheme before the NCLT.

The meetings of shareholders and creditors for approving the scheme are called at the instructions of the NCLT. Unless the NCLT dismisses the application in the very first hearing, the issue is – while the meetings of creditors and shareholders are being called, will the process of liquidation be stayed? It seems that it will be logical that the winding up proceedings should be temporarily stayed, until the shareholders’ and creditors’ meetings are called to consider the scheme. The principles for stay of winding up proceedings were contained in section 466 of the Companies Act, 1956 – this provision, and several English and Indian authorities on this regard has been discussed at length in Forbes and Company and another v. Official Liquidator (2013). If the schemes have the approval of the shareholders and creditors, then the NCLT may go by the principles well enunciated in Miheer N Mafatlal and similar rulings and, if eventually the NCLT passes order approving the scheme, the initiation of liquidation will be liable to be reversed.


It appears that when the Code was being written, the overlap of section 230 was not clearly visible, even though section 230 as amended by the Code itself makes a reference to liquidator appointed under the Code. However, now that this possibility has been opened up by jurisprudence, it is appropriate that we have codified law, rather than the uncertainty of a judicial law-making. Revival is always preferable over death, unless the so-called revival is just another ploy to permit a promoter using limited liability to continue to do unfair trading.

Scale-based liquidator’s fees: Issues and answers

-By Resolution Team, Vinod Kothari & Company

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Liquidators under the Liquidation Regulations may be paid either based on a fee fixed by the Committee of Creditors [Reg 4 (2)], or where the Committee has not fixed such fees, based on the scale provided in Reg 4 (3) [“scale-based” or “scalar” fees]. There are several points that arise in respect of computation of liquidator’s fees under Reg 4 (3). What makes the issue very sensitive is that the liquidator is paying himself out of the liquidation estate, and therefore, he is treading the very delicate issue of conflict where his duties as a fiduciary might be conflicting with his claim to the fees. Like in every case where a person responsible in a fiduciary capacity is paying to himself, the liquidator has to be extremely careful, so as to avoid even the farthest chance of an allegation of self-dealing.

This write-up tries to get into some very tricky questions about computation of liquidator’s fees.

Realisation and distribution – are the two separate?

The foremost question is, are realisation and distribution two separate additives, such that the liquidator is entitled to fees on both realisation and distribution?

It should be easy to get an affirmative answer to this question – looking at the very language of Reg  4 (3). The Regulation reads: “..the liquidator shall be entitled to a fee as a percentage of the amount realized net of other liquidation costs, and of the amount distributed, as under ..(emphasis  supplied).

The Table thereafter provides separate percentages for fees, based on amounts realised, and amount distributed.

The justification for two separate fee components, one based on realisation and one based on distribution, is understandable: there may be realisation with no corresponding distribution, and there may be distribution, with no connected realisation. “Distribution” obviously has to be read in light of section 53, and therefore, it will mean distribution to stakeholders. The possibility of there being a realisation but no equivalent distribution is when there are amounts paid over to third parties not coming under section 53, such as items not forming part of liquidation estate. There may be security deposits or other third party monies which the liquidator may be required to return. There has been a recent view that even shortfall of amounts pending to be contributed to employee benefit funds also does not form part of liquidation estate. There may be tax payments, such as municipal taxes, which take a part of the sale proceeds of property.

On the other hand, there may be distributions, with no corresponding realisation. This may mostly be the case because of cash or cash equivalents available at the start of the liquidation proceedings.

These moneys may be distributed by the liquidator after settling claims; but one cannot claim that there has been a “realisation”, as the amounts were already in liquid form.

Hence, there seems little doubt that there are two separate fee components – one based on realisation of assets, and one based on distribution of the proceeds of such realisation.

Realisation is an inflow; distribution is an outflow. The Regulations seem to have considered realisation as involving more time and effort – hence, there is a higher fee attached with realisation, than with distribution.

Point of time for accrual of the fee – realisation and distribution

In fact, the point of time for fee to be accrued comes also clear from Reg 4 (4). If the proceeds of an asset have been realised, but have not been distributed, the liquidator is entitled to only half of the fee related to realisation. However, if the proceeds have also been distributed, the liquidator  shall be entitled to the entire fee on realisation, as well as the fee payable on distribution.

