CHAPTER 10

Strengthening Private Debt

Resolution Frameworks
José M. Garrido and Anjum Rosha

INTRODUCTION
In any vibrant and dynamic economy, companies and households make invest-
ment decisions about an uncertain future. Although these investments are critical
to foster economic growth, some of them will not yield the expected outcomes,
making effective private debt resolution or insolvency frameworks critical to allow
for an orderly and efficient resolution of debt overhangs. Such frameworks are
particularly important for the financial system to ensure that credit is allocated to
the most productive part of the economy.
In the case of India, the legal and business environment applicable to corporate
and personal insolvency is complex. The vast majority of businesses in India are
micro, small, and medium enterprises (MSMEs) that are not incorporated and that
frequently struggle to access credit from the formal banking system (see Chapter 3).
At the same time, large and often highly leveraged corporate groups comprise the
lion’s share of the banking system’s loan exposure. Consumer credit from the formal
banking system, particularly unsecured credit such as credit card debt, is a relatively
new phenomenon in India but has grown exponentially in the last two decades.
Until 2016, corporate insolvency relied on a patchwork of inefficient laws, and
personal insolvency was regulated by obsolete procedures from the colonial period.
The enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 has been a
major milestone establishing an insolvency procedure for both corporates and
individuals.1
This chapter discusses the strengths of the new Indian legal framework for insol-
vency and makes recommendations for overcoming some gaps that remain.2 After
introducing the elements of the legal toolkit for private debt resolution, the first
section describes the legal reforms in India, the second section analyzes debt restruc-
turing mechanisms, and the third section focuses on corporate resolution and
liquidation. The fourth section elaborates on the institutional framework, the

1
The insolvency procedure for individuals has not become effective yet.
2
As this book went to press, the Ministry of Corporate Affairs had released a proposal to make the
insolvency regime significantly more efficient and transparent.
203

©International Monetary Fund. Not for Redistribution

204 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

fifth section gives special consideration to MSME insolvency, and the sixth section
makes recommendations for further reforms. The final section offers a conclusion.

THE LEGAL TOOLBOX

Frameworks that deal effectively with corporate insolvency are critical, particularly
in an emerging market economy like India. A well-functioning insolvency frame-
work can enable financial creditors to assume risks while pricing them appropri-
ately. It can help enhance the value of creditors’ claims and help unlock capital that
financial institutions can use to support fresh lending and optimize credit availabil-
ity and growth, as well as lower the cost of such access to credit for entrepreneurs.
The predictability fostered by such a system may also serve to exercise considerable
discipline on the enterprise sector and on individual debtors themselves. As such,
an efficient insolvency framework can increase financial stability, boost both
domestic and foreign investment, and raise overall economic growth.
International standards provide the touchstone against which enterprise
insolvency regimes can be assessed. International best practice3 suggests that
effective and efficient legal frameworks for enterprise debt resolution promote
expeditious restructuring of viable firms and speedy liquidation of nonviable
firms. A modern system of insolvency facilitates decision making by creditors in
restructuring or liquidating insolvent corporations on a case-by-case basis,
depending on whether the preservation of the business offers a better economic
outcome than its liquidation. It also supports implementation of those decisions
through appropriate and time-bound procedures. The World Bank and United
Nations Commission on International Trade Law (UNCITRAL) have recently
developed specific guidance for the insolvency of micro and small enterprises
(UNCITRAL 2021; World Bank 2021). Unlike in the case of enterprise insol-
vency, guidance in the area of personal insolvency law is more limited (INSOL
2001, 2011; World Bank 2014), yet lessons can be drawn from an increasingly
rich body of cross-country experience in this area. And there is a general consen-
sus that modern personal insolvency frameworks should include a fresh start for
overindebted individuals after liquidating the debtor’s assets and/or following
some period of repayment.
Legal tools to address insolvency can include a variety of procedures and
techniques. Formal procedures for debt enforcement, restructuring, and liqui-
dation are typically provided through legislation and entail judicial supervision
through an in-court process that usually involves all stakeholders—that is, all
secured and all unsecured creditors including the state and employees, as well
as the debtor. Out-of-court debt restructuring frameworks offer greater flexibil-
ity, can be cheaper, and involve an informal process that requires voluntary

3
International best practice for enterprise insolvency refers to (1) the UNCITRAL Legislative Guide
on Insolvency Law (2004, and successive supplements) and (2) the World Bank Principles for Effective
Insolvency and Creditor/Debtor Regimes (2021).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 205

Figure 10.1. Continuum of Legal Instruments

Informal Formal
Enhanced Hybrid Formal
out-of-court insolvency
restructuring procedure reorganization
restructuring (liquidation)

Source: Garrido (2012).

compromises between parties, which typically includes a small subset of the

creditor body. Enhanced out-of-court procedures use creditor committees and
arbitration/mediation (under ex-ante framework agreements) to facilitate debt
restructuring. Hybrid procedures typically provide for negotiations and major-
ity voting to take place out of court and prior to any filing, with a plan sub-
mitted for judicial ratification at the final stage of the process. Figure 10.1
illustrates the continuum of instruments provided by modern insolvency sys-
tems to address over-indebtedness.
The institutions necessary for the smooth functioning of the insolvency frame-
work also warrant mention. The judiciary, through courts and tribunals, plays a
central role, supported by insolvency professionals. An insolvency framework may
rely on mediators and, in many cases for consumer insolvency, a dedicated admin-
istrative authority. Other institutions support the functioning of the regime,
including credit information systems, land and collateral registers, debt counsel-
ing services, and legal aid clinics.
In a crisis, the standard market-based toolkit for debt resolution may need to
be temporarily supplemented or modified and the state may play a more active
role for a time. In the context of general economic shocks such as that caused by
the COVID-19 pandemic, debt resolution strategies need to be coordinated with
fiscal and financial policies. During such periods, there are three potential phases
and key measures for effective corporate and household debt resolution: (1) there
might be the need for interim measures to halt insolvency and debt enforcement
activity; (2) in cases of a severe crisis, transitional measures may be required to
respond to the wave of insolvency cases, including special out-of-court restructur-
ing mechanisms; and (3) a phase in which countries strengthen their regular debt
resolution tools to address the remaining debt overhang and support economic
growth (Liu, Garrido, and DeLong 2020). In response to the COVID-19 pan-
demic, the Indian authorities temporarily suspended all insolvency applications
under the IBC. The Reserve Bank of India (RBI) also issued COVID-19–specific
guidance to banks. These measures are discussed below.

PRIVATE DEBT RESOLUTION REFORMS IN INDIA

The enactment of the IBC was an important milestone aimed at improving the
business environment in India and attracting increased domestic and foreign
direct investment. Past attempts at reform had faltered for a variety of reasons,

©International Monetary Fund. Not for Redistribution

206 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

including political challenges, multiplicity of authorities, and the prevalence of

a sectorial approach to insolvency. Concerns about the rising level of nonper-
forming loans in public sector banks, a string of high-profile insolvency cases,
and the desire to improve the business environment provided much needed
impetus for the IBC. Through the reforms, authorities also aim to create a sup-
portive environment for the development of a corporate bond market (see
Chapter 5) and to boost the distressed debt market. The Bankruptcy Law
Reform Committee was constituted in 2014, submitted its final report in 2015,
and the Insolvency and Bankruptcy Code was adopted in 2016 after a relatively
uneventful passage through both houses of parliament. The authorities have
stated that the IBC “consolidates and amends the laws relating to reorganization
and insolvency resolution of corporate persons, partnership firms and individu-
als in a time bound manner for maximization of the value of assets of such
persons, to promote entrepreneurship, availability of credit and balance the
interests of all the stakeholders.”4
Prior to the enactment of the IBC, no clear policy or comprehensive legislation
existed for corporate insolvency that aimed to rescue viable businesses and speedily
liquidate unviable businesses. Insolvency was dealt with through piecemeal and
inadequate legislation including the Companies Act of 1956 and the Sick Industrial
Companies (Special Provisions) Act, the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interests Act, and the Recovery of
Debts Due to Banks and Financial Institutions Act, to name a few. Under these
laws, debt recovery was time consuming, expensive, uncertain, and prone to abuse
by debtors. The courts contributed to this outcome with their decisions (van Zwieten
2014). As a result, bank lending tended to be largely secured, quite expensive, and
not always readily available for small businesses.
Private debt resolution was plagued with issues before the IBC was enacted. In
the past, in case of a default, one of two outcomes was typical—creditors could
either “extend and pretend” by “evergreening”5 loans, or they could immediately
enforce collateral without any assessment of the viability of the debtor’s business.
The RBI’s rules for provisioning of nonperforming assets (NPAs) at the time con-
tributed to the extend-and-pretend culture.6 In addition, public sector bank officials
hesitated to write-down loans, including for fear of liability for dissipation of state
assets under anticorruption laws. The long delays and severe backlog of cases in the
courts also historically made it difficult for creditors to collect on debt in arrears in
India. Institutional limitations such as the absence of an insolvency practitioner’s
profession compounded the weak enforcement and business rescue culture.

4
IBBI website: https://www.ibbi.gov.in/about.
5
Evergreening of loans refers to banks trying to keep a loan in good standing that is on the verge of
default by providing further loans to the same borrower.
6
For quite some time, the provisioning rules permitted a nonperforming loan to be reclassified as
“performing” immediately upon restructuring without requiring a demonstrated period of performance.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 207

The IBC brought about much-needed modernization to this environment.

Although the IBC draws inspiration from English law in a few areas, it also
includes some novel features. It consolidates the procedures for corporate debt
restructuring and liquidation (as well as the yet-to-be effective personal insolvency
procedures) in a single piece of legislation. It has a number of features that are
consistent with international best practice:
1. Corporate rescue: The procedure includes a moratorium on enforcement by
secured creditors, procedures that facilitate decision making through a credi-
tors committee, and court confirmation of a debt restructuring plan agreed by
a supermajority of creditors.
2. Time-bound process: Clear procedural deadlines are specified at every stage in
the insolvency process.
3. Wrongful trading liability for corporate directors: This concept, similar to
English law and recommended by the international standard, assigns liability
to directors in cases where no reasonable prospect exists for the company to
avoid liquidation and the directors have taken no steps to minimize losses to
the company’s creditors.
4. Other features: As is the trend in many countries, both federal and state taxes
do not receive a high priority in the distribution of the proceeds of liquidation.
The IBC also includes a personal insolvency procedure, which is not yet
implemented. The IBC continues to be refined: eight reforms of the IBC have
occurred since its adoption in 2016 based on lessons from experience with the
IBC and emerging issues.
The IBC also introduced several important improvements to the institutional
framework:
1. Establishment of an insolvency regulator: The Insolvency and Bankruptcy
Board of India (IBBI) is a unique and powerful body, combining rule-making
powers and supervisory and disciplinary powers over participants in the
insolvency ecosystem.
2. Insolvency professionals: Influenced by the British model, the IBC permits the
establishment of insolvency professional agencies that perform the functions
of self-regulatory organizations of groups of insolvency professionals under the
overall supervision of the IBBI.
3. Specialized commercial courts (National Company Law Tribunals) for insolvency
cases: The tribunals were established under the Companies Act of 2013, and
the IBC provides them with jurisdiction over insolvency cases.
4. Information utilities and valuers: The IBC includes other actors in the insolvency
ecosystem that go beyond what is found in other countries. Information utilities
provide reliable information on defaults and financial claims, whereas valuers
perform an important role in corporate resolution.

