Key Features of the Insolvency and Bankruptcy Law
Do any special regimes apply in specific sectors?
The Insolvency and Bankruptcy Code covers all corporate entities except financial services entities (eg, banks, insurers and pension funds). Otherwise, there are no special regimes applicable in specific sectors.
As yet, there is also no special regime for financial services entities. The Insolvency and Bankruptcy Code allows the government, in consultation with the financial services regulators, to notify financial service providers (FSPs) or categories of FSPs for the purpose of insolvency and liquidation proceedings in such manner as may be prescribed.
The government recently notified certain rules to establish a generic framework for insolvency and liquidation proceedings for systemically important FSPs (other than banks). The rules shall apply to such FSPs/categories of FSPs as will be notified by the government, and provide that the Insolvency and Bankruptcy Code shall also apply to insolvency and liquidation proceedings involving such FSPs, subject to certain modifications. This special framework will serve as an interim mechanism pending the introduction of dedicated insolvency legislation for banks and other systemically important FSPs.
Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
Prior to the enactment of the Insolvency and Bankruptcy Code, the regime was perceived to be debtor friendly. However, the code has changed the applicable regime from a debtor in control regime to a creditor in possession regime.
Once a debtor is admitted to insolvency, its board of directors is suspended and the management of the debtor is vested in an independent insolvency professional appointed by the bankruptcy tribunal. The insolvency professional can be replaced by the creditors and will manage the proceedings under the overall supervision of the creditors. As a result of this change, the insolvency and restructuring regime is perceived to be more creditor friendly.
Benefits of restructuring
The benefits of restructuring proceedings under the Companies Act from the debtor's perspective include the following:
- This is a voluntary mechanism which allows the debtor itself to propose the scheme.
- There are no prescribed disqualifications and no competitive bidding process (which may result in a takeover of the debtor by a third party).
- The law in respect of schemes is well settled and there is thus limited regulatory uncertainty.
- Once a scheme has been sanctioned, it is binding on all creditors (whose debts are being restructured).
The drawbacks include the following:
- The non-availability of a moratorium.
- The relatively high approval threshold.
- The lack of a time-bound process.
- The inability to achieve a cross-class cramdown.
