By Dhananjay Kumar (South Square / Cyril Amarchand Mangaldas) and Gautam Sundaresh (Kirkland & Ellis International LLP)
Executive Summary
While India’s new restructuring regime under the Insolvency and Bankruptcy Code, 2016 (“IBC”) saw huge success initially, it has become a less attractive option over time for various reasons including huge delays and inconsistency in judicial decision-making. A quicker and more efficient alternative is therefore the need of the hour. This article explores the possibility of using an English restructuring plan (“English RP”) as a potential solution. It offers a comparison of the two legal regimes and highlights the benefits and new technologies offered by the English RP, in addition to the various considerations that stakeholders need to keep in mind when resorting to this option. It would be a tactical decision as to which option to choose in a given scenario, given the differences in how the two regimes deal with stakeholder rights, which is discussed here in some detail.
Unlike the IBC (which does not apply to foreign companies), the English RP is available to non-English companies as long as a “sufficient connection” test is met. In addition to considering the requirements to be met for invoking the jurisdiction of English courts for a restructuring plan in respect of Indian companies, this article also analyses potential issues in relation to recognition of such English court judgments in India. While India currently lacks a cross border insolvency framework for recognition of foreign insolvency proceedings, this article highlights the possibility of achieving recognition via the application of comity. While not having been previously applied in the context of an English RP, the article discusses the jurisprudential evolution of the principle in insolvency cases and concludes that this is potentially available for achieving recognition today. The article also sets the stage for a more robust mechanism of recognition through a separate cross border insolvency framework which is expected to be introduced in the near future.
Introduction
Eight years ago, India legislated for major corporate insolvency reform by way of the IBC. The IBC replaced the existing assortment of laws in place relating to insolvency and restructuring, and was widely touted as the long-awaited solution for India’s twin balance sheet problem and its non-performing loans crisis (especially on the books of Government-owned banks).[1] Its introduction resulted in a huge jump in India’s position on the World Bank’s Ease of Doing Business rankings, moving it up from rank 136 to rank 52.[2] The IBC saw tremendous success initially, with several of the “dirty dozen”[3] cases identified by the Reserve Bank of India (involving a total debt amount of INR 3.45 lakh crore (c.$41 billion))[4] having been successfully resolved and the banks having recovered several billion US dollars as a result. There have also been several big successes in the financial sector such as Dewan Housing Finance Corporation and SREI Infrastructure Finance Ltd.
However, the IBC is no longer considered to be the panacea it once was. This is because of several reasons, including court delays, inconsistent court judgments, and there being no statutory or legal bar on multiple rounds of litigation by various stakeholders (even if completely frivolous). Lender trust in the process appears to have waned, along with the general willingness to resort to the process. Creditors are now more likely to opt for out-of-court solutions and bilateral negotiations, even at the cost of much lower value recovery.[5] The pre-pack regime introduced in April 2021[6] is available only to micro, small and medium enterprises and has been used sparingly (only thirteen cases have been admitted as of June 2024, with resolution plans having been approved in five of these).[7] Out of the various factors affecting the IBC, delays are the most significant, and is a problem which has not yet been resolved in any comprehensive manner.
It is against this backdrop that we analyse the possibility of using the English RP as a tool to resolve financial distress for Indian companies. The English RP was introduced as part of the Corporate Insolvency and Governance Act 2020 (which introduced a new Part 26A into the Companies Act 2006). It has already proved to be a powerful and effective tool which provides for several new technologies (such as the cross-class cram down) and has been used in many major international restructurings so far. As discussed in more detail in the sections below, it might be possible to use an English RP for an Indian company if certain jurisdictional bases are met based on a ‘sufficient connection’ test. This article explores some of the legal considerations involved in using the English RP as an alternative to the IBC mechanism.
The IBC – Overview of Status and Issues Being Faced
This section of the paper discusses some of the issues plaguing the IBC framework in some detail and highlights the major pain points and drawbacks of the IBC rescue process that an English RP can seek to address.
(a) Success Rate: Letting the Numbers Speak
Despite its initial success, the performance of the IBC in rescuing companies has been rather lacklustre overall. With over 7813 cases having been admitted into the rescue process as of June 30, 2024, only 1005 resolution plans have been approved so far and 2547 companies have gone into liquidation.[8] At the same time, close to 13,000 cases remain pending before various benches of the National Company Law Tribunal (“NCLT”) (with close to 2000 of these relating to the corporate insolvency resolution process (“CIRP”) under the IBC (being the rescue process available under the statutory framework)).[9] While the IBC governs liquidation of companies as well, its primary objective remains the going concern rescue of companies, with liquidation being available as a tool of last resort if the resolution process has failed.[10] With only 13% of admitted cases having resulted in approved resolution plans, the picture remains rather dismal.
(b)Timelines
The time-bound resolution of debtors is another primary goal of the IBC as specified in the Bankruptcy Law Reforms Committee Report (“BLRC Report”) (which provides guidance into the legislative intent behind the statute) and the Preamble to the IBC; it is also emphasised in several Indian Supreme Court decisions.[11] While a laudable goal in theory, reality has fallen short of expectations.