©International Monetary Fund. Not for Redistribution

208 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

There are certain aspects of the IBC that could be strengthened. They include:
• The treatment of operational creditors in corporate resolution: The IBC dis-
tinguishes between financial creditors and operational creditors.
Operational creditors are defined in the IBC as those providing goods and
services. Although operational creditors are permitted to initiate an insol-
vency proceeding7 and may, in certain circumstances, participate in the
creditors committee as observers,8 they may not vote on any of the deci-
sions made by the creditors committee, including on the appointment of
insolvency administrators or on the restructuring plan. The lack of rights
of operational creditors could raise questions regarding the fairness of
corporate resolution.
• Ambitious timelines for corporate resolution: The timelines provided for
corporate resolution under the IBC have proven quite ambitious: 180 days
for ordinary cases (extendable by 90 additional days) and 90 days for fast-
track cases (extendable by 45 additional days). These deadlines require
significant institutional support, even without taking into account the use
and abuse of appeals and challenges: currently, procedures are taking con-
siderably longer.
• Lack of procedures for MSMEs: The original design of the IBC included the fast-
track procedure, but the procedure includes the same formalities and steps as
ordinary resolution, with the deadlines cut by half. This might be inadequate for
MSMEs and appears to have motivated the latest reform of the IBC, that is, the
introduction of pre-pack insolvency.
The IBC also introduced procedures for personal insolvency, but these have
not yet come into effect (Box 10.1). The main objective of these procedures is to
provide a fresh start for overindebted individuals by granting them a debt dis-
charge under certain conditions. Due to the social implications of this reform,
and the need to develop adequate infrastructure for its application, the effective
entry into force of this part of the IBC has not materialized. In the absence of a
personal insolvency procedure, the resolution of debts of individuals continues to
take place through enforcement procedures.
Financial institutions benefit from a special regime: since 1993, the Recovery
of Debts Due to Banks and Financial Institutions Act.9 The Debt Recovery
Tribunals provide a special judicial venue for the recovery of financial claims.

7
An operational creditor can initiate an insolvency proceeding only after it has delivered a demand
notice or copy of an invoice demanding payment of the defaulted amount to the corporate debtor and
such demand is not repaid or disputed by the corporate debtor within ten (10) days of such notice/
invoice. Accordingly, if a corporate debtor delivers a dispute notice to the operational creditor, the oper-
ational creditor needs to resort to other remedies available to it under contract, under law, or in equity.
8
Operational creditors can participate in the creditors committee only if their aggregate claims are not
less than 10 percent and through a single observer representing the interests of all operational creditors.
9
Debt Recovery Tribunals have jurisdiction for claims of at least Rs2 million. For smaller financial
debts, financial institutions can resort to the people’s courts (Lok Adalats).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 209

Box 10.1. Debt Resolution Process under the IBC

• The IBC provides for corporate resolution and liquidation. These procedures are
accessible to debtors and creditors on default, incorporate a broad stay of creditor
actions, and prioritize reorganization plans over liquidation. Resolution professionals
displace the corporate debtor’s management, and financial creditors have a decisive
influence over the resolution procedure. Originally, the resolution procedure was
designed to be concluded within 180 days with a possible extension of 90 days being
granted by the court. A fast-track version for low-value cases includes the same pro-
cess but the timeline is compressed to 90 days, with a possible extension of 45 days.
Liquidation is the last resort in the IBC system and has no time limits for its operation.
• The IBC introduces procedures for personal insolvency. The law repeals the out-
dated laws of the pre-independence period and incorporates personal insolvency
procedures influenced by current English law, which include:
(i) A “fresh start” procedure, similar to the United Kingdom’s debt relief order. This
procedure allows a natural person to obtain a quick discharge, and it only applies
to cases where the debtor has low income (Rs60,000 or less), virtually no assets,
and limited unsecured debt (Rs35,000).
(ii) An insolvency resolution process for natural persons, which provides for a repay-
ment plan prepared with the assistance of an insolvency professional.
(iii) A traditional bankruptcy procedure based on the liquidation of the debtor’s
estate.
In all cases, the debtor has the opportunity of discharging its debts on completion of the pro-
cedure, with the exception of “excluded debts” (fines, tort claims, alimony, and student loans).

Source: Authors.
Note: IBC = Insolvency and Bankruptcy Code; Rs = rupees.

Over time, the procedure at the Debt Recovery Tribunals has been streamlined,
but a key constraint is the capacity to deal with the elevated number of cases.
Secured credit can be enforced out of court by financial institutions. The
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, adopted in 2002, includes a system for the creation and
registration of charges, and allows financial institutions to enforce those security
interests without any court intervention. This remains one of the most efficient
tools for the recovery of loans in India.
In response to the pandemic, filings under the IBC were temporarily
suspended during March 2020–March 2021 and a six-month moratorium on
loan repayments was introduced between March and August 2020. These interim
measures aimed to avoid the insolvency of large numbers of enterprises
experiencing liquidity problems as a result of the pandemic-related lockdown
measures and temporary supply chain issues. The suspension of all filings under
the IBC—including voluntary filings—went somewhat beyond the temporary
pandemic response measures taken by other countries. Most other countries that
introduced similar measures (Australia, Singapore, UK, and others) continued to
permit the commencement of insolvency cases by debtor companies seeing such
procedures as “protective” of businesses in trouble. Although the suspension of
creditor petitions can be justified on the grounds that enterprises experiencing

©International Monetary Fund. Not for Redistribution

210 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

liquidity problems because of the restrictions of the pandemic need breathing

room, it might have been beneficial to allow enterprises that need a corporate
resolution process to preserve the viability of the business to access insolvency
procedures.

DEBT RESTRUCTURING
From a legal perspective, corporate debt restructuring is possible in several differ-
ent ways. At one end of the spectrum are purely voluntary or informal arrange-
ments that take place fully out of court, whereas at the other end are formal
insolvency procedures involving judicial involvement and supervision, with
hybrid options falling in between.
Following the adoption of the IBC, formal insolvency procedures have
become the preferred tool for corporate debt resolution. It appears that the
authorities have now ceased promoting out-of-court restructuring options and
have largely focused on formal insolvency procedures in the IBC. The clear pref-
erence for formal reorganization procedures and limited use of informal options
highlights the deep reliance on the National Company Law Tribunals, which,
however, are quickly becoming overwhelmed with the volume of cases.
Informal restructuring options are available, but obstacles to their use persist.
Informal restructuring requires close coordination among multiple creditors
(particularly financial creditors), which can be challenging when creditors have
different positions (e.g., different levels of provisioning in different banks) and
diverging expectations on the recovery of the debtor and on the feasibility of
providing additional financial support. Because informal restructuring requires
unanimity in decision-making, the chances of reaching a restructuring agreement
are reduced when multiple actors are involved. An additional challenge for
out-of-court restructuring in India is that out-of-court schemes may not provide
officials of public banks with the necessary immunity under anticorruption laws
to engage in meaningful restructuring that requires the recognition of losses.
Enhanced restructuring refers to any technique that facilitates the agreement
of creditors and debtors in an informal setting (for instance, incentives to restruc-
turing, or the use of master restructuring agreements that facilitate majority
agreement). The contractual out-of-court debt restructuring mechanism (known
as the “CDR”) sponsored by the RBI was an example of an enhanced restructur-
ing procedure. It was discontinued and replaced by a myriad of schemes, which
were then replaced in February 2018 by a generic framework for resolution of
stressed assets.10 The Supreme Court struck down the February 2018 circular
establishing the generic framework for resolution,11 and later, in June 2019,

10
There is a deadline of 14 days for the admission of application. The average number of days taken
for admission of applications is actually 13 days. This is a serious issue, because timely commencement
of the process increases the chances for resolution, and severe risk of misconduct by the debtor exists
during this period.
11
Supreme Court of India, judgment of September 13, 2021. https://www.financialexpress.com/economy
/sc-asks-insolvency-tribunals-to-stick-to-resolution-deadlines/2329587/.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 211

the RBI put forward a prudential framework for the resolution of distressed assets
that remains in place today.
Applicable to various financial institutions,12 the prudential framework for the
resolution of distressed assets sets out a framework for intercreditor collaboration.
This RBI guidance encourages early action even before default, intercreditor
agreements, agreeing on a resolution plan, and strategies for dealing with delayed
implementation of an otherwise viable resolution plan.
However, the success of the RBI’s restructuring schemes has been quite limited.
The RBI’s erstwhile out-of-court frameworks and schemes were not frequently
used, likely due to their perceived lack of flexibility and because they suffered from
one fundamental limitation—such frameworks operate in the shadow of the law,
and they yield best results when they are backed by predictable results under a
well-functioning formal insolvency framework. Absent such a formal framework
that creditors can resort to, out-of-court techniques offer limited incentives for
debtors. Instead, these schemes may have contributed to the practice of financial
institutions engaging in the minimal rescheduling necessary for designating the
exposure as “performing” from a prudential perspective (evergreening).
Hybrid restructuring has not been widely used in India. The Companies Act
enables schemes of arrangement.13 Similar to schemes under English law and other
common law systems, a scheme of arrangement under Indian law is a compromise
between the company on the one hand and its creditors and/or shareholders on
the other hand. It is considered a hybrid restructuring procedure because it is based
on negotiations between creditors and the debtor, with limited court intervention.
A scheme can take the form of financial or corporate restructuring. For example,
it may include restructuring of debt, and changes to the shareholding structure,
sale of assets or the business itself, or a merger with another company. Once
approved by the statutory majority of three-fourths in value (on a class basis) and
ratified by the court, a scheme of arrangement is binding on all participants
(including holdout creditors). Unlike insolvency procedures under the IBC,
schemes of arrangement can be used by solvent corporates and can involve a tar-
geted group of interested stakeholders. Although there is no automatic moratorium,
the National Company Law Tribunals can grant a limited stay to prevent enforce-
ment actions while a scheme of arrangement is being agreed. Unlike in the UK and
Singapore, schemes of arrangement have not been used extensively for debt
restructuring in India, but a few high-profile debt restructuring cases, such as
Arvind Mills Limited, BPL Limited, and Essar Oil Limited, have demonstrated the
usefulness of this process. One reason for the limited popularity of schemes of
arrangement for debt restructuring in India could be the complex procedure
requiring multiple court hearings, which creates significant scope for delays.

12
The financial institutions covered are the Scheduled Commercial Banks (excluding Regional Rural
Banks); all India Term Financial Institutions; Small Finance Banks; Systemically Important Non-­
Deposit taking Non-Banking Financial Companies; and Deposit taking Non-Banking Financial
Companies. See Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets)
Directions 2019, para 3, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580.
13
See section 230(1) of the Companies Act, 2013.