Doing a comparison between the realisation stream is not like comparing the like to like – because of costs and third party payments, there may be at least some realisation which has not been distributed at all. However, this is a conclusion one may arrive towards the end of the liquidation process.

In most real life liquidations, realisations and distributions happen in tranches. There is, obviously, no direct nexus between realisations and distributions. Realisations may happen over time; when liquidators have sufficient liquidity, not required for the purpose of liquidation affairs, the liquidator should cause an interim distribution.

In order to know whether what has been realised has been distributed or not, the only possible test to apply will be cumulative realisations and cumulative distributions. A realisation from an asset may be taken as distributed, if the cumulative realisations till the point of time are at least equal to the cumulative distributions till that point. Of course, there is no concept of partial distribution of sale proceeds – hence, if, looking at the cumulative distributions, it is only a part of the realisation that has been distributed, then it should be presumed that the realisation has not been distributed.

“Liquidation costs” and “other liquidation costs”

In case of the realisation scale, the fee is computed on the amount realised, net of “other liquidation costs”. The expression “other” liquidation cost must be taken to mean liquidation costs, other than the fee payable to the liquidator himself. Note that there is no question of deducting any such costs in case of the distribution scale, which is quite obvious, because distribution happens after all relevant costs and outflows have been accounted for.

The meaning of “liquidation costs” comes from Sec 5 (16) of the Code, read with Reg 2 (1) (ea). Section 5 (16) defines the term to mean “any cost incurred by the liquidator during the period of liquidation subject to such regulations, as may be specified by the Board”. As may be seen, the definition is wide enough to include “any cost”.

However, Reg 2 (1) (ea) seems to be doing some delimitation to such wide meaning. The said Regulation gives a comprehensive definition of the term, however, limiting it to 4 components:

  • Liquidator’s own fee
  • Remuneration payable to professionals, in terms of Reg 7
  • Cost incurred by the liquidator in verification and determination of the claim, in terms of Reg 24
  • Interest on interim finance, for a maximum period of 12 months from commencement of

The first question that comes is – was Reg 2 (1) (ea) actually meaning to delimit the seemingly unlimited ambit of sec. 5 (16)? Reg 2 (1) (ea) was inserted in the statute to ensure that the priority under section 53 (1) (a) is not applicable to all costs incurred by the liquidator but not paid. Hence, it is notable that the language of Reg 2 (1) (ea) is “payable” or “incurred”, rather than paid. That is to say, if the liquidator has engaged professionals for carrying out liquidation functions, but the said professionals could not be paid, the unpaid fee will have the first claim on the priorities listed in section 53.

But could it the idea of Reg 2 (1) (ea) to say that it is only the 4 items of costs that will be deducted from the sale proceeds of assets?

Depending on the facts of the case, there may be numerous types of costs that may be incurred by the liquidator:

  1. Costs and expenses to the extent required to keep the business of the corporate debtor going;
  2. Costs and expenses required for beneficial liquidation – for example, if there are half-done jobs, the same may have to be completed to get a right on the
  3. Costs of insuring the assets
  4. Costs of repairing and maintenance of assets
  5. Security costs
  6. Manpower costs – many assets may require regular upkeep; while the employees may have been dismissed on liquidation orders, some staff may have to be retained on retainership contracts.
  7. Municipal and other asset-related taxes
  8. Professionals fees –including valuations, auditors, auctioneers, consultants or agents to facilitate a sale

Of the 4 elements mentioned in Reg 2 (1) (ea), the liquidator’s fee itself is not a deductible in view of the language of Reg 4 (3). The costs incurred for determination of a claim may include those limited cases where a claim was dismissed, and had to be litigated before the claim could be admitted, or costs incurred for verification of the claim from records of information utility, etc. Interim financing may also not be a common occurrence. That leaves only 1 item of deductible in computing the net realisations under Reg 4 (3) – the fees payable to professionals (discussed at length separately).

However, was that the intent of Reg 4 (3) – to confine the deduction from the sale proceeds only to the professionals’ fees, and ignore all other costs?

A useful comparison may be Rule 18.22 of the UK Insolvency Rules, 2016. Here, all bankruptcy expenses are to be deducted in applying the realisation scale, excepting the fee of the receiver, and the expenses in carrying on the business of the insolvent, spent out of the money received in carrying on such business. Assuming that the business of the insolvent was not carried on, all the bankruptcy expenses are deducted, except the liquidator’s own fees.