The Standing Committee of Finance noted that the delay in admission of cases and approval of resolution plans by the NCLTs is the primary cause for delay in insolvency resolutions.[12] While the statutorily prescribed outer timeline to decide cases under the IBC is 330 days,[13] the average time taken by NCLTs from insolvency commencement date to approval of resolution plan has been closer to the 761-day mark (639 days excluding the statutorily ‘excluded time’).[14] A major reason for this is litigation initiated by employees and management, operational creditors, and inter-se creditors themselves.[15] Indian courts have also considered, in public interest, special entitlements for some types of vulnerable stakeholders even without there being a statutory basis for doing so.[16] In several instances, it is the erstwhile management and promoters that cause the delays by offering last minute settlement offers or by launching frivolous challenges to the eligibility of the resolution applicant or validity of the process in general.[17]
The delays are also exacerbated due to the infrastructural deficiencies at the NCLT, with the number of sitting members being significantly lower than the sanctioned strength. There have been several occasions during which the number of sitting members has fallen below 50% of the total sanctioned strength of 63.[18] However, under the recent budget announced in June 2024, the Government has committed to setting up additional benches of the NCLT which will exclusively hear cases filed under the Companies Act, 2013 (which would free up benches as well as judges’ time to deal with IBC cases) and has also announced the introduction of an ‘integrated technology platform’[19] for the IBC. [20]
As a result of such delays, creditors are often seen to be willing to walk away with lower net present recovery through negotiated settlements, rather than having to wait several years to receive marginally higher pay-outs.[21] This also results in creditors resorting to the IBC process more as a pressure tactic rather than with any legitimate expectation of a successful insolvency resolution process.[22] As per recent reporting, there were over 26,500 instances of applications (with an underlying debt amount of INR 9.33 lakh crores (c. $111 billion) being withdrawn before admission of the insolvency petition by the NCLT, and close to 1000 cases being withdrawn before completion of the insolvency resolution process.[23] While there is no doubt that the IBC is a huge step up from the insolvency regime which preceded it in terms of timelines, it is clear that there is still some distance to be covered for the IBC to be an attractive proposition for creditors.
(c) Inconsistency in Jurisprudence
The IBC is a prescriptive statute providing a high level of detail and is to be read in conjunction with the BLRC Report which provides insights into the thinking that went into its drafting and formulation. At the same time, however, statutory ambiguity and interpretation issues cannot be pre-empted (perhaps like any other statute) and are thus left to the courts to adjudicate on. While this is the normal course of evolution for any law (especially in common law jurisdictions), it is the inconsistency of positions taken by courts, and in certain instances, deviations from the letter of the law, which has resulted in uncertainty and lack of trust among creditors.[24]
A prime example of this is the Indian Supreme Court’s ruling in the Rainbow Papers case.[25] Here, the Court held that the State Tax Department is to be classified as a ‘secured creditor’ within the meaning of the IBC and was eligible to be paid out at par with the other secured creditors (despite the IBC specifically providing for much lower priority to government dues relative to dues owed to secured creditors).[26] This came as a shock to secured creditors such as banks, as it seemed to violate a fundamental presumption that they were operating on, and one which squarely found its basis under the IBC liquidation waterfall.
There have also been other such rulings which have had the effect of undermining creditor confidence. For instance, in a ruling[27] by the National Company Law Appellate Tribunal, New Delhi in 2022, the Appellate Tribunal held that payment to be made to secured creditors is to be correlated to their voting share rather than the value of their security interests (which goes against the global legal position on the point, including the UNCITRAL Legislative Guide on Insolvency Law).[28] There have also been a series of other rulings which have created uncertainty vis-à-vis the rights of dissenting creditors. For instance, in Jaypee Kensington[29], the court held that dissenting financial creditors have to be paid in cash (and cannot be given the same type of non-cash consideration that assenting financial creditors are being provided under a resolution plan), which is likely to have an adverse impact on creditors’ overall willingness to support a plan. Further, in Amit Metallics and DBS Bank v. Ruchi Soya[30], different benches of the Supreme Court have taken differing positions as to whether dissenting creditors are entitled to receive pay-out based on their voting share in the creditors’ committee or based on the value of their security interests instead. This issue has been referred to a larger bench for determination.
d) Limited Scope of Jurisdiction
While the IBC has achieved some degree of success domestically, it is designed to be very inward looking and does not provide for the ability to deal with companies incorporated outside India. Under the IBC, the definition of ‘corporate debtor’ is limited to companies and limited liability partnerships (LLPs) with their registered offices in India. Indian courts therefore cannot exercise jurisdiction under the IBC in relation to foreign-registered companies, which renders the regime unavailable in situations where the debt sits at the level of a foreign holding company or subsidiary. Nor does the Indian statutory regime provide for the possibility of a joint CIRP for Indian and international group entities, rendering it ineffective for groups with a diversified capital structure across entities, or those that have strategically selected borrowers incorporated outside India to raise finance.
This is quite unlike the English regime, which as explained below, provides for a rather flexible “sufficient connection” test, enabling the English court to exercise jurisdiction in relation to foreign companies.
The English RP: Background and Considerations
(A) Overview of Regime and Mechanics
Summary of process: As a first step, a court application is made for an order convening a meeting of the creditors or members, which can be made by the creditors or the company itself (in addition to a liquidator or administrator).[31] Next, a convening hearing is held, where the court decides on class formation and related aspects, and whether it has jurisdiction to sanction the proposed plan. Pursuant to the convening hearing, the court would direct the creditors or members to vote on the proposal in advance of the sanction hearing. All creditors and members whose rights would be affected under the plan must receive notice and a detailed explanatory statement and be permitted to participate in the creditors’ meetings (although stakeholders that do not have a genuine economic interest in the company can be excluded from voting).[32] Stakeholders whose rights are not being compromised under the plan will not be included in this process.