©International Monetary Fund. Not for Redistribution

212 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

There is thus considerable potential for more intensive use of informal and
hybrid restructuring in India. Out-of-court restructuring and hybrid restructur-
ing can achieve results with speed and efficiency and reduce the burden on the
already backlogged National Company Law Tribunals. Hybrid restructuring, in
particular, could offer a workable solution for many instances of corporate distress
where financial restructuring is what is required. The fact that a court confirms
the agreement reached by creditors could be instrumental in reducing the
personal liability concerns that affect directors and officers of public banks.

CORPORATE RESOLUTION AND LIQUIDATION

Corporate insolvency under the IBC is based on a two-stage process that priori-
tizes corporate resolution over liquidation. The process potentially has two stages:
(1) resolution, where creditors seek to agree on a plan to resolve the debtor’s
insolvency, and (2) liquidation, in case of failure of an attempted resolution pro-
cess where parties cannot agree on a resolution plan within the deadlines set by
the law.
Corporate resolution has become the most important insolvency proceeding
in the new Indian system. Since the entry into force of the IBC, banks have
resorted to corporate resolution as the preferred tool to deal with large corporate
exposures. Corporate resolution is a creditor-centric process that seeks to promote
a speedy outcome to resolve corporate debt distress. In a certain way, several fea-
tures of corporate resolution appear to be designed in reaction to the problems of
the previous insolvency regime in India: the abuse of process by recalcitrant debt-
ors and the unlimited duration of insolvency proceedings being two key exam-
ples. To tackle those problems, corporate resolution puts the creditors in control
of the procedure and establishes deadlines that increase the pressure to reach an
agreement, with the threat of liquidation hanging over the participants.
The corporate resolution process is designed to restructure a company within
a short timeline. The creditors must agree on a resolution plan within 180 days,
extendable for 90 additional days and should not last more than a maximum of
330 days. To achieve this objective, the procedure follows a clear sequence with a
demanding timeline (Box 10.2). This timeline has undergone minor modifica-
tions since 2016.
The corporate resolution process is driven by financial creditors. In the past
financial creditors in India would be more likely to pursue an out-of-court
enforcement action against assets they held as security for the debt. But now they
are expected to lead the corporate resolution process and control its outcome. The
resolution professional requires the approval of the super majority of the creditors’
committee for most actions, and the fate of the company is ultimately decided by
the financial creditors. Corporate resolution is used as a catalyst for reaching an
agreement among creditors. The main effect of corporate resolution is to put
pressure on all parties to reach an agreement over a resolution plan, faced with the
threat of liquidation if that agreement is not concluded within the prescribed
deadline.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 213

Box 10.2. Corporate Resolution: Sequence and Timeline

• A creditor (financial or operational), or the debtor itself, presents an application to the
National Company Law Tribunal.
• The National Company Law Tribunal decides on the application within 14 days.
• Once the National Company Law Tribunal opens the case (D0), the countdown of
180 days for the completion of the process starts. A moratorium is imposed for the
duration of the process.
• The National Company Law Tribunal will appoint an interim Resolution Professional
on the commencement date. In the case of a petition presented by a financial credi-
tor, the court will appoint the professional designated by the creditor. The resolution
professional takes control of the debtor’s assets and business activity.
• The interim resolution professional will make a public announcement within three
days of the appointment (D+3), providing the deadline for the submission of claims
(D+14, but now it is possible to submit claims until D+90).
• The interim resolution professional appoints two registered valuers to calculate the
liquidation value and the fair value, within seven days of the interim resolution pro-
fessional’s appointment (D+21), and no later than D+47.
• The verification of claims takes place within seven days of the deadline for the sub-
mission of claims (D+97 maximum).
• The interim resolution professional constitutes the committee of creditors, after col-
lating the claims and determining the financial situation of the debtor. Report certi-
fying constitution of the committee, two days after verification (D+23).
• The resolution professional files a report certifying the constitution of the committee,
within two days from the verification of claims.
• The first meeting of the creditors committee is convened within seven days of the
filing of the report (D+30). The creditors can confirm the resolution professional or
appoint a new one, by a 66 percent majority.
• The resolution professional will prepare an information memorandum as specified by
Insolvency and Bankruptcy Board of India regulations. Two weeks from appointment,
no later than D+54.
• The resolution professional sends an invitation for expressions of interest in submit-
ting a resolution plan.
• Financial creditors and resolution applicants can formulate resolution plans based on
the information memorandum.
• The resolution professional checks compliance of the proposed resolution plans with
the legal requirements and submits the plan to the vote of the Creditors’ Committee.
• During the process, the resolution professional will manage the business and can
take substantial decisions with the authorization of the Creditors’ Committee (by a
66 percent majority).
• A resolution plan must be agreed among the financial creditors within 180 days by a
66 percent majority. If creditors agree, by a 66 percent majority, to continue the pro-
cess, the resolution professional will submit a petition to the National Company Law
Tribunals, and the tribunal may allow the negotiations to be extended for a maximum
of 90 additional days.
• If no agreement exists over a resolution plan after 180 days (or after extension granted
by the court, up to 330 days, which is the total limit for the conclusion of the process),
and the National Company Law Tribunals has not received a plan for its approval, the
court “shall order” the liquidation of the company.
• A resolution plan needs to be approved by the National Company Law Tribunal to be
effective.

Source: Authors.

©International Monetary Fund. Not for Redistribution

214 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Speed is the main objective of the corporate resolution process. The legislative
design is that of an extremely fast process, reliant on insolvency professionals and
engaged financial creditors.
Initial implementation of corporate resolution focused on large corporate
cases. Credit institutions started using the new procedures enthusiastically,
prompted by the RBI. Initial practice was tilted toward the use of insolvency
proceedings as a tool to acquire large companies. For instance, Essar Steel India
Limited was acquired by Arcelor Mittal India Pvt. Ltd. Other high-profile acqui-
sitions include Bhushan Steel Limited, Bhushan Power & Steel Limited, Jaypee
Infratech Limited, Alok Industries Limited, and others. The focus on acquisitions
appeared to be facilitated by the competitive process to submit resolution plans
(Handa 2020). The outcome of the process tends to be a sale of the business
rather than a reorganization of the enterprise. Corporate resolution appears much
less effective as a tool for operational restructuring.
Experience with the IBC highlighted several issues in practice. Some of these
issues have been tackled through amendments to the IBC and regulations, but
many challenges remain. A few of them shed light on broader issues and pertain
to the roles of creditors and debtors in the process, and limitations in the IBC,
such as the treatment of executory contracts, enterprise groups, and cross-border
insolvency. Others are of a more technical nature (Box 10.3).
As mentioned previously, corporate resolution relies on the active participation
of financial creditors who have the decision-making power over the ultimate fate
of the company, but also over practically all significant decisions during the pro-
cedure (e.g., appointment of a resolution professional, post-petition financing,
sales outside the ordinary course of business). The peculiarity of the process is that
financial creditors control it irrespective of their exposure to the debtor or the risk
attached to their lending positions (a financial creditor may have provided a small
unsecured loan, whereas it is possible that a trade creditor—known as “operational
creditors” under the IBC—may have extended more credit, and that credit may
be protected by a security interest). This can exacerbate conflicts among creditor
classes and foster strategic behavior. The IBC assumes that financial creditors are
in the best position to determine the outcome of the process and to take most of
the decisions. This seems to be based on a belief that financial creditors have more
expertise than other creditor classes14 and that operational creditors would be
more interested in the liquidation of the corporate debtor rather than the resur-
rection of the firm. In practice, financial creditors have not always responded to
the expectations of professionalism placed on them, and, more importantly, their
interests are not necessarily aligned with those of the other creditors, or other
stakeholders. The proposal to adopt a code of conduct for the committee of cred-
itors seeks to respond to the criticism over the conduct of financial creditors, with

14
The Supreme Court appears to support this argument, stating that “since the financial creditors
are in the business of money lending, banks and financial institutions are best equipped to assess
viability and feasibility of the business of the corporate debtor” (Swiss Ribbons v. Union of India,
4 SCC 17, 2019).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 215

Box 10.3. Technical Issues in the IBC and the Corporate

Resolution Regulation
• Commencement of the insolvency process: Commencement of corporate resolution is
not based on a cash-flow test or balance sheet test of insolvency, as the international
standard recommends, but merely on a default of a certain amount (Rs10 million).
This may have contributed to the use of insolvency petitions as a pressure mecha-
nism to obtain payment even in situations where there is no insolvency.
• Appeals and challenges: The law is designed with the idea that the process must fol-
low its strict deadlines irrespective of any appeal or challenge. However, appeals and
challenges do interfere in practice with the strict timeline.
• Effects of commencement: It is not clear whether the commencement of resolution
accelerates all claims, and whether claims (secured and unsecured) stop generating
interest during the process.
• Treatment of secured creditors: Secured creditors do not seem to receive any protec-
tion against the effects of the moratorium (which may prevent them from enforcing
during the whole duration of the resolution process). Secured creditors do not have
the possibility to request that the moratorium is lifted.
• Approval of the resolution plan: The resolution plan requires a 66 percent majority of
claims from the financial creditors’ group. However, financial creditors include
secured creditors, unsecured creditors, and claims for deficiency in the case of insuf-
ficient value of the collateral. These three categories of financial creditors are in differ-
ent positions in the creditors’ hierarchy, yet they are put in the same class to decide
on the resolution plan.
• Valuation and safeguards for creditors: The baseline for the satisfaction of creditors is
the liquidation value of assets, following the international standard, but the resolu-
tion procedure does not include the respect of absolute priority among creditor
classes (and the concept of a dissenting class is alien to the IBC because only the class
of financial creditors has the right to vote). The reform of the corporate resolution
regulation included the concept of “fair value” that should also be determined by the
valuers, but its main role is informative, and the criteria for determining the fair value
are not clear.
• Types of resolution plan. The general understanding is that a resolution plan cannot
provide for a business transfer, where the legal entity of the debtor is left behind as a
shell entity and will therefore need to be dissolved (Ravi 2021).
• Effects of the resolution plan: The plan should bind all creditors, but instead, the
combined effect of the law and regulations is that the plan results in the immediate
payment of the liquidation value to operational creditors, and the payment of the
liquidation value to the dissenting financial creditors before the rest receive any pay-
ment. In practice, this may complicate the design of plans because it is not possible
to predict the amount of cash necessary to make the initial payments.
• Repeat resolution plans: The law is not entirely explicit about this point, but it seems
that reaching a superficial restructuring agreement would be enough to save the
company from liquidation, and that after one year there could be another application
to restart the corporate resolution procedure. This diminishes the effectiveness of the
threat of liquidation in the insolvency regime.

Source: Authors.
Note: IBC = Insolvency and Bankruptcy Code; Rs = rupees.