Taking any other interpretation will be unrealistic. Following are some examples:

  • An asset will sell for Rs 150 if I incur a repairs cost of Rs 20. If I don’t incur the expense, it will sell for Rs 100. So, I decide to incur the expense, and sell the asset for Rs 150. Is it justifiable for me to claim a fee on Rs 150, without deducting the cost of Rs 20 which was responsible for the higher realisation.
  • The asset in question is a car. The asset will sell for Rs 110 if the asset is insured, with current tax payments. The asset will sell for Rs 100 if the asset does not have an insurance and road tax receipt. So, I spend Rs 10 on the insurance and road tax. Can I claim the realisation scale on Rs 110, without deducting the insurance and road tax?

In essence, if we limit the expenses to be deducted from the sale proceeds, there may be intricacies of having to distinguish between expenses that have contributed to the sale proceeds and those that have not, expenses that have assisted in the sale process and those have not, etc etc.

Intuitively, if something is a part of bankruptcy expenses, irrespective of whether it is a professionals’ fee or not, the same should be deducted from the realisations.

Therefore, the items which are not deductible from the sale proceeds (i.e. realisations) should actually include only such items which are, properly speaking, not costs. These may include:

  • Any taxes on sale such as GST (typically, GST should not be treated as a part of realisation as well).
  • Any amounts which were not regarded as forming part of liquidation estate, such as moneys held for third parties, or similar

Professionals’ Fees

Section 35(1)(i) enables the liquidator to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities. Further, Regulation 7 enables the liquidator to appoint “professionals” to “to assist him in the discharge of his duties, obligations and functions” for a reasonable remuneration and the remuneration shall form part of liquidation cost.

Notably, reg. 2(1)(ea) refers to reg. 7 and not section 35(1)(i) – therefore, it might be said that “obtaining professional assistance” and “appointing professionals in discharge of duties, obligations and responsibilities” are not one and same. For instance, if the liquidator obtains a legal opinion – the same would qualify as “professional assistance”.

Now, the duties, obligations and functions of a liquidator are multifarious as described in section 35(1) – ranging from verifying claims to distributing the proceeds; taking the assets into custody, preserving those assets and ultimately selling the assets; instituting/defending suits, prosecution or other legal proceedings in the name of on behalf of the company; and even carrying on the business of the corporate debtor for its beneficial liquidation. Besides, the liquidator has been entrusted with various duties/obligations under the Liquidation Regulations – for instance, arranging for valuations, preparation of various reports, receipts and payments account, etc.

Therefore, as it appears, such professionals who “assist” the liquidator in the functions/duties as above are to be included under regulation 7 and consequently the remuneration paid to them shall be a part of “liquidation cost” under reg. 2(1)(ea). Certain instances of such professionals are –

  • merchant bankers appointed for facilitating sale of assets;
  • valuers appointed for valuation of assets;
  • lawyers/counsels, etc. appointed for representing the liquidator/company in legal proceedings

However, there are several such instances where it might not be possible to clearly distinguish whether the professional was appointed “in discharge of duties/obligations” of liquidator – take for example, auditor appointed for receipts and payments, professionals appointed for drafting sale documents, retainers engaged to carry out beneficial liquidation (whether or not they qualify as “professionals”), etc.In view of the above, determination of reg. 7 costs might be an area of conflict and lead to faulty/uneven computation of liquidator’s fee on realisation. Computation of fee on net realisations (that is, excluding all costs, as discussed above) will possibly avoid such conflicting situations.

How to deduct expenses from realisations?

In case of phased distributions, another issue is – how to deduct expenses from realisations? The expenses are incurred over a period of time. hence, is it expected that all expenses upto the point of the distribution are deducted from the realisation, or the expenses that pertain to the assets disposed off are to be deducted?

In practice, doing an asset-based allocation of the expenditure will be impractical. Hence, one will to deduct all expenses upto a particular distribution, and then, the expenses from that point onwards may have to be deducted while making the next distribution.

