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  • Writer's pictureShweta Bharti

IBC Suspension – Hurdles and Way Ahead

With the nuanced suspension of institution of petitions under Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for a period of at least 6 months, it is essential to identify the impending difficulties that will be faced in corporate debt rescue and what existing mechanisms can be strengthened to enable insolvency and illiquidity resolution.

Essentially, the forefront formal insolvency resolution and debt restructuring mechanisms, outside of the IBC mechanism, prevalent in India are the Reserve Bank of India’s (RBI) lender oriented Prudential Framework for Resolution of Stressed Assets and the RBI had on 1st January 2019 also introduced a scheme for one-time restructuring of advances to Micro, Small and Medium Enterprises the operation whereof has been extended till 31st December 2020. Additionally, there has been much discussion on introduction of pre-pack insolvency resolution schemes to enable debt restructuring during the period of suspension of IBC.

In the above context, it becomes essential to examine the viability of mechanisms under Section 230 of the Companies Act, 2013, which provides for compromise of arrangements with members or creditors that encompasses a debt-restructuring mechanism.

Debt Restructuring under Schemes of Arrangements

The schemes of arrangement have been historically been available under the erstwhile Companies Act, 1913, and Companies Act, 1956 and have been subjected to certain essential developments under the present Companies Act, 2013.

A scheme of arrangement is a statutory procedure for effecting compromise of arrangement between a company and its members and/or creditors (or importantly, any class of them), with the sanction of the court. It will be erroneous to equate the same to an insolvency resolution procedure, but rather a creature of corporate statute to be found in Chapter XV of the Companies Act, 2013 (“CA 2013”).

The jurisprudence on the subject signifies the essence of compromise which is that the scheme seeks to resolve some dispute or difficulty by way of an arrangement which is broad enough to entail any transaction involving the element of “give and take” between a company and its members or creditors.

These schemes of arrangements were principally designed along the lines of principles of Common Law, and have been identified as an important tool for both corporate restructuring in general and debt restructuring in particular. However, conventional wisdom has led to restricted resort to this mechanism primarily on account of delays and costs attributed to court intervention, which was even noted by the Banking Law Reforms Committee in its 2015 report in the lead up to the introduction of IBC. These schemes were intended for rescuing companies which are otherwise fit for winding-up.

A scheme of arrangement begins with the board of the directors of a debtor company proposing a compromise or an arrangement between the company and its creditors and/or shareholders. Section 230(1) provides for the company/creditor/member to make an application to the National Company Law Tribunal (“NCLT”) under to operationalize the process of formalizing the scheme and the procedures for convening meetings of the respective classes of creditors.

There are three distinct stages in the procedure for implementing a scheme: (i) the ‘leave to convene’ hearing; (ii) the scheme meetings; and (iii) the sanction hearing. Before undertaking a detailed overview of the schemes, it would not be unwise to identify the principles behind these scheme as identified by Chadwick LJ in Re Hawk Insurance [2001] 2 BCLC 480, wherein it was noted that “[…] each of those stages serves a distinct purpose. At the first stage the court directs how the meeting or meetings are to be summoned. It is concerned, at that stage, to ensure that those who are to be affected by the compromise or arrangement proposed have a proper opportunity of being present (in person or by proxy) at the meeting or meetings at which they are to be considered and voted upon. The second stage ensures that the proposals are acceptable to at least a majority in number, representing three-fourths in value, of those who take the opportunity of being present (in person or by proxy) at the meeting or meetings. At the third stage the court is concerned (i) to ensure that the meeting or meetings have been summoned and held in accordance with its previous order, (ii) to ensure that the proposals have been approved by the requisite majority of those present at the meeting or meetings and (iii) to ensure that the views and interests of those who have not approved the proposals at the meeting or meetings (either because they were not present or, being present, did not vote in favour of the proposals) receive impartial consideration.”

However, schemes of compromise or arrangement have been prone to disruptions by unsatisfied creditors. This is because the requisite majority of creditors must approve the scheme separately. Moreover, although the Companies Act 2013 does not provide any guidance on the formulation of classes of creditors, however there exists extensive jurisprudence on these aspects. The English courts prefer to take a commonsense approach to the classification of creditors; as Neuberger J remarked in Re Anglo American Insurance [2001]1BCLC755: “Practical considerations are not irrelevant . . . if one gets too picky about potential different classes, one could end up with virtually as many classes as there are members of a particular group.” Courts in India, too have sought to avoid a hyper technical approach and have mostly adopted the approach similar to that followed by English courts. The Indian jurisprudence relating to classification prescribes that a class “must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult each other with the view of their common interest” as observed in Re Maneckchowk and Ahmedabad Manufacturing Co. Ltd., (1970)40Comp.Cas.819(Guj).