©International Monetary Fund. Not for Redistribution

216 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

the goal of promoting specialization, due diligence, professionalism, and absence

of conflicts of interest (Sriram 2021).
In contrast, operational creditors have almost no influence in the process. The
IBC does not classify creditors according to the nature of their entitlement (i.e.,
secured creditors, preferential creditors, unsecured creditors) (see Pryor and Garg
2020). Operational creditors represent a broad category that includes practically
all creditors that are not financial institutions. In corporate resolution, no partic-
ipation mechanisms exist for these creditors: there is no creditors’ meeting, and
the committee of creditors is only open to financial creditors, as a rule. These
creditors are effectively disenfranchised and depend on the actions of financial
creditors to satisfy their claims (Mahapatra, Singhania, and Chandna 2020). As
indicated, this is irrespective of the amount of their claims and of the legal posi-
tion of their claims.
Practice has shown that it is not possible to rely on financial creditors to pro-
tect the interests of operational creditors, so the courts have insisted on compli-
ance with the legal protections for operational creditors and, over time, some of
these legal protections have made their way into the IBC through targeted
amendments. In 2019, the IBC was amended to ensure that resolution plans at
least offer operational creditors the liquidation value, or the value they would
have received if the sums of money under the plan had been distributed according
to the general priority order in section 53 of the IBC, whichever is higher.15 In
addition, the lack of recognition of categories of creditors according to the nature
of their legal entitlements has led to the peculiar solution of classifying homebuy-
ers as financial creditors (IBC amendment in 2018; see Mohan and Raj 2020).
Possibly in recognition of the imbalance in representation of operational creditors
through the IBC process, the judiciary has required the committee of creditors to
consider the interests of all stakeholders in a resolution.16 In the same vein, the
IBBI proposed a code of conduct for the committee of creditors, which would
encourage financial creditors to make decisions in the interest of all stakeholders
instead of their own self-interest. This is a remarkable departure from the conven-
tional expectation from creditors in an insolvency (i.e., protecting their own
economic interests), and it is possible that this “quasi-fiduciary” role for financial
creditors would result in increased litigation and complex case law.
Debtors, and related parties, have limited influence in corporate resolution.
The Indian legislator made a conscious policy choice of dispossessing the debtor
in corporate resolution. This means that the directors, officials, and shareholders
are prevented from using their rights under corporate law to make decisions on
behalf of the insolvent company.17 This is a policy choice entirely admissible

15
See amended section 30 of the IBC (2019).
16
Prowess International Pvt. Ltd. v. Parker Hannifin India Pvt. Ltd. (National Company Law Appellate
Tribunal) Company Appeal (AT) (Insolvency) No. 89 of 2017 | 18-08-2017.
17
As the Supreme Court put it: “Entrenched managements are no longer allowed to continue in
management if they cannot pay their debts” (Innoventive Industries Ltd. v. ICICI Bank and Others,
(2018) 1 SCC 407).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 217

under the international standard, but it has been observed that maintaining the
debtor in possession during reorganization represents a powerful incentive that
encourages debtors to commence insolvency proceedings at an early stage, maxi-
mizing the chances of recovery. A significant motivation for the design of the IBC
in this respect is to prevent persons in control of the company (“promoters” or
controlling owners) from interfering with corporate resolution, abusing the pro-
cess, or otherwise deriving a strategic benefit from insolvency. This largely corre-
sponds with bad practices that existed before the IBC. To prevent such abuses, the
IBC precludes promoters and parties connected to them from present a resolution
plan under a set of specified circumstances (section 29A). Although the policy
objective of avoiding abuse is laudable (see Divan and Monga 2021; Gupta 2021;
Kamalnath 2020; Mohan and Raj 2021), the prohibition is blunt and possibly
unnecessary given the role and involvement of financial creditors, who should be
able to accurately assess a resolution plan. The prohibitions on the promoters are
complex and can generate litigation, which in turn can delay corporate resolution.
Another critical issue affecting promoters is the issue of personal guarantees,
which are used extensively in corporate lending in India. The IBC and the courts
have affirmed that promoters are liable when they have personally guaranteed
corporate debts, and the resolution process does not extinguish such
guarantees.18
The lack of comprehensive rules for executory contracts reduces the effective-
ness of corporate resolution. The IBC allows the continuation of essential goods
and services contracts, irrespective of the will of the contracting party. Therefore,
these contracts, together with licenses and permits, cannot be terminated during
the moratorium. Essential goods and services include electricity, water, telecom-
munications, and IT services. The law does not include a rule to terminate the
contracts that are detrimental to the debtor, specifying the treatment of the claims
for breach of contract. This reduces the possibility of using corporate resolution
for operational restructuring.
The IBC does not include any rules for the treatment of enterprise group insol-
vency. Modern enterprises tend to be organized in group structures, rather than
concentrating all assets and liabilities in a single corporate entity. This lack of
connection between the assumptions of traditional insolvency law and economic
reality requires some adjustments, in line with the recommendations issued by
UNCITRAL (2010). To tackle the insolvency of an enterprise group, it is neces-
sary to implement procedural coordination measures: these can consist, for instance,
of the appointment of an insolvency administrator for several insolvent enterprises,
the development of coordinated reorganization plans, or even the financing of the
continuation of the business with resources of other enterprises in the same group.
These procedural coordination measures are absent in the IBC, and this may create
severe coordination problems and prevent the restructuring of the group as an

18
See Supreme Court, Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta &
Others (2019) SCC Online SC 1478. In addition, promoters can be liable for corporate debts on
account of engaging in wrongful or fraudulent trading.

©International Monetary Fund. Not for Redistribution

218 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Figure 10.2. Corporate Resolution Procedures

(Cumulative data)
Mar. 2017 Mar. 2018 Mar. 2019 Mar. 2020
Mar. 2021 June 2021 June 2022
6,000

5,000

4,000

3,000

2,000

1,000

0
Admitted Closure Ongoing
Source: Insolvency and Bankruptcy Board of India.

economic entity.19 A high degree of flexibility and inventiveness on the side of

insolvency professionals and the courts is required to resolve these problems under
the current framework, although more ambitious reforms are planned.20
Cross-border insolvency is another missing piece in the Indian insolvency regime.
Although the lack of cross-border insolvency rules along the lines of the UNCITRAL
Model Law (1997) does not cause immediate problems in the operation of corporate
resolution, the progressive internationalization of the Indian economy will demand
better coordination with foreign insolvency proceedings to give response to the treat-
ment of foreign creditors, improve the possibilities of coordinated rescue of multina-
tional enterprises, and, ultimately, improve the investment climate. Progress has been
made with legislative drafts incorporating the UNCITRAL Model Law, and the
2022 budget law has included the adoption of this reform as a priority.
The practical implementation of corporate resolution saw a very promising start,
but the performance of corporate resolution has stalled over time. The number of
cases has increased, even after the suspension of the IBC for one year during the
pandemic (Figure 10.2). The deadlines contemplated in the IBC have proven

19
One of the examples of the difficulties in dealing with enterprise groups under the IBC has been
the Videocon case. The resolution of Videocon Industries required a merger of 13 subsidiaries with
Videocon Industries as a way of bringing all different economic activities under a single corporate
entity to implement resolution. In any event, this has been one of the cases where creditor losses have
been highest (it is estimated that creditors took a 96 percent loss).
20
A special working group on group insolvency was constituted, and its report was published in 2019. The
thrust of the framework is “facilitation,” “flexibility,” and “choice.” It envisages an enabling group insol-
vency framework to be implemented in a phased manner: first, procedural coordination, then cross-border
and, finally substantive consolidation (i.e., joint treatment of all assets and liabilities, disregarding separate
corporate personality. This is a remedy for exceptional cases of fraud or commingling of assets).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 219

Figure 10.3. Timeline of Ongoing Corporate Resolution Procedures

(As of May 2021)

Less than 90 days

90–180 days

180–270 days

More than 270 days

0 10 20 30 40 50 60 70 80
Source: Insolvency and Bankruptcy Board of India.

unattainable in a majority of cases, which is a source of concern (see Shikha and

Shahi 2021). Indeed, most insolvency cases last longer than originally foreseen
under the IBC (see Figure 10.3). Reports indicate that insolvency resolution takes
nearly 593 days on average. Multiple factors may be at play behind this general
delay in the completion of cases, but three main reasons seem particularly relevant:
insufficient court resources and, especially, an insufficient number of judges; inad-
equate skills of some insolvency professionals, financial creditors, and other profes-
sionals participating in the procedure; and, finally, the fact that the deadlines are
rigid and possibly too short for large, complex insolvency cases (see Suyash 2021).
Delays also occur in complying with many of the deadlines in corporate resolution,
including in the deadline for admission of petitions.21 The Indian Supreme Court
has insisted that the deadlines included in the IBC must be respected.22
Statistical analysis of corporate resolution cases reveals interesting insights
into the functioning of the process. The IBBI is doing an excellent job collect-
ing statistical information on insolvency. Since the entry into force of the IBC,
4,541 cases have been initiated (as of June 2021). Of these, 2,859 cases had
been closed, and 1,682 were ongoing. By June 2021, 47 percent of corporate
resolution cases ended in liquidation and 14 percent ended with a resolution
plan. In remaining cases, the application was withdrawn,23 an appeal was made,

21
There is a deadline of 14 days for the admission of application. The average number of days taken
for admission of applications is actually 13 days. This is a serious issue, because timely commencement
of the process increases the chances for resolution, and severe risk of misconduct by the debtor exists
during this period.
22
Supreme Court of India, judgment of September 13, 2021. https://www.financialexpress.com
/economy/sc-asks-insolvency-tribunals-to-stick-to-resolution-deadlines/2329587/.
23
In general, the number of insolvency petition withdrawals is quite high—this may mean that there
is a negotiation with the debtor when a petition is submitted. As of May 31, 2021, the number of
withdrawals was 17,631 (out of 32,547 petitions).

©International Monetary Fund. Not for Redistribution

220 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Figure 10.4. Closure of Corporate Resolution Procedures

(Cumulative data, 2022)

Resolution plan
Appeal
Liquidation
Withdrawal

Source: Insolvency and Bankruptcy Board of India.

or a settlement was reached (Figure 10.4). These percentages would be even

lower considering the global number of petitions: out of 32,547 insolvency
petitions, only 365 resolution plans had been concluded (in contrast to 1,318
liquidations). A large number of resolution petitions were withdrawn (17,631),
and 1,085 processes were closed midway. There are 1,719 ongoing corporate
resolution cases. Financial creditors recovered 167.95 percent of the liquidation
value of companies, but this represents only 36 percent of the value of their
claims.24
Under the IBC, liquidation is the last resort, generally after a failed resolu-
tion attempt. International best practice favors the use of reorganization
options, but this must be justified by the situation of the firm: if the liquidation
value of a firm is higher than its going concern value, the firm should be liqui-
dated. Despite the preference for resolution, liquidations are frequent in prac-
tice because resolution attempts often fail (Figure 10.4). When liquidation is
postponed, it tends to result in much heavier losses.25 The average recovery in
liquidation cases has been a mere 3.5 percent (Kotak 2021). Contrary to cor-
porate resolution, liquidation does not have a fixed timeline, and it is expected
that the time taken to conclude liquidation cases will be substantially longer
than for resolution cases (Figure 10.5).
The regulation of the liquidation procedure is concise. Liquidation commences
with an order by the National Company Law Tribunals, and the appointment of

24
Of the large 40 accounts referred by order of the RBI in 2017, only 20 had achieved resolution.
In those 20 cases, banks recovered 40 percent of their debt; see https://www.bloombergquint.com
/business/four-years-on-did-rbis-ibc-gamble-with-40-large-defaulters-work.
25
In the 37 liquidation cases concluded in December 2019, the average recovery for creditors was
1 percent (Ernst and Young 2019).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 221