A class approves the plan if at least 75% in value of those present and voting, vote in favour.
The following conditions need to be met in order for a court to approve a plan where one or more classes have dissented:
- the court is satisfied that if the plan was to be sanctioned, no member of a dissenting class would be any worse off than they would be in the event of the ‘relevant alternative’ (which is to be assessed on a case-by-case basis);[33] and
- the plan has been approved by at least one class who would receive payment, or have a genuine economic interest in the company, in the event of the relevant alternative.[34]
The court retains discretion as to whether to sanction (approve) the plan, even if the above conditions are satisfied.
Additionally, the court will always critically assess the plan company’s evidence as to the relevant alternative, especially when there is no “burning platform”.[35] The court will also conduct a ‘horizontal comparison’ analysis and try to identify whether the plan provides for differences in treatment of different classes of stakeholders inter se, and whether these changes can be justified (including in respect of dissenting classes vis-à-vis others).[36] Further, in Adler,[37] it was held that the court must also inquire into how the value sought to be preserved or generated by the restructuring plan (over and above the relevant alternative) is allocated between assenting and dissenting creditor groups.
The Court in Adler also held that an English RP cannot deviate from the principle of pari passu treatment of creditors within a certain class (where they would rank equally in the relevant alternative to the plan), unless there is a good reason for such departure (such as where one set of creditors provide some additional benefit to assist the achievement of the restructuring). In this case, the Court of Appeal held that the preservation of existing maturity dates of multiple series of notes represented a departure from the pari passu principle (by leaving later-dated noteholders at greater risk of non-payment), without proper justification. At the same time, it held that the elevation of one earlier-dated series of notes in exchange for a one-year maturity extension also departed from the pari passu principle, but this could be justified (given the maturity extension).
Similarly, in the recent Cineworld decision,[38] the court approved restructuring plans despite opposition from certain landlords. This judgment further emphasised the importance of the pari passu principle and held that courts will be slow to enforce agreements which operate to undermine the pari passu principle.
Trigger requirements: While the IBC provides for a straightforward default test for the initiation of a CIRP (default of at least 10 million rupees),[39] the trigger requirements for an English RP are wider, the test being that the company “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.[40] The company must demonstrate that the purpose of the compromise or arrangement sought to be achieved is to eliminate, reduce, prevent, or mitigate the effect of such financial difficulties.[41] There are no other financial criteria which apply, thereby making the English RP available to both solvent and insolvent companies.
Timelines: An English RP usually takes between 14-18 weeks to be approved. This includes about 6-8 weeks for the preparation of the transaction and court documents, and another 8 weeks or so for the court process (commencing with the convening order for the scheduling of meetings, up till the sanction order approving the plan). This, however, does not include the lead up time to enter into lock-up arrangements and pre-negotiations with the creditors, shareholders and other stakeholders (which could amount to an additional 8-10 weeks). Thus, the overall timeline to achieve a restructuring under an English RP is about 26-28 weeks, which is considerably lower than the IBC route, which takes closer to 90-100 weeks to complete.[42] This timeline is highly variable, however, and is subject to availability of court dates.
Cross-class cram down: The English RP draws some inspiration from the Scheme of Arrangement under Part 26 of the Companies Act 2006. An important deviation from the scheme of arrangement, however, is that an English RP provides for the possibility of a cross-class cram down, whereby the plan can be imposed on certain classes of dissenting creditors, subject to certain protections. In contrast, a scheme of arrangement is required to be approved by all classes of creditors.
The court will attach little weight to opposition from out-of-the-money stakeholders.[43]
Who can propose a plan: A plan can be proposed by either the debtor or the creditors of the company (or the administrator or liquidator, if the company is in administration or liquidation). While it has most often been the debtors who have proposed plans in the UK (given the requirement to account for the interests of all stakeholders, the general interplay with the future business strategy of the company, and the fact that the board is considered best placed to assess the ‘relevant alternative’), there is no bar on creditors proposing a plan. This is akin to the position under the IBC, where it is either the corporate debtor itself or the creditors (either financial or operational), who can file for the initiation of a CIRP.[44] There has been one creditor-proposed plan so far under the English RP regime in Good Box.[45] In this case, the court held that the consent of the plan company (or its insolvency officeholders) is required for the court to have jurisdiction to sanction the plan.
Overseas and unregistered companies: Unlike the IBC, which does not apply to non-Indian companies altogether, an English RP is available to non-English companies as long as the “sufficient connection” test is met, which provides for a relatively low bar. Sufficient connection can be established in a few ways, including (i) having English group entities accede as guarantors and execute deeds of contribution or a deed poll in respect of the debt, (ii) having English entities become co-issuers of the debt, (iii) effecting a change of governing law of the debt documentation, or (iv) changing the ‘centre of main interests’ of the company to England & Wales. In this respect, it is relevant to note that many Indian companies do in fact have foreign currency denominated debt, the underlying documentation for which is governed by English law. Further, it is not necessary for the company’s entire indebtedness to comprise of English law debt for the test of ‘sufficient connection’ to be met (for instance, in Hong Kong Airlines,[46] the Court found that the sufficient connection test was met, even though the English-law governed debt made up only c.42% of the total indebtedness (although in this case there was a parallel Hong Kong scheme of arrangement to deal with the Hong Kong law governed liabilities)). English courts will however closely scrutinise “jurisdictional engineering” - pejoratively known as “forum shopping” – to ensure that it benefits the creditors and is not intended to disadvantage a particular group of creditors.[47]
B) Considerations
Given the protracted timelines involved and possibilities of severe delays and costly litigation in an IBC scenario, the English RP does seem to have several significant advantages in comparison. There are a few considerations which need to be kept in mind while opting for the English RP route, as discussed below.