If the view is that expenditure to be deducted from the sale proceeds is all liquidation costs, and that the reference to para 2 (1) (ea) is not relevant to Reg 4 (3), then the easiest way to compute the net realisations will be to start from the distribution, and simply add back the items which are not regarded as “costs” or expenses.

Stress on proper format of liquidator’s accounts:

The above discussion also points to the need for standardisation of liquidators’ receipts and payments accounts as well. The receipts and payments account not only has to have appropriate groupings of items of inflows and outflows, so as to make intelligible reading, it must also present the sale proceeds, expenses of liquidation, and fees of professionals and the liquidator himself, so as enable the computation of fees.


Seemingly, what is needed is a detailed clarity on regulation 7. Nevertheless, it would be appropriate to consider any cost incurred during liquidation while computing fee on realisation. The  same follows a conservative approach, and is recommended because of its reasonability too.

Also, it is suggested that the liquidator’s accounts be presented with suitable headings so as to reflect the nature of the expenses paid by the liquidator, alongwith notes, if required.

Entity versus Enterprise: Dealing with Insolvency of Corporate Groups

By Vinod Kothari & Sikha Bansal

Present-day businesses sweep across multiple entities, such that the “enterprise” consisting of multiple entities, often in multiple jurisdictions, is referred to as a “group”. While accounting standards and securities market regulators have moved on to the concept of “business groups”, the ghost of the 19th century ruling in Salomon v. Salomon & Co continues to hover over corporate laws and, consequentially, over insolvency laws too.

Insolvency laws have not been accommodative of “group concerns” – the insolvent entity is treated as a separate and focused subject matter altogether, and the group entities remain insulated, irrespective of the extent of intermingled structures and shared resources. The relevance of the enterprise approach may be seen from two perspectives – the objective of insolvency or liquidation proceedings, and the complex, inter-connected nature of legal entities in corporate groups of the present day. Given the primary objective of insolvency laws to rescue an entity, a mostly entity-focused approach may fail to do justice to the needs of an ailing enterprise, where resources, operations and assets may be scattered across entities. In liquidation too, where the intent is to liquidate assets, if the assets are entangled across entities and jurisdictions, no meaningful liquidation may be achieved. In any case, due to the entangled nature of the entities, whereby picking up one of the group entities and seeing the same in isolation may not be meaningful at all, the group approach becomes unarguable.

As Sir Goode[1] laments,
Business, entity or group enterprise?

The subject of insolvency proceedings has always been, and continues to be, the particular corporate entity that has become         insolvent, and this focus is accentuated by the reluctance of English law to pierce the corporate veil. What insolvency law here and overseas has so far singularly failed to accommodate is the management of enterprise groups where one or more, or possibly all, members of the group have become insolvent. Whereas the preparation and filing of group accounts has long been required, when it comes to insolvency the distinct legal personality of each individual company within the group is respected, with separate proceedings for each company, yet the insolvency of one member of a group may threaten the viability of previously solvent members and where the group activity is integrated a coordination of the management of the group as a whole may be highly desirable. This is particularly the case as regards multinational group of companies, where the complexity is exacerbated by the variety of corporate structures and the possibility of concurrent proceedings in different jurisdictions governed by different laws, . . .

[emphasis supplied]

While India is pondering over developing a framework under the Insolvency and Bankruptcy Code for group-based insolvency, a lot of work has already been done across the globe – UNCITRAL had constituted a working group, Working Group V, to deal with insolvency law, and through its various sessions, the Working Group has been advancing its work on insolvency of enterprise groups. The UNCITRAL Legislative Guide to Insolvency Law has dedicated a complete part, viz., Part 3, dealing with insolvency of enterprise groups. The EU Insolvency Regulation also applies in cases where there are insolvency proceedings in two or more EU member states.
When it comes to approaches, a group-focused approach may involve looking in multiple directions – as in “looking up”, “looking down” and “looking laterally”. As it suggests, looking up would mean looking at the holding or controlling entities, looking down would mean looking at the subsidiary level, and looking laterally would require looking at fellow subsidiaries, or entities equally controlled by holding entities. The UNCITRAL work discusses several approaches – extension of liability and contribution orders, equitable subordination, avoidance applications, procedural consolidation, and substantive consolidation – last two being major and extensive ones.

