INDIA Law and Practice Contributed by: Divyanshu Pandey, Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
7.7 Set-Off Rights The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 provide the right of set-off during the liquidation process. IBC does not recognise the principle of the set- off during a CIRP. This has also been clarified by the Supreme Court of India. 7.8 Out-of-Court v In-Court Enforcement A typical private credit out-of-court restructur - ing would require the co-operation of the bor - rower and the equity holders of such borrower and other security providers. The out-of-court restructuring may involve the conversion of debt into equity, the refinancing of debt with haircuts or the sale of the company to a new investor to resolve the debt. An in-court restructuring is a creditor-driven, court-supervised process and does not warrant co-operation from the borrower or the equity holders. This gives the lenders greater control over the restructuring process. IBC recognises the clean slate principle. The courts in India have clearly recognised a white - wash of past liabilities (including statutory liabili - ties) upon the completion of a CIRP. This is not available during out-of-court restructurings. 7.9 Dissenting Lenders and Non- Consensual Restructurings In order to protect the rights of dissenting finan - cial creditors, IBC provides that financial credi - tors who do not vote in favour of the resolution plan must be paid an amount that is not less than the amount they would have received pur - suant to the liquidation waterfall set out in IBC in the liquidation of the corporate debtor. This amount has to be paid in priority to the amounts payable to assenting financial creditors.
shares may still be bound by the decisions made by the specified majority. Due to a moratorium being imposed, the lenders are not able to enforce their security interest. The guarantors are not covered by the moratorium and lenders can enforce their remedies against them, including initiating a CIRP. 7.6 Transactions Voidable Upon Insolvency Under IBC, if the liquidator or the IRP is of the view that the corporate debtor has given a pref - erence to any person, then such liquidator or IRP may apply to the NCLT to seek a declaration that such transactions are void and that their effect be reversed. The types of transactions subject to scrutiny are: • preferential transactions that favour specific creditors, sureties or guarantors over others; • undervalued transactions, where a corporate debtor transfers assets for a value that is sig - nificantly less than their actual worth; and • extortionate credit transactions, where the terms require the corporate debtor to make exorbitant payments in respect of the credit provided, or where the terms are unconscion - able under the principles of law relating to contracts. The look-back period for preferential transac - tions and undervalued transactions is two years preceding the insolvency commencement date (ie, the date on which an application for initi - ating the CIRP is admitted by the NCLT) for a related party and one year in the case of any other person. However, the look-back period for extortionate transactions is two years prior to the insolvency commencement date in all cases.
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