Ranking and priority of debt: The decision to opt for an English RP instead of the IBC would depend heavily on the respective creditor’s classification and ranking under the two legal regimes. For instance, it may be a material factor for an unsecured creditor (i.e. one that influences its selection of legal process) that the IBC does not distinguish between financial creditors on the basis of security for purposes of voting, and all financial creditors therefore form one homogenous class (unsecured creditors do rank lower than secured financial creditors under the distribution waterfall, however).[48] Under an English RP, however, unsecured creditors may be classified under a separate class, accorded much lower recovery, be crammed down entirely (as long as they receive no less than what they are entitled to in the ‘relevant alternative’), and no separate meeting necessarily needs to be held for this class (they do however still receive a copy of the explanatory statement and the restructuring plan).[49] Therefore, it is theoretically possible (especially if the voting percentage held by them is sufficiently high) that unsecured financial creditors receive a relatively better deal under the IBC since they are involved in the negotiations on the resolution plan.
Additionally, the IBC provides for dissenting financial creditors to be paid ahead of financial creditors who voted in favour of the plan.[50] This becomes relevant if there is information available ex ante on how creditors are likely to vote. If it is likely that a sizeable number of creditors will be voting against the plan, this is another factor that would weigh against the IBC option.
Gibbs rule: A traditional IBC resolution process will still be hit by the Gibbs rule if the debt is governed by English law (as is often the case for foreign currency denominated debt availed by Indian companies). Under this rule, which was laid down in an 1890 case[51] of the Court of Appeal of England & Wales, an English court is not obligated to recognise a discharge of debt by a foreign insolvency court where the debt in question pertains to an English law governed contract. A key exception to this rule is that where creditors submit to the jurisdiction of the foreign insolvency court (e.g. by voting in the foreign process), they can no longer claim the benefit of the Gibbs rule. Therefore, while an IBC process still exposes the participating members of the CIRP process to the risk of certain foreign creditors standing outside the process and claiming higher recovery under Gibbs, opting for an English RP does away with this risk. This is the case even where there is a bifurcated capital structure, with some portion of the debt being English law governed.
Cross-class cram down: The cross-class cram down is a powerful and new technology under the English RP. However, whether this is determinative in making the choice between an IBC resolution process and an English RP depends on whether there is sufficient basis to create sub-classifications of financial creditors that can be effectively crammed down. Under the IBC, it is only the financial creditors who are given a seat at the table for purposes of voting (operational creditors may attend without the right to vote if their aggregate dues constitute at least 10 per cent of the debt).[52] An IBC resolution plan becomes binding once it has been approved by sixty six percent of financial creditors by voting share.[53] Therefore, if there is no reasonable basis to sub-classify between types of financial creditors (based on type of facility/ debt instrument, security etc.), the English RP cross-class cram down may not provide any significant advantage, given that a IBC resolution plan is binding on all creditors and stakeholders in any case.
Debtor-in-possession versus creditor-run process: The two regimes fundamentally differ as to who remains in control during the process. While management retains control during and for purposes of an English RP,[54] the IBC institutes a creditor-in-control regime, where a committee of creditors (consisting of the financial creditors) along with a ‘resolution professional’ chosen by it run the process, and the management has no say or vote.[55] In fact, except in a limited set of circumstances, the existing promoters and management of the corporate debtor are ineligible to be resolution applicants under the IBC.[56] Therefore, an Indian IBC process would usually always involve a full write down of the equity, with a new management taking over control of the company. Under an English RP, however, existing management remains in control and shareholders are afforded the right to vote if their rights are affected by the plan (but can be disenfranchised if out of the money or even crammed down). In fact, as mentioned above, English courts have also held that the consent of the plan company is a necessary condition for a plan to be sanctioned.[57] Retention of equity by the existing shareholders is also a possibility under an English RP, which does not require that the ‘absolute priority’ rule be followed.[58]
Recognition: The Current Bottleneck
While the English RP is a promising restructuring tool and can be used for a company incorporated in India as long as the ‘sufficient connection’ test is met, the next hurdle to cross is having judgments and proceedings relating to the English RP recognised in India. This is also relevant because an English court will require evidence of likelihood of recognition of the plan in each key jurisdiction before approving a restructuring plan. The primary issue here is that there is currently no statutory framework in India for the recognition of foreign insolvency judgments.
Unlike several other jurisdictions globally, India has not yet instituted a cross border insolvency framework. Section 234 of the IBC provides for the Indian Government to enter bilateral treaties with other countries to extend the application of the IBC to assets or property of the corporate debtor outside India. However, no such bilateral treaties have been entered into till date. As a result, one needs to look to the general statutory regime, in the context of recognition of foreign insolvency judgments and proceedings.