The courts have been firm in their approach that very small differences among the creditors are not material as it may only lead to distinguish the creditors artificially. For example, a debenture holder by virtue of a creation of a debenture redemption reserve was held not to constitute a separate class in In Re Spartek Ceramics India Ltd.. (2007)7SCL548(AP).

As per Section 230(6) of the Companies Act, 2013, the scheme must be approved by a majority in number at least more than 50 % representing 75% value of each class of shareholders present and voting in separate meetings for each class. After obtaining the approval, the company has to approach the NCLT for the purpose of sanctioning the scheme. The NCLT has a supervisory role, as clarified by the Hon’ble Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996)87Comp.Cas.792(SC) that the jurisdiction of the court is supervisory like an umpire with the liberty to parties entering compromise or arrangement to decide on what terms they are entering the compromise.

IBC vs. Schemes of Arrangements

The essential features distinguishing the Corporate Insolvency Resolution Process (“CIRP”) under the IBC from the Section 230 schemes are the prescribed strict timelines under the former and the same heavily relies on specialized insolvency professionals, and leaves the regulators and tribunals, for limited oversight of the resolution process. Thirdly, CIRP focuses on altering the power-balance between creditors and debtors by placing the management of the firm with the insolvency professional (acting under the creditors’ oversight) during the resolution process.

Moreover, CIRP is triggered only on default of payment of debt, but the schemes of arrangements have a role to play in the case of companies that may wish to go for debt restructuring even before reaching the stage of insolvency. The schemes of arrangements are basically a “debtor-in-possession” approach, while the CIRP has introduced a creditor-controlled regime.

But when it comes to cramdown, schemes of arrangements suffer from certain disadvantages as the schemes would be binding on the minority within each class. However, under the CIRP, it would be possible to cram down across all classes of creditors, while at the same time balancing their interests by providing priority of payment to the dissenting members of the committee of creditors.

Moreover, a key element distinguishing CIRP is that in the schemes of arrangements there is no scope of the imposing moratorium, while the IBC provides for the imposition of the moratorium on admission of an application under Sections 7, 9 as well as 10.

It is pertinent to state that the schemes of arrangements though have been provided under the Companies Law ever since but these schemes have been hardly used as the mechanism of corporate debt restructuring. Nevertheless, the adjudicating authority has been pro-active in supporting a viable company from going into liquidation, by allowing the possibility of revival using the schemes of arrangements.

At this juncture it is pertinent to bring to the light the fact that the even before IBC, NCLAT in Rasiklal S. Mardia v. Amar Dye Chem Limited (In Liquidation) Company Appeal (AT) No. 337 of 2018 had allowed the promoter director to rescue the Company in Liquidation by allowing to make application with a scheme of arrangement. The NCLAT pointed out that the liquidator “is only an additional person and not exclusive person” to file an application initiating a scheme of arrangement.

The dreaded effect of failure of CIRP resulting in the liquidation is at the forefront of reasons for the government to strongly consider suspension of IBC.

The NCLAT, however, has been pro-active at introducing mechanisms to avoid companies from undergoing liquidation by providing for innovative mechanisms such as Reverse Insolvency as was propounded in the Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd. decision passed earlier this year.


The law generally plays important role in facilitating successful rescues by constraining creditors’ rights in various ways but each process discussed above has its own advantages and disadvantages therefore the scheme which provides more incentives to the creditors as well as the debtors tends to influence the choice of law.

As seen from the jurisprudence that the scheme of arrangements has been outmoded by other debt enforcement mechanisms like IBC, though it still remains to be seen whether it gains relevance as the formal method of debt restructuring for the solvent companies but in financial distress during the suspension of the IBC.

More so as the scheme of arrangement offers exhaustive flexibility to parties to conduct debt restructuring coupled with other forms of corporate restructuring, it may be viewed as “pre-pack rescue” option by the creditors as well as the debtors.

The jurisprudence as discussed above suggests that the scheme of arrangements have been looked at as a tool for revival of a company prior to liquidation even in those cases where creditors have not taken steps under the IBC.

Therefore, it would not be pre-mature to conclude that the scheme of arrangements modeled on the lines of reversing insolvency is an attractive tool for revival of Company in form of the pre-pack recuse for pre-IBC cases and for the new cases that may arise during the suspension of the IBC.

Finally, the “debtor-in-possession” approach is, in the present economic circumstances, a much more viable option for the management of the corporate debtor to submit itself for debt restructuring at an early stage rather than to wait till the stage where the interests of creditors are compromised.

(This article was originally published in Axfait-

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