Figure 10.5. Duration of Ongoing Liquidations

(As of June 2022)
700

600

500

400

300

200

100

0
> 2 years > 1 year > 270 days > 180 days > 90 days ≤ 90 days
≤ 2 years ≤ 1 year ≤ 270 days ≤ 180 days
Source: Insolvency and Bankruptcy Board of India.

a liquidator. Rules exist for the formation of the insolvency estate26 and the veri-
fication of claims (the liquidator leads the verification efforts, with a possible
appeal to the National Company Law Tribunals).27 Secured creditors have the
option of relinquishing the collateral or realizing the collateral directly. The law
ensures that secured creditors pay their share of the liquidation costs and that the
residual value after enforcement goes to the liquidation estate.
Liquidation includes a ranking of claims that goes beyond the classification of
financial and operational creditors. The ranking of claims recognizes the priority
of secured creditors, workers’ claims, and it includes a priority for financial unse-
cured creditors. Tax and public claims rank equally with the unsecured portion of
secured loans. This ranking incorporates policy choices that may be influenced by
national considerations, but these choices should be closely aligned with the
treatment of creditors under corporate resolution.
The participation of secured creditors in the liquidation procedure is
optional. If the debtor is to be liquidated, secured creditors have the choice
either to relinquish their security to the liquidation estate, and participate in
the distribution of proceeds set out under the IBC, or to independently enforce
and realize their collateral without participating in the said distribution. In the

26
These rules include exceptions for financial contracts. Similar rules should exist in corporate reso-
lution. Avoidance actions are also contemplated in liquidation, but not in corporate resolution: this
can create issues in cases where corporate debt distress is related to a series of previous transactions,
even if the company does not end up in a liquidation.
27
Verification of claims in liquidation should benefit from previous efforts under corporate resolution.
In fact, it should be possible to contemplate just an update of the list of claims used in corporate
resolution, as the IBBI liquidation regulation recognizes.

©International Monetary Fund. Not for Redistribution

222 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

latter case, it appears that the secured creditor is required to bear the costs of
enforcement, account for the liquidation to the insolvency administrator, and
surrender any amount recovered in excess of its claim. It is difficult to under-
stand why a secured creditor would choose to relinquish its security—if a
secured creditor does that, the risk is sharing the proceeds realized at pari passu
with workmen who rank equally in the distribution. The provision allowing the
creditor to enforce its collateral outside the insolvency process runs counter to
the collective nature of the insolvency proceeding and could make the sale of
the business as a going concern virtually impossible. That said, this provision
is consistent with the common law tradition, and it reinforces the position of
secured creditors.
The work of the insolvency professional is central in the liquidation process.
In liquidation, the insolvency professional enjoys ample autonomy, and this
includes not only powers to sell assets but also to disclaim contracts. Creditors can
provide input and recommendations, and request information through a so-called
“stakeholders’ consultation committee.” This committee is more inclusive than
the creditors’ committee in corporate resolution, but its role is consultative. The
liquidator’s fees encourage the prompt realization of assets because those fees
decrease over time. Although a scheme of arrangement or the sale of the business
as a going concern are possible, the rights given to secured creditors make it
extremely challenging in practice.
Overall, the corporate insolvency procedures included in the IBC have
improved debt resolution in India, but challenges remain. Legislative and regula-
tory activity has developed a comprehensive regime for the rehabilitation and
liquidation of corporate debtors. Technical issues are still outstanding, but the
constant collection of data and the analysis and cooperation with specialists are
proof of a strong commitment to improvement of the regime through reforms.
The policy issues underlying corporate resolution, however, will need further
reflection.

THE INSTITUTIONAL FRAMEWORK

The importance of the institutional framework of the insolvency regime cannot
be overstated. In the words of prestigious insolvency experts: “We would opt for
bad law and good personnel over good law and bad personnel” (Westbrook and
others 2010, 203). The Indian institutional framework is complex and includes
the institutions that formulate insolvency policy and the institutions in charge of
the application of the regime.
In terms of legislative policy, insolvency stands out as a special matter because
of the attention given to it by the office of the prime minister. Insolvency is a
cross-cutting subject with multiple ramifications, and for that reason it is neces-
sary to have interdepartmental coordination among the Ministries of Corporate
Affairs, Law and Justice, Finance, and MSMEs. In addition, because insolvency
performs a fundamental function in tackling NPAs in the banking system, the
RBI takes a strong interest in insolvency legislation and has spearheaded

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 223

initiatives affecting the insolvency system, such as the directions to use corporate
resolution given to credit institutions in 2017.28 Other regulators, such as the
Securities and Exchange Board of India (securities markets) and the Competition
Commission of India, also contribute to the formulation of insolvency policies.
The need to ensure coordination at the policy level, together with the technical
complexity of insolvency law, explains why insolvency legislation is frequently the
result of delicate trade-offs and compromises.
The institutional framework of the IBC is supported by an elaborate ecosys-
tem. The fundamental institutions for the application of the IBC are the courts,
the IBBI, the insolvency professionals (and the insolvency professionals’ associa-
tions), and the information utilities. These are sometimes referred to as “the four
pillars of the ecosystem.” In addition, valuators should be included in the analysis
of the institutional framework.
The drafters of the IBC were aware of the importance of having specialized
courts for the proper application of corporate legislation, which requires ample
expertise and knowledge of corporate and commercial law. The IBC attributed
exclusive jurisdiction to the National Company Law Tribunals and to the
National Company Law Appellate Tribunal. There are 11 National Company
Law Tribunals in the country, with 15 benches dedicated to insolvency cases and
an additional principal bench in New Delhi.29
The caseload for the insolvency tribunals has grown at a steady pace. Most of
the cases are resolved without completing the process: Out of the 28,441 cases
filed under the IBC until September 2020, 14,884 cases were withdrawn before
admission, which suggests that parties negotiate before moving forward with
corporate resolution.30 But the number of cases is nevertheless substantial. During
June 1, 2016, to May 31, 2021, the National Company Law Tribunals took
4,283 cases, and they have resolved 3,283. There are 1,000 cases pending resolu-
tion, and it is expected that cases will increase after the suspension of the IBC
concluded and the consequences of the pandemic over the economy continue.
This case workload is in addition to the responsibilities of the National Company
Law Tribunals in corporate law litigation.
The court system has not been supported by adequate resources. The delays in
corporate resolution are the result of several contributing factors, but one of the
main reasons for such delay is the insufficiency of resources at the courts. National
Company Law Tribunals and the National Company Law Appellate Tribunal lack

28
With the ordinance of the cabinet in May 2017, amending the Banking Regulation Act 1949, the
RBI was empowered to direct banks to use the insolvency process to resolve NPAs. However, in 2019
the Indian Supreme Court ruled that without specific direction from the government, the RBI could
not direct banks to use the IBC process, and therefore the court struck down the RBI Circular that
set a time limit for restructuring negotiations before commencing the insolvency process.
29
This includes benches at New Delhi, Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai,
Guwahati, Jaipur, Hyderabad, Kolkata, Mumbai, Cuttack, Kochi, Amravati, and Indore (https://nclt
.gov.in/national-company-law-tribunal-benches).
30
According to Debroy and Sinha (2021), “There is a need to disseminate the important fact that a
large proportion of IBC cases are getting resolved on the way.”

©International Monetary Fund. Not for Redistribution

224 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

human and material resources (Alvarez and Marsal 2017). As of 2021, there were
only 15 benches with 19 judicial members and 21 technical members at the
National Company Law Tribunals. The National Company Law Appellate Tribunal
has two benches with 11 members. Numerous vacancies exist at the National
Company Law Tribunals (34 vacancies, including the president, out of a total of
63 members, according to the latest report in August 2021). There have been delays
with filling vacancies, inviting further censure from the Indian Supreme Court,
following which the authorities have taken steps to increase staffing.31 A litigious
approach with practically any aspect of the insolvency proceedings being contested
by parties does not help with these pressures, including when parties present frivo-
lous challenges and appeals unforeseen in the legislation.
The IBBI combines multiple functions as a regulator. The IBBI is a creation of the
IBC and represents a critical component of the institutional infrastructure32 and an
invaluable link with policymakers in the executive and legislative powers of the state.
• Regulation. The IBBI adopts insolvency regulations. This is a function that sets
the IBBI apart from insolvency authorities in other legal systems, which tend
to lack the capacity to enact insolvency regulations, despite being informally
referred to as “regulators.” The IBBI has adopted regulations that specify and
develop the provisions of the IBC in multiple areas, including all corporate
insolvency proceedings. The regulations must respect the statutory provisions
and the rules of procedure established by the IBBI itself (IBBI Mechanism for
Issuing Regulations of 2018). The IBBI also has a role in preserving the integ-
rity of the insolvency legislative and regulatory framework; this allows the
IBBI to file complaints or appeals with the courts regarding specific decisions
or actions. The IBBI is consulted on projected legislative changes to the insol-
vency legislation and is routinely involved in legal reforms.
• Supervision. The IBBI not only regulates the insolvency regime, which
includes developing regulations and standards for the qualification and con-
duct of insolvency professionals and their agencies, but also actively supervises
the conduct of insolvency professionals and their agencies. The IBBI seeks to
ensure the integrity and quality of the insolvency profession. The IBBI super-
vises compliance with regulations, with the assistance of the insolvency pro-
fessional agencies, and punishes irregular conduct of insolvency professionals.
• Research and dissemination. The IBBI publishes research on insolvency pro-
ceedings, including the collection of comprehensive and accurate data, and
conducts training and dissemination activities that support the development
of the insolvency system, particularly by providing continuous education to
insolvency professionals.