Procedural consolidation is where the proceedings of insolvency of different entities are coordinated, even if before different judicial or adjudicating authorities. On the other hand, substantive consolidation disregards the separation of entities and pools the assets and liabilities of various entities into a common hotchpot. This extreme remedy is rarely used, even though UNCITRAL has been aggressively working on developing the principles for the same. Basically, substantive consolidation is ordered by courts where pooling of assets and liabilities is to the larger benefit of different creditors, and generally not prejudicial to any. Mostly, this is done under circumstances similar to those inviting “lifting or piercing the corporate veil”; even substantive consolidation is different from veil lifting or piercing. US courts have well developed jurisprudence around substantive consolidation, though the remedy has been considered to be one which should be “sparingly used”, particularly after the ruling in Owens Corning. Recourse to the remedy will depend upon several factors, majorly, interests of creditors of the entire group.

India does not seem to have any trail of winding up case law on substantive consolidation, though “lifting of corporate veil” has been a well-known recourse in several judicial precedents. While, under the Insolvency and Bankruptcy Code, a subsidiary’s assets cannot form a part of an insolvent holding company, it is felt that the very idea of substantive consolidation is based on a substantive, equitable power of the adjudicating bodies. The remedy is applied in cases where the separation of legal entities is either artificial, or it is observed that dealing with the insolvency of one of the several entities, without disturbing the others, will be self-frustrating approach. Therefore, it is futile to search for legal provisions to permit approaches such as substantive consolidation. It is felt that insolvency laws have equity at their core: therefore, irrespective of the provisions explicitly providing for exclusion of the assets of a subsidiary from those of the holding entity, the National Company Law Tribunal has the equitable power to order substantive consolidation, wherever deemed appropriate and in the ends of justice.

In the Paper titled Entity versus Enterprise: Dealing with Insolvency of Corporate Groups, posted on SSRN  the authors have delved deeper into the discussions and have made an effort to identify  ways for making group insolvency work from global and Indian perspective.

The powers of a Court, specifically Bankruptcy Court w.r.t. “substantive consolidation”, lifting of corporate veil etc., in case of SPVs, has been discussed in the article titled “Consolidation” available at:

[1] Goode on Principles of Corporate Insolvency Law, Fifth Edition, by Kristin Van Zwieten, pg. 29-30.

Post-Admission Withdrawal of Insolvency Proceedings- Balancing Between Creditors’ Supremacy and Adjudicators’ Discretion

-By Richa Saraf

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Initiation of insolvency proceedings, whether by creditors or by the debtor himself, may be compared with the Brahmastra: as the latter cannot be retracted without killing the target, the former, once admitted, cannot be withdrawn. However, after all, any insolvency resolution process is a case of a mutual contract between the creditors and the debtor – with requisite majority of creditors, it gets the seal of approval of the Adjudicating Authority and becomes a “statutory contract”. Resolution is, therefore, a consensus in substance. Isn’t it possible for the creditors to reach to a consensus with the debtor outside of the insolvency resolution process, and thus, recall the proceedings? In banking parlance, can there be a one-time-settlement (OTS) after admission of insolvency proceedings?

Section 12A was inserted specifically providing for withdrawal after admission. It is well known that the section was inserted after the Supreme Court ruling in Lokhandwala Kataria Construction Private Limited v. Nisus Finance And Investment Managers LLP, where the Apex Court had to use its plenary powers under Article 142 of the Constitution of India to permit withdrawal after admission of resolution process. The SC subsequently eased out the process of withdrawal by its ruling in Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors.

Post this ruling, there has been a spate of withdrawals under Section 12A. Data from IBBI shows that out of the 142 cases closed, 63 have been withdrawn under Section 12A[1].

This article intends to get into the limits, if any, of creditors’ discretion in withdrawal under Section 12A. The article reviews the law in this regard based on precedents under the winding up regime under the Companies Act, 1956, and international experience. Finally, the article tries to identify the boundaries of creditors’ wishes and the discretion of the Adjudicating Authority.

Law of Section 12A

As per Section 12A of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority may allow the withdrawal of application admitted under Sections 7, 9 or 10, with the approval of ninety per cent. voting share of the committee of creditors. Considering that the proceedings are primarily carried on behalf of and for the benefit of stakeholders of the corporate debtor, the section stipulates two layers of consent. While it is understood that this is the sole requisite is consent of the majority of creditors, the ultimate authority to permit withdraw or not to permit vests with the Adjudicating Authority.