The general statutory regime for recognition of foreign judgments is contained in the Code of Civil Procedure, 1908 (“CPC”). Section 44-A of the CPC provides for enforcement of foreign judgments which have been issued by competent courts in certain ‘reciprocating territories’ (these are 13 jurisdictions overall, including England), subject to such judgment not falling within the exceptions of Section 13 of the CPC (which includes fraud, among other things). Besides this, courts have also been willing to grant recognition under the private international law principle of ‘comity’.[59]
There have been a few court decisions so far that have specifically dealt with the recognition of foreign insolvency proceedings in India. In 2017, the Supreme Court of India in Alcon Electronics[60] expanded the scope of the regime for enforcement of foreign judgments to include interlocutory orders and held that such orders given by a foreign court should also be given “due weight” by Indian courts following principles of comity (but subject to the exceptions in Section 13 of the CPC). This judgment was however in the context of recognition of an order for costs by an English court and was not in the context of a foreign insolvency proceeding.
In the Toshiaki Aiba[61] judgment in 2022, the High Court of Delhi granted recognition to a bankruptcy proceeding initiated in the courts of Japan and rejected an application filed by the bankrupt to dismiss the plaint filed by the Japanese Bankruptcy Trustee. The plaint filed by the Japanese Trustee in this case, however, had to do with restoration of certain immovable properties of the bankrupt which were located in India and had been disposed of by the bankrupt. The court held that such an action to administer the assets of a bankrupt pursuant to a foreign bankruptcy order is not an execution of a foreign judgment and does not fall within the scope of applicability of Section 44-A, but instead allowed the plaint on the basis of comity. The principle of comity has been recognised by a number of cases in India which have applied it in conjunction with the ‘first strike’ principle (which provides that in deciding between two court decisions in different jurisdictions, the decision of the court which was first in time will be respected).[62]
The Toshiaki judgment paved the way for recognition of interim orders and judgments passed in foreign insolvency proceedings based on comity and was also followed in other cases.[63] In a recent judgment of the Calcutta High Court in Uphealth Holdings v. Dr. Syed Sabahat Azim,[64] however, the court did not recognise a moratorium order passed by a US bankruptcy court under Chapter 11. The decision was predicated on the fact that the U.S. is not a reciprocating territory under the terms of the CPC, and that the IBC does not provide for a cross border insolvency framework to recognise such orders from non-reciprocating territories. It is relevant to note that the court mentioned that the proceedings before it were not in fact insolvency proceedings, since the stay in question was sought on an anti-arbitration suit filed by the Respondent against arbitration proceedings, and therefore these were not the types of proceedings that should be hit by such a stay order. The court also highlighted that the scope of the moratorium order passed by the US Bankruptcy Court in the Chapter 11 proceedings extended mainly to money claims or claims which would result in depletion of assets, and that this anti-arbitration suit was not such a claim. The court also found it determinative that the suit it was adjudicating on was filed prior in time to the moratorium order passed by the US bankruptcy court (such timing being relevant for purposes of application of the principle of comity per the ‘first strike’ principle). It is also relevant to note that the court in this case discussed both the Toshiaki and the Alcon Electronic judgments without overruling them, and also recognised the validity and importance of the principle of comity.
Cross-Border Insolvency Framework
In 2018, the Ministry of Corporate Affairs recognised the need for a comprehensive legislation for cross-border insolvency and published a draft bill for public consultation (the Bill largely followed the UNCITRAL Model Law on Cross-Border Insolvency, save for a few notable deviations (including on reciprocity)).[65] Further, a Cross Border Insolvency Rules/ Regulations Committee was formed in 2020 to draft a report on the implementation of a cross-border insolvency regime. While the Committee issued its report in 2021 itself,[66] India has not instituted a cross border insolvency regime so far.
Very recently, however, the Ministry of Corporate Affairs (in its 100-day plan released in April 2024 in the lead up to the general elections) mentioned its plan to implement a cross-border insolvency framework under the provisions of the IBC. The introduction of a cross border regime will be a gamechanger for the IBC and will provide a specific statutory basis for the recognition of foreign insolvency proceedings and judgments, including in the context of an English RP.
If the final framework to be introduced will be along the lines of what was proposed under the draft ‘Part Z’ of the IBC which the Ministry of Corporate Affairs published for public consultation in 2018, it will closely follow the UNCITRAL Model Law.
What is Possible Today – A Summary
Based on what has been discussed in the two sections above, it may be useful to briefly summarise the possibilities as they exist today for the use of an English RP for Indian distressed companies.
As a first step, of course, one would need to establish that there is ‘sufficient connection’ for an English court to exercise jurisdiction in relation to the debtor company, and the various requirements will need to be met for the restructuring plan to be approved by the court. These are discussed in more detail under the section titled ‘English RP: Background and Considerations’ above.