31
https://www.barandbench.com/news/11-judicial-members-10-technical-members-appointed-to-nclt
-benches.
32
In the words of its first chairman, M. S. Sahoo, the IBBI performs executive, quasi-legislative, and
quasi-judicial functions. “The IBBI blends the duties of a regulator of professions, a regulator of markets,
and a regulator of utilities, though its role is vastly different from that of any of them” (Sahoo 2021, at 3).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 225

Insolvency professional agencies are self-regulatory organizations for insolvency

professionals. The agencies complement the activities of the IBBI as regulators for
insolvency professionals (see Burman and Roy 2015). This two-tier system is
inspired by the English system. Insolvency professional agencies can develop guide-
lines and recommendations for their members and have competences for the super-
vision and sanction of insolvency professionals.
Insolvency professionals are tasked with important functions in insolvency
proceedings. The ordinary business of insolvency proceedings is conducted by
insolvency professionals. Following the international standard, the courts take
decisions only on matters litigated by the parties or that require a detailed legal
analysis. Insolvency proceedings require numerous routine operations for their
smooth functioning (e.g., taking control of the debtor’s assets, verifying creditors’
claims, examining the debtor’s financial statements). To operate seamlessly, it is
required that insolvency professionals have adequate expertise. This tends to be a
challenge because insolvency professionals should be knowledgeable in varied
subjects, including legal, business, and accounting matters relevant to insolvency.
India has built a new insolvency profession, applying a degree of flexibility to
eligibility requirements.33 The IBBI oversees the syllabus and the organization of
official examinations for insolvency professionals. These professionals also need to
complete a training program before registration. The number of insolvency pro-
fessionals has increased steadily. Per the data on the IBBI website, three insolvency
professional agencies and more than 3,600 insolvency professionals and entities
have been registered with the IBBI.34 However, it is not entirely clear that all
insolvency professionals have the necessary qualifications, particularly when deal-
ing with large and complex corporate insolvency cases. The rapid growth of the
profession has made it difficult to ensure the quality and integrity of all
professionals.
Information utilities—another original creation of the IBC—provide infra-
structure services to insolvency processes. The idea behind this innovation is to
create reliable databases that provide clear evidence for defaults, given the impor-
tance that the evidence of default has in the commencement of corporate resolu-
tion under the IBC. In addition, information utilities can provide a list of finan-
cial claims that can be easily integrated into the resolution process. Although it
was envisaged that this would be a competitive industry, in practice there is only
one information utility, National e-Governance Services Ltd., active since 2017.
The IBBI set the technical standard for the service (Barman 2021). To a certain

33
The eligibility requirements of insolvency professionals have recently been revised to increase flex-
ibility (for management professionals, 10 years’ experience is required, after earning a postgraduate
degree, or 15 years, after a bachelor’s degree; for lawyers, it is 10 years’ experience after a bache-
lor’s degree; and for accountants and advocates, 10 years of combined experience) (IBBI regulation,
July 2021). The new regulation is also tightening rules on conflicts of interest by barring the possibility
of appointing an insolvency professional when another person in the same service firm has acted for
any of the parties in the insolvency case.
34
https://www.taxscan.in/ibbi-to-celebrate-its-5th-annual-day-on-oct-1st/134447/.

©International Monetary Fund. Not for Redistribution

226 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

extent, the service lends itself to a natural monopoly, but that also means that the
supervision of the information utility needs to be rigorous to ensure that the
technology is adequate and that no data loss or confidentiality issues occur
(Suyash 2021).
The insolvency regime also relies on the work of valuators. “Registered valuers”
calculate both the liquidation and the fair value of the assets of companies under
corporate resolution. The IBBI has developed a regulatory regime for registered
valuers, which is also supported by the establishment of professional organizations
for valuers. At present, more than 4,300 valuers and 16 valuers’ organizations are
registered with the IBBI. However, important gaps exist in the regulation of val-
uers and of valuation standards (Saini 2021). The Working Group appointed by
the Ministry of Corporate Affairs recommended a broader initiative that would
consist of the enactment of a Valuers Act, contemplating the establishment of a
valuation regulator, the development of valuation standards and the strengthen-
ing of the regime of valuers.35
In conclusion, reforms have overhauled the institutional framework for corpo-
rate insolvency in India, but the judiciary could materially improve. Procedural
delays in corporate resolution can be attributed, to a great extent, to the lack of
resources at the National Company Law Tribunals and National Company Law
Appellate Tribunal.36 The insolvency profession is in its early stages, and it needs
to acquire expertise and further specialization, while valuers would benefit from
a comprehensive regulation of their activities.

SPECIAL CONSIDERATIONS FOR MSME INSOLVENCY

When the IBC was adopted in 2016, no special provisions existed for MSMEs.
In the design of the IBC, the focus was on large corporates and on the need to
address large NPAs on the banks’ balance sheets. As a result, the insolvency pro-
cedures—notably, corporate resolution—are complex, too sophisticated, and too
costly for the needs and resources of MSMEs.
MSMEs are an important part of the Indian economy. They contribute
30 percent of India’s gross domestic product and provide jobs for 100 million
people. The classification of MSMEs has been recently reformed by the Ministry
of MSMEs (July 1, 2020; see Table 10.1). The classification excludes agricultural
enterprises, but it now includes unified criteria for manufacturing and service
enterprises, based on investment and turnover.

35
See Report of the Committee of Experts to Examine the Need for an Institutional Framework for
Regulation and Development of Valuation Professionals (2020), available at https://www.mca.gov.in
/Ministry/pdf/Notice_14042020.pdf.
36
See Implementation of Insolvency and Bankruptcy Code. Pitfalls and Solutions (2021). 32 report, Lok
Sabha, August 2021.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 227

TABLE 10.1.

Classification of Micro, Small, and Medium Enterprises (2020)

Micro Small Medium
Manufacturing Investment in Plant Investment in Plant Investment in Plant
Enterprises and and Machinery or and Machinery or and Machinery or
Enterprises Rendering Equipment: Not more Equipment: Not more Equipment: Not more
Services than Rs10 million; and than Rs100 million; and than Rs500 million; and
Annual Turnover: Not Annual Turnover: Annual Turnover:
more than Rs50 million. Not more than Not more than
Rs500 million. Rs2,500 million.
Source: Ministry of Micro, Small, and Medium Enterprises.
Note: Rs = rupees.

Two important peculiarities exist in the MSME sector in India: the prevalence
of unincorporated enterprises and the small number of medium enterprises. The
share of medium enterprises in India is insignificant (0.05 percent of all MSMEs).
Micro enterprises represent 99.5 percent of the whole MSME category.37 In addi-
tion, most MSMEs are unincorporated: 95.98 percent of all MSMEs are propri-
etary concerns.
The corporate resolution procedure in the IBC is not adequate for the needs
of micro enterprises. The lack of adequate legal response to the insolvency of
MSMEs is not new (Debroy 2005), and the IBC did not alleviate those problems
in 2016. Micro enterprises do not have enough resources or expertise to navigate
a sophisticated and costly process such as corporate resolution, and financial
creditors are not eager to invest their own resources in seeking the resolution of
these businesses: enforcement of collateral, if any, would be the preferred course
of action for creditors. The prevalence of micro enterprises in India affects the
insolvency debate, because it is estimated that ordinary insolvency proceedings
work well for medium enterprises, but micro and small enterprises experience
difficulties because of the high costs and complexity of such procedures (Diez and
others 2021). Until recently, the IBC included only several special rules and
accommodations for the situation of micro and small enterprises. The most nota-
ble one is the rule that allows promoters of distressed MSMES to act as resolution
applicants in the corporate resolution of their enterprises.38 This amendment of
the IBC allows the promoters of MSMEs to submit resolution plans, and in this
way the interests of the owners are protected, but also the interests of creditors are
advanced, because it is unlikely that third parties would be interested in propos-
ing resolution plans for a MSME.

37
The absolute numbers are the following: a total of 63,388,000 MSMEs, including 63,530,000
micro enterprises, 331,000 small enterprises, and 5,000 medium enterprises.
38
Section 240A was introduced in 2018 to provide certain relaxations to MSMEs with respect to
the exclusions of eligibility in acting as resolution applicant (section 29A). The intention behind the
enactment of this provision was to grant exemptions to corporate debtors which are MSMEs, by per-
mitting a promoter who is not a willful defaulter or covered under any other specific disqualification
as provided under the law to bid for the resolution plan of an MSME.

©International Monetary Fund. Not for Redistribution

228 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

The lack of alignment of the insolvency regime with the needs of MSMEs was
highlighted by the COVID-19 pandemic. The pandemic has affected39 smaller
businesses disproportionately. Due to the difficulties of addressing the problems
of small businesses through the ordinary insolvency regime, the policy response
included a suspension of the IBC, raising the threshold of default for the com-
mencement of corporate resolution, and the introduction of special debt restruc-
turing schemes for MSMEs.
Restructuring schemes for MSME loans have offered an alternative to debt
resolution. The RBI adopted the so-called “resolution framework 2.0” to address
MSME debt in 2021, raising the threshold for the scheme to Rs500 million. Upon
implementation of restructuring plans, banks can set provisions for 10 percent of
the residual debt of the borrower, which represents a regulatory incentive to
restructure the debt. Loans classified as standard can retain that classification,
whereas the accounts that may have slipped into NPA category between April 1,
2021, and date of implementation of the restructuring, may be upgraded.
The introduction of a special insolvency procedure (pre-pack) represents a
major development in the regulation of MSME insolvency. The prepackaged
insolvency resolution process, specifically designed for MSMEs, was introduced
in 2021.40 The pre-pack, despite the use of this term, is not a variety of expedited
reorganization, such as prepackaged reorganization plans in US practice. The
design of the procedure resembles a simplified and shortened debtor-in-possession
reorganization, with a prearranged plan. At the same time, this procedure also
presents similarities with pre-packs in English practice because it assumes an
agreement with secured creditors and often with an investor who will take control
of the company.
There has been an effort to adapt the pre-packs to the needs of MSMEs. The
minimum default necessary to access a pre-pack is Rs1 million, which sets a
threshold more in line with the characteristics of MSMEs. The procedure is avail-
able to all MSMEs, in principle, but there are certain exclusions for MSMEs that
have already used an insolvency procedure in the previous three years, MSMEs
undergoing ordinary insolvency procedures, or MSMEs that have been ordered
to be liquidated. Connected parties are not allowed to apply for the pre-pack
procedure. The procedure can only be accessed by the MSME itself.41
The application for a pre-pack procedure takes priority over applications for
ordinary insolvency.

39
Raising the threshold for default under the IBC to Rs10 million from the previous Rs100,000 can
be seen as a measure to protect MSMEs from ordinary insolvency procedures.
40
The pre-pack procedure was adopted by ordinance on April 4, 2021. The IBC was amended in
August 2021 to adapt the code to the new procedure for MSMEs (Insolvency and Bankruptcy Code
[Amendment] Act, 2021).
41
This requires a special resolution (three-fourths majority) adopted by shareholders or at least
the agreement of three-fourths of the partners. Financial creditors may request to see evidence of
shareholder/partner support, together with the Base Resolution Plan, before agreeing to the com-
mencement of the pre-pack procedure. Parties disqualified from being resolution applicants (section
29A IBC) cannot apply for a pre-pack process.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 229

The procedure assumes the existence of previous out-of-court negotiations

between the debtor and its main creditors. Those negotiations rely on a base reso-
lution plan, whose compliance with the legal requirements is verified by a resolution
professional.42 However, these negotiations are not conclusive, because the pre-pack
process also offers opportunities for the development of alternative plans.
The debtor-in-possession model can contribute to the success of the pre-pack
process. The fact that the debtor remains in control of the business represents a
powerful incentive for the use of the procedure, which can assist in tackling dis-
tress at an earlier stage. The committee of creditors can apply to the court to
remove the debtor’s management if there is a 66 percent majority in favor of the
removal in cases of fraud or gross mismanagement. In case of removal, the reso-
lution professional takes over the management of the business. In any case, a
resolution professional is appointed since the commencement of the procedure,
whose duties include, among others, verifying claims, monitoring the manage-
ment of the business, and preparing an information memorandum for the com-
mittee of creditors.
Although the procedure requires agreement over the plan, it is possible to
conclude it with a different plan. Since the procedure starts with a plan supported
by a majority of creditors, it is foreseen that its duration will be much shorter than
that of corporate resolution (120 days, instead of the maximum 330 days that
corporate resolution may take) (see Suyash 2021). In theory, the procedure could
be shorter, because the majority required for commencement of the procedure is
the majority necessary for the adoption of the plan.43 However, it is always nec-
essary to have a vote at the committee of creditors. If the base resolution plan does
not impair the rights of operational creditors, the committee of creditors can
approve it and submit it to the National Company Law Tribunals. However, if
creditors do not approve the plan or the plan impairs operational creditors’ rights,
the resolution professional needs to invite competing plans. The “Swiss challenge”
allows any third party to present an alternative resolution plan when the original
resolution plan does not satisfy operational creditors in full. The original appli-
cant can still match the plan presented by the challenger.
Pre-packs can offer a good option for the resolution of MSMEs in distress
(Mehta 2021). In comparison with corporate resolution, the pre-pack procedure is
much simpler, the role of the courts is much more limited, and therefore potential
is great for achieving a faster and more economical resolution of MSME distress
(Box 10.4), although the process is still complex and further streamlining would be
possible. In any event, the procedure will need to be tested in practice.
The biggest shortcoming of pre-packs is the lack of coverage of unincorpora­ted
MSMEs. Given that more than 95 percent of Indian MSMEs are not incorporated,

42
The resolution professional also verifies that the sufficient majority of shareholders or partners
supports the pre-pack petition.
43
This may not be the case if there are financial creditors related to the corporate debtor, because the
majority required for the commencement of the process is required in respect of the financial creditors
that are not connected to the corporate debtor.