The Hon’ble Supreme Court in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal & Ors. held that Section 12A contains no time stipulation and allowed the settlement, even after issue of invitation for expression of interest, thereby annulling the CIRP proceedings.

Further, the National Company Law Appellate Tribunal in V. Navaneetha Krishnan v. Central Bank of India, Coimbatore held:

“In view of Section 12A even during the liquidation period if any person, not barred under Section 29A, satisfy the demand of COC then such person may move before the Adjudicating Authority by giving offer which may be considered by the COC, and if by 90% voting share of the COC, accept the offer and decide for withdrawal of the application under Section 7 of IBC, the order of liquidation passed by the Adjudicating Authority will not come in the way of Adjudicating Authority to pass appropriate order.”

In Satyanarayan Malu v. SBM Paper Mills Ltd., NCLT Mumbai permitted withdrawal of CIRP at the stage when resolution plan was pending approval of the NCLT, after acceptance by CoC. The Bench took into account the offer of one-time settlement (OTS) made by the corporate debtor to the financial creditor, which was more economical than the resolution plan.

Previous Law:

Similar provisions were contained in Section 35 of the Provincial Insolvency Act, 1920, which provides for power to annul adjudication of insolvency. Under the Companies Act, the general rule was that “wishes of the majority creditors prevail”. If the majority show confidence in the continuance of the business of the company, the court will not interfere. The law on this point is stated in Palmer’s Company Law 21st Edition, page 742, as follows:

 “The right to winding up order is, however, qualified by another rule, viz., that the court will regard the wishes of the majority in value of the creditors, and if, for some good reason, they object to a winding up order, the court in its discretion may refuse the order.”

The wishes of the creditors will, however, be tested by the court on the grounds as to whether there are matters which should be inquired into and investigated if a winding up order is made. The court is invested with a wide jurisdiction, and if the facts disclose an unsatisfactory state of affairs so as to make out a strong case for investigation, the court will not hesitate to make a winding up order, inspite of the wishes of the creditors[2]. [See Madhusudan Gordhandas & co. v. Madhu Woollen Industries P. Ltd.]

Considering the facts and circumstances of the case, and in exercise of its inherent powers under Rule 9 of the Companies (Court) Rules, 1959, the courts have on several occasions allowed revival of a company even after winding up order was passed. In the case of NGEF Ltd., since attempts to revive the company by clearing the debts had failed, as per the suggestions of Board for Industrial & Financial Reconstruction, the Karnataka High Court had on 3rd August, 2004 ordered the winding up of the company. However, on 22nd June, 2017, the court recalled its 13-year-old order[3]. In the said case, while the minority shareholder claimed that there was no provision in law for recalling a wind-up order and there was no scheme placed by the state for revival; the court very clearly held that though there is no specific provision in the Companies Act for recalling of a wind-up order, the law does not restrict the court from it either, if the circumstances requiring such recall are established by any of the applicants, be it the Official Liquidator, or a creditor, or a contributory or a shareholder. The court also went on to state that revival of a company does not necessarily mean revival and restoring of the usual manufacturing or business activity. It is a broader term including therein, the best utilisation of the assets. It is only the live and operating companies or business, which contribute to the economic welfare of the country and not the process of winding up of companies, which achieves this objective of larger public good.

In Sudarsan Chits (I) Ltd v. O. Sukumaran Pillai, the Apex Court observed that it is well settled that a winding up order once made can be revoked or recalled.

Global Law:

Section 706(a) of US Bankruptcy Code bestows upon the debtor one-time absolute right of conversion of a liquidation case to a reorganization or individual repayment plan case. If the case has already once been converted as such, then the debtor cannot exercise the right. The policy of the provision is that the debtor should always be given the opportunity to repay his debts, and a waiver of the right to convert a case is unenforceable. Section 706(b) permits the court, on request of a party in interest and after notice and a hearing, to convert the case to one under reorganisation at any time. The decision whether to convert is left on the sound discretion of the court, based on what will most inure to the benefit of all parties in interest. For instance, in Re Wallace, 191 B.R. 925, 927 (Bankr. M.D.Fla. 1995), the bankruptcy court has taken due cognizance to the fact that conversion of a bankruptcy case to one under reorganisation would be a futile, where there exits circumstance that will cause reconversion to bankruptcy.

