Overview

Debt restructuring in India spans out-of-court workouts under the RBI Prudential Framework for Resolution of Stressed Assets (June 2019), one-time restructuring schemes for MSMEs, and formal insolvency resolution under the Insolvency and Bankruptcy Code, 2016. The choice between pathways is shaped by the creditor mix, the stress level, the extent of promoter cooperation, and the strategic objective — preservation of operations, maximisation of recovery, or structured exit.

The June 2019 Prudential Framework replaced the earlier February 2018 framework that was struck down in Dharani Sugars and Chemicals Ltd. v. Union of India (2019) 5 SCC 480. The current framework permits lenders to design inter-creditor agreements for resolution, imposes a 30-day review period for default identification, and requires mandatory reference to IBC where resolution is not achieved within the prescribed timeline. Resolution plans under the framework can involve payment reschedule, security modification, equity conversion, or promoter change.

Restructuring Frameworks — Strategic Mapping

Inter-creditor agreement (ICA) restructuring under the 2019 Prudential Framework is suited to multi-lender exposures where coordinated action is feasible and the distress is manageable within the existing corporate shell. ICA resolution requires consent from lenders representing 75 percent by value and 60 percent by number. The process is out-of-court, confidential, and allows for flexible deal structuring. It is unsuitable for cases with highly fragmented creditor bases, operational-creditor opposition, or where promoter fraud is implicated.

One-time settlement and compromise routes under RBI guidelines allow a lender-led haircut and exit. These routes are suited for single-lender exposures, smaller corporate borrowers, and where the lender has determined that full recovery is not feasible. The settlement is book closed on the lender side; the borrower receives a clean discharge.

Corporate insolvency resolution under the IBC is the formal, collective, time-bound resolution framework. It is suited where promoter cooperation has failed, where cross-creditor coordination is impossible, where avoidance-transaction recovery is needed, or where the corporate debtor’s business case requires a clean-slate resolution. CIRP carries process rigidity and public visibility that out-of-court routes avoid.

Resolution Plan Architecture

A commercially feasible resolution plan integrates five design elements. First, treatment of financial creditors — payment mix, timing, equity component, security release. Second, treatment of operational creditors and workmen — at a minimum, the Section 30(2)(b) liquidation-value protection. Third, treatment of stakeholders outside the CoC — equity shareholders, promoters, personal guarantors. Fourth, treatment of pending litigation, tax demands, and regulatory issues — carve-outs, indemnities, and continuation frameworks. Fifth, funding architecture — upfront cash, deferred payment, convertible instruments, and any lender-to-the-plan funding.

The resolution plan evaluation matrix (RPEM) published by the committee of creditors determines how plans are scored and compared. RPEM design is itself a strategic exercise — plans can be scored on net present value, upfront cash, completion certainty, business-plan credibility, promoter retention, and employment preservation. The weightings chosen by the CoC materially affect which plan wins.

Promoter Route under Section 29A and the Eligibility Test

Section 29A of the IBC, introduced in 2017 and amended in 2018, disqualifies defaulting promoters and connected persons from submitting resolution plans. The statutory test covers undischarged insolvency, wilful default, classification as wilful defaulter by any banking authority, convictions under specified laws, and connected-person tests. The eligibility screen is applied at the plan-submission stage and at any subsequent amendment stage.

The Manish Kumar v. Union of India (2021) 5 SCC 1 ruling upheld the constitutionality of Section 29A and the 2019 amendments tightening the MSME-promoter window. The pre-pack framework under Chapter III-A, notified in April 2021, provides a limited debtor-initiated route for MSMEs that preserves promoter retention possibilities where eligibility is met.