Next, we come to recognition. As mentioned above, India has not yet adopted a cross border insolvency framework, which is not an ideal situation to be in. However, for purposes of an English RP, recognition may still be possible by way of comity. While the CPC recognition route (i.e. under Section 44A) has not been tested before courts yet in the context of an insolvency judgment, we envisage that a possible roadblock may arise in demonstrating that such judgment meets the definitional threshold of a ‘decree’ for purposes of Section 44A (which is defined as a decree or judgment of a ‘superior court’, under which a sum of money is payable (not being a sum payable in respect of taxes or other charges of a like nature or in respect to a fine or other penalty, and also not including an arbitration award)). Further, the CPC enforcement mechanism may also not be broad enough to include all insolvency orders such as interim orders, and moratorium and administrative orders. This issue was also highlighted in the case of Sumikin Bussan v. King Shing Enterprises.[67]
What remains on the table, therefore, is recognition via comity. As mentioned above, the Toshiaki judgment paved the way for the application of principles of comity for recognition of foreign insolvency judgments in general. While it is true that Toshiaki related to an action to administer the assets of the bankrupt pursuant to a foreign bankruptcy order, there is no reason to preclude the applicability of comity to a foreign insolvency judgment as well. The importance of comity was also recognised in Uphealth Holdings (although the court refused to grant a stay in this case based on the specific factual matrix at hand). It is therefore the authors’ view that recognition via comity still remains an option for foreign judgments (including those related to foreign insolvency proceedings) even in the wake of Uphealth Holdings. In fact, in an encouraging decision of the English High Court in Jain Irrigation,[68] the court was satisfied that the scheme of arrangement would be granted recognition / regarded as effective in India, based on an expert report.
Thus, while an official cross border insolvency framework is keenly awaited, recognition of an English RP by Indian courts is indeed still very much a possibility. Furthermore, while one may need to account for time taken to achieve recognition through the Indian court system (and for potential litigation), it may be possible to reduce the risk of creditors disregarding the English RP and pursuing rent-seeking behaviour, by having creditors enter into lock up agreements ex ante which prohibit such actions and lock the creditors up to the terms of the restructuring plan. This may be highly achievable in scenarios where the overall number of Indian creditors is lower.
Conclusion
Despite the fact that the IBC is a significant improvement to the legal regimes of the past, it has not quite been able to meet the current demands of creditors and debtors alike to reach a quick and optimal restructuring solution. The issues of delays in timelines, insufficient member staffing at the NCLT, and inconsistency in case law have rendered the situation unsatisfactory and these are issues which are likely to take significant time to resolve. While no quick fixes are possible, India needs a robust restructuring solution imminently and cannot afford to wait for the IBC to catch up.
The English RP seems to check several boxes in this respect and is a tried and tested solution which is not only speedy but also offers several new technologies that the relevant stakeholders can benefit from. There are of course certain factors to weigh when deciding which process would be most beneficial from a stakeholder perspective, and these have been discussed under the section entitled ‘English RP: Background and Considerations’ above.
While an English RP is possible to implement for a foreign company based on a ‘sufficient connection’ test (which has been discussed earlier in the paper), the next hurdle to cross is recognition of the restructuring plan and plan related judgments by Indian courts. It is the authors’ view, however, that recognition of foreign insolvency judgments is still possible via application of principles of comity.
A cross border framework will of course provide a more certain means of dealing with recognition. Given that the framework is expected to be introduced imminently, we propose to analyse the mechanics of the framework in a separate paper in the near future.
* This article was originally published in the December 2024 issue of the South Square Digest, and will also be published in an upcoming edition of International Corporate Rescue.
** All views expressed in the paper are solely those of the authors and do not represent the views of Kirkland & Ellis International LLP, Cyril Amarchand Mangaldas, or South Square. The authors thank Kon Asimacopoulos and Kate Stephenson (Kirkland & Ellis International LLP) for their feedback and input.
[1] Insolvency and Bankruptcy Code: A Miscellany of Perspectives, Insolvency and Bankruptcy Board of India Publication, available at https://ibbi.gov.in/uploads/whatsnew/2019-10-11-191223-exc18-2456194a119394217a926e595b537437.pdf.
[2] World Bank Group, Doing Business 2020 Rankings, available at https://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf. The Business Ready report (which replaces the Ease of Doing Business rankings) for India is awaited.
[3] In June 2017, the Reserve Bank of India (India’s central bank) identified a list of the country’s 12 biggest corporate defaulters to be mandatorily referred to the IBC process for priority resolution. The 12 companies on the list were Jyothi Structures Limited, ABG Shipyard Limited, Jaypee Infratech Limited, Era Infra Engineering Limited, Electrosteel Steels Limited, Monnet Ispat & Energy Limited, Amtek Auto Limited, Alok Industries Limited, Bhushan Power and Steel Limited, Essar Steel Limited, Lanco Infratech Limited, and Bhushan Steel Limited.
[4] Clouds of resolution period delay, NCLT manpower crunch over IBC ‘sheen’, Economic Times (October 10, 2022), available at https://bfsi.economictimes.indiatimes.com/news/policy/clouds-of-resolution-period-delay-nclt-manpower-crunch-over-ibc-sheen/94749223.
[5] Nimitt Dixit, Death of a Tribunal: How India’s NCLT Fades in Influence, Asian Legal Business Online (02 May 2024), available at https://www.legalbusinessonline.com/features/death-tribunal-how-indias-nclt-fades-influence.
[6] Introduced by the Government of India on 4 April 2021 through the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021, and later assented to by the Indian legislature through the passing of the Insolvency and Bankruptcy Code (Amendment) Act 2021.
[7] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India (April-June, 2024), Vol. 31, available at https://ibbi.gov.in/uploads/publication/9bc46bf1e4b86dab3b0310cb8284cb74.pdf; See also Limited Interest, Low Recoveries, Prepack Insolvency Scheme in Slow Lane, Business Standard (August 21, 2024), available at https://www.business-standard.com/economy/news/limited-interest-low-recoveries-prepack-insolvency-scheme-in-slow-lane-124052600722_1.html.
