Joint Lenders’ Forum: Introduced in February 2014, the Joint Lenders’ Forum (JLF) allowed multiple lenders to devise a collective resolution mechanism. However, the lenders seldom agreed with each other and recoveries remained dismal.

Strategic Debt Restructuring Scheme (SDR): The Strategic Debt Restructuring (SDR) Scheme of 2015 allowed banks to convert borrowers’ debt into equity. However, this was dependent on promoters and finding buyers for this equity was often difficult. The banks were saddled with equity and controlling interest in borrower companies which they were unable to manage.

Scheme for Sustainable Structuring of Stressed Assets (S4A): The Scheme for Sustainable Structuring of Stressed Assets (S4A), introduced in 2016, allowed banks to restructure large loans but with the caveat that projects should be up and running. Hence, the scheme had limited efficacy.

By RBI Circular dated 12.2.2018, the JLF, SDR and S4A were withdrawn.

Insolvency and Bankruptcy Code 2016: It is the strongest measure taken by the Government. The code essentially necessitates a comprehensive turnaround, not just debt re-engineering.

Ø  The Code recognises that it is normal for some businesses to fail; therefore, it emphasises decisive corrective action. It focuses on quick decision making (maximum 270 days), be it turnaround or liquidation, enabling the speedy release of scarce capital assets locked in a distressed asset for productive use and facilitating an early settlement of all stakeholder issues.

Ø  The Code unifies the legal framework to deal with insolvency and prescribes a ‘creditor in control’ framework, as compared to the current ‘debtor in possession’ regime. The Code establishes that insolvency is a commercial issue and it is for creditors to decide if a business should be liquidated or revived, once it is insolvent. The court cannot intervene in this decision.

Ø  One of the Code’s most significant provisions is the “order of priority” or the waterfall mechanism. Liquidation proceeds will be paid in the following sequential manner: insolvency related cost (including IP fee and interim funding); secured creditors; workmen’s dues (up to 24 months); dues to other employees (up to 12 months); unsecured financial creditors; government dues; and any other claims. The commitment to render government dues junior to most others is significant.

Ø  The Code unambiguously states that the trigger for an insolvency resolution petitions can be a single default, which, if approved, will result in taking over the management of the defaulter by an IP on behalf of all financial creditors. Therefore, a valid insolvency petition filed by any creditor can push the entire business into the insolvency process.

Ø  The Code imposes imprisonment of up to five years if asset stripping is noticed within 12 months before the default. This is a significant shift from a legal system that was heavily supportive of promoters and delayed recovery/revival under the cover of public interest or saving organisational capital.