©International Monetary Fund. Not for Redistribution

230 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Box 10.4. “Pre-pack” Insolvency for MSMEs: Sequence and Timeline

• Application with the National Company Law Tribunals by a MSME corporate debtor,
naming a resolution professional.
• Unrelated financial creditors, who are not related to the debtor, having a minimum
66 percent of the value of financial debt due, must have approved the filing of the
application and proposed the resolution professional (D0).
• National Company Law Tribunal admits the application within 14 days of receiving
the petition (D1). A moratorium starts until approval of the plan or termination of the
procedure.
• The MSME delivers a list of claims and a preliminary information memorandum to the
resolution professional (D+3).
• The MSME submits a “base resolution plan” to the resolution professional (D+2).
• The resolution professional constitutes the committee of creditors (D+7).
• Committee of creditors can approve the resolution plan. Otherwise, the resolution
professional can invite resolution applicants to submit alternative resolution plans.
• The resolution professional submits to National Company Law Tribunals a resolution
plan approved by the committee of creditors; or informs that the procedure should
be terminated (D+90). If the debtor is eligible for ordinary corporate resolution, the
committee of creditors can decide to commence that process.
• If a plan has been approved, National Company Law Tribunals decides on the confirma-
tion of the plan within 30 days of receiving it. Confirmation by the court is necessary.
• The procedure should be completed within the statutory deadline (D+120).

Source: Authors.
Note: MSME = micro, small, and medium enterprise.

it is clear that the impact of the current pre-pack insolvency procedure will be mar-
ginal. The vast majority of MSMEs do not have an insolvency procedure that allows
them to reorganize. The challenge is to address the distress situation of enterprises
and, at the same time, the effects of distress on individuals and families who own
the businesses. To provide a proper response to the problem, the authorities need to
further develop a plan to implement a personal insolvency regime.
The treatment of guarantors of MSMEs also needs to be addressed. It is frequent
that individuals guarantee the debts of the corporate MSMEs they own. The IBC
assigns the competence over the bankruptcy of guarantors of corporate debt to the
National Company Law Tribunal, but it must be noted that the problem of pro-
moters guaranteeing debts of large companies is very different from the problem of
MSME guarantors. This problem has received the attention of the authorities. A
special working group produced a report on this topic.44 The proposed plan is to
implement personal insolvency in phases, first applying bankruptcy to guarantors
and, later, introducing personal insolvency law for other categories of debtors (indi-
viduals with a business activity first and, as a final step, consumer insolvency).

44
“The Working Group noted that it may be beneficial to have different procedures and frameworks
for individuals with business and those without business under Part III of the Code. It was concluded
that in personal insolvency, one size may not fit all. Therefore, it shall be appropriate to have separate
set of rules and regulations for personal guarantors to corporate debtors, for individuals with business,
and for individuals without business” (IBBI 2019).

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 231

RECOMMENDATIONS
A series of changes, as part of a concerted initiative, could further increase the
effectiveness of private debt resolution. The recommended changes around the
main areas covered in this analysis include the following.

Restructuring
• Encourage the use of out-of-court restructuring as an alternative to in-court
proceedings. For cases that only require adjustments of debt (and not oper-
ational restructuring), informal restructuring is the best option.
• To increase debt restructuring activity, preconditions need to be met. Banks
must be adequately capitalized, guidelines or codes of conduct are needed
for cooperation among financial creditors, and bankers that follow pre-
scribed procedures and enter into agreements that benefit the interests of
their entities must face no risk of liability.
• The use of hybrid restructuring tools, such as schemes of arrangement—
which would need to be reformed to be made more efficient—would con-
tribute to the development of the restructuring practice.
• Hybrid restructuring could also be promoted by legislative reforms, adapt-
ing lessons from the pre-pack insolvency procedure for MSMEs. This would
reduce the use of scarce judicial resources.
• The judicial procedure under the IBC should become a deterrent that encour-
ages the negotiation between debtors and creditors, and its use should be
reserved for cases where such agreements are not possible, or the company
cannot be restructured without heavy judicial involvement.

Corporate Resolution and Liquidation

• The corporate resolution process should include mechanisms for the partic-
ipation of operational creditors45 and ensure that creditors are classified
according to their position in the hierarchy of claims. These changes would
also result in improved decision-making over resolution plans and safe-
guards for dissenting minorities.
• The process should include comprehensive rules for the continuation,
rejection, and assignment of executory contracts. This would improve
the possibility of restructuring the operations of businesses in corporate
resolution, instead of opting for the sale of the business as the usual
outcome.

45
Participation of operational creditors requires structural changes to the scheme of the IBC by
giving them the right to vote on a resolution plan and other governance rights. It has been argued
that even incremental changes, such as giving them a right to give their objections on proposed
resolution plans, may reduce litigation, improve decision making, and increase trust in the process
(see Prakash 2021).

©International Monetary Fund. Not for Redistribution

232 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

• Corporate resolution should commence as soon as possible after a petition

is submitted to the courts. Any delays should be avoided, and courts
should be ready to adopt provisional measures to protect the interests of
creditors.
• Liquidation rules should find a compromise between the respect of the
rights of secured creditors and a realistic possibility of a going concern sale,
which can offer higher recoveries for all classes of creditors.
• In both corporate resolution and liquidation, appeals should be discouraged.
Courts should favor consensual solutions to conflicts. Frivolous appeals
should result in costs and damages being paid by the appealing party.
• Corporate resolution and liquidation should include procedural coordi-
nation mechanisms for enterprise group insolvency. Substantive consol-
idation should also be possible in cases of fraud or commingling of
assets.
• The system of the IBC would benefit from the adoption of the UNCITRAL
Model Law on cross-border insolvency and the model law on cross-border
insolvency of enterprise groups.

Institutional Framework
• The main priority is strengthening the courts in charge of insolvency liti-
gation. It is necessary to cover vacancies at the National Company Law
Tribunals and at the National Company Law Appellate Tribunal and
increase the number of insolvency judges (plans exist to double the
National Company Law Tribunals benches). An evaluation of the needs in
human and material resources should precede a plan to ramp up the court
infrastructure, including full digitalization of the courts and specialized
training for judges and court officials. The courts specializing in insolven-
cy law will benefit from the plans of the Indian government to reinforce
the judicial system (National Institution for Transforming India [NITI]
action agenda).
• Information utilities could increase their functions by becoming early warn-
ing systems. Information utilities could integrate data from other sources,
beyond the financial sector (for instance, information on tax liabilities or
commercial claims).
• Continue developing expertise and specialization of insolvency profession-
als, particularly in management and restructuring of distressed enterprises.
• A platform for the sale of distressed assets would be a welcome addition
to the insolvency ecosystem. An electronic platform could perform sev-
eral functions: it can leverage finance for distressed companies, provide
a competitive environment for the analysis and formulation of resolu-
tion plans, and serve as a venue for electronic auctions of enterprises and
assets.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 233

MSME Insolvency
• The latest reform, the pre-pack insolvency process for MSMEs, represents a
notable attempt to adapt the corporate resolution process to the needs of
smaller enterprises. Pre-packs will need to be tested in practice, although
they show considerable promise and could inspire reforms for the general
resolution framework.
• However, the pre-pack process will probably be too costly and complex for
micro and small enterprises, and further simplification should be studied—
including by using out-of-court mechanisms more widely to reduce the
costs of restructuring and avoid overloading the courts.
• Most important, the pre-pack insolvency process is not available for unin-
corporated MSMEs, which represent the overwhelming majority of enter-
prises in India. It is necessary to offer flexible and economical procedures
that can apply to both legal and natural persons.

CONCLUSION
In the past five years, private debt resolution in India has been substantially trans-
formed, mostly thanks to the introduction of the IBC. The IBC has redesigned
the insolvency regime with corporate resolution and liquidation processes, and
the development of a full ecosystem where the IBBI is the central institution.
Targeted amendments and reforms are building over the foundations of the code;
among these, the pre-pack insolvency process for MSMEs is probably the most
consequential.
At the same time, RBI has been active in developing out-of-court restructuring
solutions. The evolution of the RBI schemes for debt restructuring has occurred in
several stages with the overarching goal of preventing the rise of NPAs. RBI moved
from recognizing multiple restructuring schemes to a unified framework for reso-
lution of stressed assets in 2019. However, to mitigate the economic impact of the
pandemic over Indian businesses, RBI has developed a number of special schemes
targeted at the specific debt distress problems induced by COVID-19.
Despite all improvements in restructuring and insolvency, India needs to step
up efforts to improve private debt resolution to face the challenge of widespread
distress. The economic consequences of the pandemic have worsened the situa-
tion of Indian businesses, particularly MSMEs. The private debt resolution sys-
tem will be subject to increased pressure, particularly after changes in monetary
and economic policy revert to a normal stance.
After more than five years of operation, an examination of the performance of
the IBC, and of the private resolution regime in general, seems appropriate. The
comprehensive data collected by the IBBI shows that corporate resolution is fac-
ing challenges, and to a great extent these are due to the lack of institutional
support. Legislative and regulatory activity need to go hand in hand with sup-
porting institutional reforms, building on the remarkable progress since 2016.

©International Monetary Fund. Not for Redistribution

234 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

ANNEX 10.1.

ANNEX TABLE 10.1.1.