[8] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India (April-June, 2024), Vol. 31, available at https://ibbi.gov.in/uploads/publication/9bc46bf1e4b86dab3b0310cb8284cb74.pdf.
[9] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India (April-June, 2024), Vol. 31, available at https://ibbi.gov.in/uploads/publication/9bc46bf1e4b86dab3b0310cb8284cb74.pdf; See also Over 21,000 cases pending with NCLT, government informs parliament, Insolvency Tracker (March 13, 2023), available at https://insolvencytracker.in/2023/03/13/over-21000-cases-pending-with-nclt-govt/.
[10] See Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., 4 SCC 17 [Indian Supreme Court]; Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., (2019) 8 SCC 416 [Indian Supreme Court].
[11] Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions & Anr., (2022) 2 SCC 401 [Indian Supreme Court]; Gujarat Urja Vikas Nigam Limited v. Amit Gupta, (2021) 12 SCC 150 [Indian Supreme Court]; and Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., 4 SCC 17 [Indian Supreme Court].
[12] Standing Committee on Finance, Thirty Second Report: Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions (August 2021), available at https://ibbi.gov.in/uploads/resources/ab3223d9de3b1c9fc8c580d1c6cd0252.pdf.
[13] Proviso to Section 12(3) of the IBC.
[14] Quarterly Newsletter of the Insolvency and Bankruptcy Board of India (April-June, 2024), Vol. 31, available at https://ibbi.gov.in/uploads/publication/9bc46bf1e4b86dab3b0310cb8284cb74.pdf.
[15] Misha, Impact of Delays in Insolvency Resolution on the Economy, BW Legal World (June 08, 2024), available at https://bwlegalworld.com/article/impact-of-delays-in-insolvency-resolution-on-the-economy-522442.
[16] See for e.g. Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Limited, (2022) 1 SCC 401 [Indian Supreme Court], where the court took over 5 years to decide the case, and also classified homebuyers as financial creditors.
[17] See Essar Steel Asia Holdings & Ors. v. Satish Kumar Gupta & Ors., NCLT Ahmedabad order dated 29 January 2019 (IA 430 of 2018 in C.P. (I.B.) No. 39 & 40/ NCLT/ AHM/ 2017).
[18] Clouds of resolution period delay, NCLT manpower crunch over IBC ‘sheen’, Economic Times (October 10, 2022), available at https://bfsi.economictimes.indiatimes.com/news/policy/clouds-of-resolution-period-delay-nclt-manpower-crunch-over-ibc-sheen/94749223; NCLT President Seeks More Manpower to Speed up Bankruptcy Cases, Global Insolvency (03 October 2024), available at https://globalinsolvency.com/headlines/nclt-president-seeks-more-manpower-speed-bankruptcy-cases.
[19] This provides a common technological platform for the operation of the National Company Law Tribunal, the Information Utilities, the Insolvency and Bankruptcy Board of India, and the Ministry of Corporate Affairs. See generally Dhananjay Kumar and Abhishek Mukherjee, Why integrating technology platforms is essential for quickening insolvency resolution, Money Control Opinion (July 29, 2014), available at https://www.moneycontrol.com/news/opinion/why-integrating-technology-platforms-is-essential-for-quickening-insolvency-resolution-12780515.html.
[20] Govt proposes amendments to IBC for better outcomes, more NCLT benches to be added, Money Control News (July 23, 2024), available at https://www.moneycontrol.com/news/business/budget/govt-proposes-amendments-to-ibc-for-better-outcomes-more-nclt-benches-to-be-added-12768001.html.
[21] Nimitt Dixit, Death of a Tribunal: How India’s NCLT Fades in Influence, Asian Legal Business Online (02 May 2024), available at https://www.legalbusinessonline.com/features/death-tribunal-how-indias-nclt-fades-influence.
[22] Ibid.
[23] Bishwajit Dubey and Raghav Pandey, Performance of the NCLTs under the IBC Regime: An Overview, SCC Online (March 19, 2024), available at https://www.scconline.com/blog/post/2024/03/19/performance-of-the-nclts-under-the-ibc-regime-an-overview/.
[24] See generally L. Viswanathan, Animesh Bisht and Karan Sangani, IBC and Hard Cases: The Indian Insolvency Jurisprudence Faces Challenges, available at https://www.linkedin.com/posts/l-viswanathan_ibc-and-hard-cases-activity-7114933098873561089-Z9q.
[25] State Tax Officer (1) vs. Rainbow Papers Limited, 2022 SCC Online SC 1162 [Indian Supreme Court].
[26] Section 53(1)(e)(i) of the IBC.
[27] Small Industries Development Bank of India v. Vivek Raheja & Others¸ Company Appeal (AT) (Insolvency) No. 570 of 2022 (NCLAT, New Delhi, Order dated September 16, 2022); Union Bank of India v. Mr. Rajender Kumar Jain, Resolution Professional of M/s Kudos Chemie Ltd. & Others, Company Appeal (AT) (Insolvency) No. 665 of 2022 (NCLAT, New Delhi, Order dated July 20, 2022); Andhra Pradesh State Financial Corporation v. Kalptaru Steel Rolling Mills Ltd. & Another, Company Appeal (AT) (Insolvency) No. 584 of 2020 (NCLAT, New Delhi, Order dated December 13, 2022).