Section 261 of the UK Insolvency Act, 1986 also stipulates that a debtor can make a proposal for voluntary arrangement, and if creditors approve the voluntary arrangement, the bankruptcy order may be annulled by the court. As to all matters relating to the winding up of a company, the court will give effect to the wishes of the majority[4] (Section 195). Section 282 further provides for court’s power to annul bankruptcy order. The considerations for annulling the order is provided under Section 282(1) of the Act. The relevant extract is reproduced below for reference:

“The court may annul a bankruptcy order if it at any time appears to the court-

   that, on any grounds existing at the time the order was made, the order ought not to have been made..”

on plain reading of the provision, it may be stated that the court retains a discretion whether to annul the adjudication or not, for Section 282(1) merely mentions that the court “may” annul the bankruptcy order under the circumstances described[5]. Thus, a bankrupt may still be denied an annulment if his conduct has been in some way improper [Refer In Taylor, Re (1901) 1 QB 744 (DC)].

Discretion of the Adjudicating Authority:

Section 12A stipulates that the Adjudicating Authority may allow the withdrawal on an application made with the approval of ninety per cent. voting share of the committee of creditors. While the pre-condition is approval of CoC members holding 90% share, the final discretion to allow or disallow vests with the Adjudicating Authority. The report of the Bankruptcy Law Reforms Committee also discussed that “Once a bankruptcy petition is filed, it cannot be withdrawn without the leave of the Adjudicating Authority[6].

In case where no resolution plan has been received or the resolution plan is not approved before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process, the Adjudicating Authority shall pass an order for liquidation of the corporate debtor, in terms of Section 33 of the Code. As against the mandatory provisions of Section 33, Section 12A is not an automatic remedy. If the debtor files an OTS scheme, the creditors may consider the same. However, the ultimate authority to approve withdrawal of CIRP vests with the Adjudicating Authority, and the power should be exercised, considering commercial as well as social interest.

The Adjudicating Authority has adequate powers to deal with illegal activity or abusive conduct. The considerations for permitting withdrawal may be nature of OTS, in terms of fundamental requirements. The provisions of the Code should not be misused by any stakeholder to strip asset value or otherwise work to the detriment of the business or other stakeholders. The intent of IBC was to provide a reasonable opportunity for rehabilitation of a business before a decision is taken to liquidate and the Adjudicating Authority may allow withdrawal if the pre-conditions are met, however, Section 12A should not provide the debtor with an opportunity to abuse the process of law. The Adjudicating Authority should, therefore, have relevant information about the debtor for effective consideration of withdrawal. If required, the Tribunal may obtain independent comment and analysis of that information by experts.

Section 12A and Section 29A:

Can Section 12A be used as the surrogate to enable what is not possible under Section 29A? It may be noted that Section 29A is ineligibility to submit resolution plan by promoters. Section 12A is not a resolution plan- Section 12A hits at the very roots of the initiation of the process itself. However, if in guise of withdrawal of CIRP, the creditors are actually agreeing to a resolution plan, then the Adjudicating Authority may exercise discretion. The idea of withdrawal under Section 12A is akin to a declaration by overwhelming majority of creditors that the circumstance which led to initiation of insolvency do not exist anymore. If the facts are that the entity is intrinsically insolvent, the idea of Section 12A cannot be perpetuation of insolvent business. Section 12A should not be allowed to become a re-run of the process under BIFR or earlier regime where an insolvent business could continue to run without any hard time lines. The IBC regime does not want deadwood to continue to lock economic resources, and unsuccessful/unscrupulous promoters to continue to manage businesses. Hence, if the circumstances that led to initiation of insolvency continue to prevail, the Adjudicating Authority will be justified in using its discretion to refuse to allow withdrawal.


[2] Re Clandown Colliery Co. 91915) 1 Ch 369.


[4] P. & J. Macrae Ltd. (1961) 1 WLR 229: (1961) 31 Com Cases 424: (1961) 1 All ER 302 CA

[5] Askew Peter Dominic Ltd. (1997) BPIR 163; Coney, Re (1998) BPIR 333