Financial Soundness Indicators

(Percent, unless indicated otherwise)
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22
I. Scheduled Commercial Bank
Risk-Weighted Capital 13.3 13.6 13.8 14.3 14.7 16.0 16.8
Adequacy Ratio (CAR)
Public sector bank 11.8 12.1 11.7 12.2 12.9 14.0 14.6
Private sector bank 15.7 15.5 16.4 16.3 16.5 18.4 18.8
Foreign bank 17.1 18.7 19.1 19.4 17.7 19.5 19.8
Number of Institutions Not 1 0 1 1 3 0 N/A
Meeting 9 Percent CAR
Public sector bank 0 0 1 0 1 0 N/A
Private sector bank 1 0 0 1 1 (LVB 0 N/A
only)
Foreign bank 0 0 0 0 0 0 N/A
Net Nonperforming Assets 4.4 5.3 5.9 3.7 2.8 2.4 1.7
(percent of outstanding net
advances)
Public sector bank 5.7 6.9 7.8 4.8 3.8 3.1 2.3
Private sector bank 1.4 2.2 2.4 2.0 1.5 1.4 1.0
Foreign bank 0.8 0.6 0.4 0.5 0.5 0.6 0.6
Gross Nonperforming Assets 7.5 9.6 11.2 3.1 8.2 7.3 5.9
(percent of outstanding
advances)1
Public sector bank 9.3 12.5 14.6 11.6 10.3 9.1 7.3
Private sector bank 2.8 4.1 4.6 5.3 5.5 4.9 3.8
Foreign bank 4.2 4.0 3.8 3.0 2.3 2.4 2.8
Return on Assets2 0.4 0.4 −0.2 −0.1 0.1 0.7 0.9
Public sector bank −0.1 −0.1 −0.9 −0.7 −0.2 0.3 0.5
Private sector bank 1.5 1.3 1.1 0.6 0.4 1.2 1.4
Foreign bank 1.5 1.6 1.3 1.5 1.5 1.6 1.4
Balance Sheet Structure of All Scheduled Banks
Total assets (percent of GDP) 95.3 92.3 89.2 87.3 88.6 99.2 N/A
Loan/deposit ratio 78.2 73.0 78.6 79.9 78.1 73.1 N/A
Investment in government 26.8 26.3 27.9 26.5 27.8 29.5 N/A
securities/deposit ratio
II. Nonbanking Financial Companies3
Total assets (percent of GDP) ... 13.5 14.3 15.1 16.6 17.6 N/A
Risk-weighted CAR 24.3 22.1 22.8 22.5 23.7 25.0 26.6
Gross nonperforming assets 4.5 6.1 5.8 6.1 6.8 6.4 6.4
(percent of outstanding net
advances)
Net nonperforming assets 2.5 4.4 3.8 3.5 3.4 2.7 2.5
(percent of outstanding net
advances)1
Return on assets2 2.1 1.8 1.7 1.2 1.2 1.8 2.0
Sources: Bankscope; Reserve Bank of India; and IMF staff estimates.
1
Gross nonperforming assets less provisions.
2
Net profit (+) / loss (−) in percent of total assets.
3
Data are based on sample of 300 nonbanking financial companies of total asset size Rs 43.9 lakh crore, comprising about
94 percent of total assets of the sector.

©International Monetary Fund. Not for Redistribution

Chapter 10 Strengthening Private Debt Resolution Frameworks 235

ANNEX TABLE 10.1.2.

Asset Quality/CRARs of NBFCs

(Percent of assets/RWA)
2016 2017 2018 2019 2020 2021 2022
GNPA ratio 4.5 6.1 5.8 6.1 6.8 6.4 6.4
NNPA ratio 2.5 4.4 3.8 3.3 3.4 2.7 2.5
CRAR 24.3 22.1 22.8 22.5 23.7 25.0 26.6
Source: June 2022 Financial Stability Report.
Note: CRAR = capital-to-risk weighted average ratio; GNAP = ross nonperforming asset; NBFCs = nonbanking financial
companies; RWA = risk-weighted asset.

REFERENCES
Alvarez & Marsal (India). 2017. The National Company Law Tribunal (NCLT) Readiness.
https://www.alvarezandmarsal.com/sites/default/files/restructingindia_nclt.pdf.
Barman, R. B. 2021. “Role of Information Utility in Insolvency Resolution.” Quinquennial of
Insolvency and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of India, New
Delhi, 153.
Burman, Anirudh, and Shubho Roy. 2019, “Building an Institution of Insolvency Practitioners
in India”, 5 Bus. & Bankr. L.J. 118.
Debroy, Bibek. 2005. “An Economic and Legal Analysis.” In Small Scale Industry in India. Large
Scale Exit Problems, edited by Bibek Debroy and Laveesh Bhandari. Academic Foundation,
New Delhi, 111.
Debroy, Bibek, and Aditya Sinha. 2021. “IBC: Liberalising Exit.” Quinquennial of Insolvency
and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of India, New Delhi, 121.
Diez, Federico J., Romain A. Duval, Jiayue Fan, José Garrido, Sebnem Kalemli-Ozcan, Chiara
Maggi, Maria Soledad Martinez Peria, and Nicola Pierri. 2021. “Insolvency Prospects Among
Small-and-Medium-Sized Enterprises in Advanced Economies: Assessment and Policy Options.”
IMF Staff Discussion Note 2021/002, International Monetary Fund, Washington, DC.
Divan, Madhavi, and Sahil Monga. 2021. “Promoter’s Paradise Lost.” Quinquennial of Insolvency
and Bankruptcy Code 2016. Insolvency and Bankruptcy Board of India, New Delhi, 179.
Ernst and Young India. 2019. Evolving Landscape of Corporate Stress Resolution. https://assets
.ey.com/content/dam/ey-sites/ey-com/en_in/topics/transaction-advisory-services/pdfs/evolving
-landscape-of-corporate-stress-resolution.pdf?download.
Garrido, José. 2012. Out-of-court Debt Restructuring. World Bank, Washington, DC.
Gupta, Akhil. 2021. “Section 29A of IBC: A Key Feature.” Quinquennial of Insolvency and
Bankruptcy Code 2016. Insolvency and Bankruptcy Board of India, New Delhi, 175.
Handa, Ankit. 2020. “An Analysis of the Corporate Insolvency Resolution Process as a Route
for Acquisitions in India.” International Insolvency Review 29 (2): 234–53.
INSOL International. 2001. Consumer Debt Report: Report of Findings and Recommendations,
London, UK.
INSOL International. 2011. Consumer Debt Report II: Report of Findings and Recommendations,
London, UK.
Insolvency and Bankruptcy Board of India (IBBI). 2019. “Report on Bankruptcy Process:
Proposing Rules and Regulations for Personal Guarantors to Corporate Debtors.” IBBI
Working Group on Individual Insolvency. https://www.ibbi.gov.in/uploads/resources/
e6153215c43ebfcd00b29f946d8005bc.pdf.
Kamalnath, A. 2020. “Corporate Insolvency Resolution Law in India—A Proposal to Overcome
the ‘Initiation Problem.’” UMKC Law Review 88 (3): 631.
Kotak, Uday. 2021. “IBC: How Do We Reach the Promised Land?” Quinquennial of Insolvency
and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of India, New Delhi, 205.
Liu, Yan, José Garrido, and Chanda DeLong. 2020. “Private Debt Resolution in the Wake of the
Pandemic.” IMF Special Series on COVID-19, International Monetary Fund, Washington, DC.

©International Monetary Fund. Not for Redistribution

236 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Mahapatra, Sudip, Pooja Singhania, and Misha Chandna. 2020. “Operational Creditors in
Insolvency: A Tale of Disenfranchisement.” NALSAR Student Law Review 14: 78–92.
Mehta, Sunil. 2021. “Pre-pack: A Great Enabler for Resolution of Stress in MSMEs.”
Quinquennial of Insolvency and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of
India, New Delhi, 371.
Mohan, M. P. Ram, and Vishakha Raj. 2020. “Apartment Buyers as Financial Creditors:
Pushing the Conceptual Limits of the Indian Insolvency Regime.” Columbia Journal of Asian
Law 33 (2): 219–63.
Mohan, M. P. Ram, and Vishakha Raj. 2021. “Section 29A of India’s Insolvency and Bankruptcy
Code: An Instance of Hard Cases Making Bad Law?” Indian Institute of Management
Ahmedabad Working Paper.
Prakash, Shreya. 2021. “Increasing Participation of Non-Financial Creditors while Approving
Resolution Plans.” Quinquennial of Insolvency and Bankruptcy Code, 2016. Insolvency and
Bankruptcy Board of India, New Delhi, 233.
Pryor, C. Scott, and Risham Garg. (2020). “Differential Treatment among Creditors under
India’s Insolvency and Bankruptcy Code, 2016: Issues and Solutions.” American Bankruptcy
Law Journal 94 (1): 123–54.
Ravi, Aparna. 2021. “Easing the Resolution Process.” Quinquennial of Insolvency and Bankruptcy
Code, 2016. Insolvency and Bankruptcy Board of India, New Delhi, 211.
Sahoo, M. S. 2021. “Insolvency and Bankruptcy Board of India: A Regulator Like No Other.”
Quinquennial of Insolvency and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of
India, New Delhi, 1.
Saini, Navrang. 2021. “Valuation Profession in India: Organisational Evolution, Institutional
Importance and Way Forward.” Quinquennial of Insolvency and Bankruptcy Code, 2016.
Insolvency and Bankruptcy Board of India, New Delhi, 501.
Shikha, Neeti, and Urvashi Shahi. 2021. “Timely Resolution of Insolvency in India: Assessing
the Roadblocks.” Quinquennial of Insolvency and Bankruptcy Code, 2016. Insolvency and
Bankruptcy Board of India, New Delhi, 217.
Sriram, B. 2021. “A Code of Conduct for Committee of Creditors.” Quinquennial of Insolvency
and Bankruptcy Code, 2016. Insolvency and Bankruptcy Board of India, New Delhi, 295.
Suyash, Ashu. 2021. “IBC: Coding a Seismic Shift.” Quinquennial of Insolvency and Bankruptcy
Code, 2016. Insolvency and Bankruptcy Board of India, New Delhi, 37.
United Nations Commission on International Trade Law (UNCITRAL). 1997. Model Law on
Cross-Border Insolvency. United Nations, New York.
United Nations Commission on International Trade Law (UNCITRAL). 2004. Legislative
Guide on Insolvency Law, Part 3. United Nations, New York.
United Nations Commission on International Trade Law (UNCITRAL). 2010. Legislative
Guide on Insolvency Law, Part 3 (Enterprise Group Insolvency). United Nations, New York.
United Nations Commission on International Trade Law (UNCITRAL). 2021. Draft Legislative
Guide on Insolvency Law for Micro- and Small Enterprises. http://undocs.org/en/A/CN.9/
WG.V/WP.174.
van Zwieten, Kristin. 2014. “Corporate Rescue in India: The Influence of the Courts.” Oxford
Legal Studies Research Paper 37/2014. https://ssrn.com/abstract52466329.
Westbrook, Jay Lawrence, Charles D. Booth, Christoph G. Paulus, and Harry Rajak. 2010.
A Global View of Business Insolvency Systems. World Bank, Washington, DC.
World Bank. 2021. Principles for Effective Insolvency and Creditor/Debtor Regimes, 2021 Edition.
World Bank, Washington, DC.
World Bank, Insolvency and Creditor/Debtor Regimes Task Force. 2014. Report on the
Treatment of the Insolvency of Natural Persons. World Bank, Washington, DC.

©International Monetary Fund. Not for Redistribution