[28] UNCITRAL Legislative Guide on Insolvency Law (2005), United Nations Commission on International Trade Law (Part two, Chapter 4 (paras. 28, 37, and 38) and Chap 5 (para 62)), available at https://uncitral.un.org/en/texts/insolvency/legislativeguides/insolvency_law.
[29] Jaypee Kensington Boulevard Apartments Welfare Association & Ors. v. NBCC (India) Limited & Ors., (2022) 1 SCC 401 [Indian Supreme Court].
[30] DBS Bank Limited Singapore v. Ruchi Soya Industries Limited and Anr., 2024 SCC Online SC 3 [Indian Supreme Court].
[31] Section 901C(2) of the Companies Act, 2006 (Part 26A).
[32] Section 901C(4) of the Companies Act, 2006 (Part 26A).
[33] Section 901G(3) of the Companies Act, 2006 (Part 26A).
[34] Section 901G(5) of the Companies Act, 2006 (Part 26A).
[35] See Hurricane Energy plc, [2021] EWHC 1759 (Ch).
[36] Re AGPS Bondco Plc., [2024] EWCA Civ 24.
[37] Id. at ¶ 160.
[38] Re Cine-UK Ltd. and others, [2024] EWHC 2475 (Ch).
[39] Ministry of Corporate Affairs, Notification No. S.O. 1205(E), dated 24-3-2020, available at https://ibclaw.in/notification-no-s-o-1205e-dated-24-03-2020-ibc/.
[40] Section 901A of the Companies Act, 2006 (Part 26A).
[41] Ibid.
[42] IBC Recoveries Declining, Resolution Timelines Getting Prolonged - Crisil, Economic Times (November 24, 2023), available at https://economictimes.indiatimes.com/news/economy/indicators/ibc-recoveries-declining-resolution-timelines-getting-prolonged-crisil/articleshow/105476797.cms?from=mdr.
[43] See Virgin Active, [2021] EWHC 1246 (Ch); and Project Lietzenburger Strasse Holdco S.à r.l., [2024] EWHC 563 (Ch.).
[44] Section 6 of the IBC.
[45] NGI Systems & Solutions Ltd. v. The Good Box Co. Labs Ltd. (in administration), [2023] EWHC 274 (Ch).
[46] Hong Kong Airlines Limited, [2022] EWHC 3210 (Ch).
[47] See Project Lietzenburger Strasse Holdco S.à r.l., [2024] EWHC 563 (Ch).
[48] Section 53(1)(d) of the IBC.
[49] The evidentiary bar in this regard is rather high, however, and one would need to demonstrate that these creditors are fully out of the money.
[50] Regulation 38(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016.
[51] Antony Gibbs & Sons v. La Société Industrielle et Commerciale des Metaux, (1890) 25 QBD 399.
[52] Section 24(3)(c) of the IBC.
[53] Section 30(4) of the IBC.
[54] Unless the restructuring plan is proposed by the company’s insolvency officeholders (being the administrator or liquidator).
[55] Sections 21 and 22 of the IBC.
[56] Section 29A of the IBC.
[57] See e.g. NGI Systems & Solutions Ltd. v. The Good Box Co. Labs Ltd. (in administration), [2023] EWHC 274 (Ch.).
[58] CB&I UK Ltd., [2023] EWHC 2987 (Ch).
[59] See generally John Kuhn Bleimaier, The Doctrine of Comity in Private International Law, 24(4) The Catholic Lawyer pp. 327-332, available at https://scholarship.law.stjohns.edu/cgi/viewcontent.cgi?params=/context/tcl/article/2041/&path_info=04._The_Doctrine_of_Comity_in_Private_International_Law.pdf.
[60] Alcon Electronics Private Limited v. Celem S.A. of FAO 34320 Roujan, France, (2017) 2 SCC 253 [Indian Supreme Court].
[61] Toshika Aiba v. Vipan Kumar Sharma, 2022:DHC:1682 [Delhi High Court].
[62] Surya Vadanan v. State of Tamil Nadu & Ors., (2015) 5 SCC 450 [Indian Supreme Court].
[63] See e.g., Mahmood Hussain Khan v. Madam Canisia Ceizar, AIR Online 2023 TEL 181 [Telangana High Court].
[64] 2022 SCC Online Del 1260 [Calcutta High Court].
[65] Ministry of Corporate Affairs, Government of India, Insolvency Section File No. 30/27/2018, dated 10-06-2018, https://www.mca.gov.in/Ministry/pdf/PublicNoice CrossBorder_20062018/pdf.
[66] Report on the rules and regulations for cross border insolvency regulation, June 2020, published by the Ministry of Corporate Affairs, dated November 23, 2021, https://ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-Oclh9-6e353aefb83dd0138211640994127c27.pdf.
[67] Sumikin Bussan International (HK) Ltd. v. King Shing Enterprises & Anr., (2005) 6 Bom CR 240 [Bombay High Court]; See Sumikin Bussan Int’l (HK) Ltd. v. M. T. Mody & Ors., Supreme Court Case Special Leave Petition (Civil) 26680 of 2010 connected with Special Leave Petition (Civil) 3752 of 2006.
[68] Re Jain International Trading BV, [2021] EWHC 3636 (Ch).
