Debt Restructuring Outside the IBC Under RBI Frameworks

Vikrant D. Shetty

Sep 23

11 min read

Updated: Sep 25

Debt Restructuring Outside IBC: RBI Frameworks Versus Formal Insolvency

A corporate borrower under financial stress can restructure its debt outside formal insolvency through the Reserve Bank of India's Prudential Framework for Resolution of Stressed Assets, issued on 7 June 2019 under Section 35AA of the Banking Regulation Act, 1949, which requires lenders to attempt a coordinated Resolution Plan before the Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 becomes necessary. Multiple lenders sign an Inter-Creditor Agreement binding a dissenting minority to the majority's decision. The framework replaced an RBI circular the Supreme Court struck down in Dharani Sugars and Chemicals Ltd. v. Union of India. This article compares the RBI framework against the IBC route.

The RBI Prudential Framework for Resolution of Stressed Assets

The primary RBI framework governing debt restructuring outside the IBC is the Prudential Framework for Resolution of Stressed Assets, issued by the RBI in June 2019, effective for all commercial banks and certain other regulated lenders (including NBFCs from a later date). The Prudential Framework replaced earlier RBI schemes including the Corporate Debt Restructuring (CDR) Scheme, the Strategic Debt Restructuring (SDR) Scheme, and the Scheme for Sustainable Structuring of Stressed Assets (S4A).

Under the Prudential Framework, lenders are required to identify incipient stress in borrower accounts and classify such accounts as "Special Mention Accounts" (SMA) at defined stages of overdue. When a borrower defaults, a 30-day Review Period begins. During this period, lenders must decide whether to pursue a Resolution Plan or initiate insolvency proceedings.

The Inter-Creditor Agreement (ICA) Mechanism

Where a borrower has multiple lenders, the Prudential Framework requires that all lenders execute an Inter-Creditor Agreement (ICA) to facilitate a coordinated resolution. The ICA requires that decisions on the Resolution Plan be made by majority vote: lenders holding at least 75% of the outstanding debt by value and 60% by number must agree to the plan for it to bind all ICA lenders.

This majority-binding feature is structurally similar to the CoC majority in the IBC CIRP, but there are important differences. The ICA framework is contractual, not statutory. A dissenting lender that has signed the ICA is bound by the majority decision, but the legal mechanism for enforcement is the contractual ICA, not an NCLT order. A lender who has not signed the ICA is not bound.

The 180-Day Restructuring Timeline

The Prudential Framework requires that a Resolution Plan be implemented within 180 days of the end of the Review Period. If no Resolution Plan is implemented within this period, lenders must make additional provisions against the stressed account and are expected to initiate formal insolvency proceedings under the IBC. This creates a structured pathway from out-of-court resolution to formal insolvency.

Failure to implement a Resolution Plan within 180 days triggers an additional provision requirement of 20% of the outstanding debt (reduced to 15% if insolvency proceedings are initiated within 15 days of the deadline expiry). This provisioning penalty incentivises lenders to resolve quickly or move to the IBC rather than allowing accounts to remain in extended informal resolution.

What Are the RBI's One-Time Settlement and Compromise Routes?

Outside the Prudential Framework, individual lenders can enter into one-time settlements (OTS) or compromise arrangements with borrowers. An OTS involves the lender agreeing to accept a lump-sum payment less than the outstanding dues in full and final settlement. OTS arrangements are governed by each bank's internal board-approved policy and RBI guidelines on compromise settlements issued from time to time.

The RBI issued a circular on compromise settlements and technical write-offs in June 2023, providing a revised framework that expanded banks' ability to enter OTS arrangements, including with wilful defaulters (subject to conditions). This was a significant policy shift from the earlier RBI guidance that restricted OTS with wilful defaulters.

IBC as the Backdrop to RBI Restructuring

The existence of the IBC has fundamentally changed the negotiating dynamics in out-of-court debt restructuring. Creditors who previously had limited enforcement options now hold the threat of CIRP initiation as leverage. Borrowers who previously might have strung along negotiations indefinitely face the prospect of management control loss once a Section 7 or 9 application is admitted.

This IBC threat has made out-of-court RBI-framework restructuring more credible and faster. Borrowers have greater incentive to agree to meaningful haircuts outside the IBC because the alternative, CIRP, risks losing the enterprise entirely to a resolution applicant and opens the promoter to potential IBC consequences.

RBI Frameworks Versus IBC: A Comparative View

The table below summarises key differences between the RBI out-of-court framework and formal IBC proceedings.

Initiation: RBI framework is voluntary and lender-driven; IBC CIRP can be creditor-initiated through NCLT. Management control: Under RBI framework, borrower management typically continues during restructuring; under IBC CIRP, management is immediately superseded by the IRP on admission. Binding on dissenting lenders: Under RBI framework, binding only if ICA executed and majority achieved; under IBC CIRP, CoC majority binds all financial creditors by statute. Moratorium: No automatic moratorium under RBI framework; IBC CIRP triggers automatic Section 14 moratorium on admission. Regulatory oversight: RBI supervises lender compliance with the Prudential Framework; under IBC CIRP, oversight is by the NCLT and IBBI. Timeline: RBI framework requires 180-day resolution; IBC CIRP has 180-day initial period, extendable to 330 days. Public process: RBI framework is largely private; IBC CIRP is a public legal process with NCLT adjudication.

When Should a Lender Use the RBI Framework Instead of the IBC?

The RBI framework is appropriate where a borrower's stress is temporary, the business is fundamentally viable, and lenders believe restructured terms will restore solvency. It is faster, preserves management continuity, and avoids the reputational and operational disruption of a CIRP. It is unsuitable where the borrower is uncooperative, where there are too many lenders with conflicting interests to achieve the ICA majority, or where the business is not viable and the correct outcome is an orderly asset sale through CIRP.

The IBC route is appropriate where the RBI framework has been tried and failed, where the borrower is uncooperative or concealing assets, or where the stress is deep enough that only a clean resolution plan or liquidation can achieve a meaningful recovery for lenders. The CIRP also provides the Section 14 moratorium as a tool to freeze enforcement actions while the resolution is structured.

How Did the Supreme Court Reshape Out-of-Court Restructuring?

Restructuring outside the insolvency process operates today in a framework shaped by the Supreme Court's intervention in Dharani Sugars and Chemicals Ltd. v. Union of India [(2019) 5 SCC 480]. The Court struck down the Reserve Bank of India's February 2018 circular, which had mandated a rigid resolution timeline and compulsory reference to insolvency, holding that it went beyond the authority under which it was issued. The decision prompted the Reserve Bank to replace it with the revised Prudential Framework of June 2019, which restored flexibility to lenders to design and implement resolution plans for stressed accounts out of court, within a structured but less rigid regime. That framework, born of the Court's ruling, is the foundation of contemporary out-of-court restructuring in India.

The Prudential Framework and Inter-Creditor Agreements

Under the revised framework, lenders enjoy a defined review period on the default of a borrower during which they decide on a resolution strategy, and they enter into an inter-creditor agreement to govern how they will act collectively. The framework provides for majority decision-making among the lenders, so that a plan agreed by the requisite majority binds dissenting lenders within the group, and it builds in incentives, through provisioning requirements, for lenders to resolve stress in a timely way rather than allowing it to fester. This structure allows a viable but distressed borrower to be restructured by agreement, preserving value and avoiding the disruption of a formal insolvency, while still imposing discipline on the lenders and a timeline on the process.

Choosing Between Restructuring and Formal Insolvency

Out-of-court restructuring and the formal insolvency process are complementary rather than mutually exclusive, and the choice between them depends on the borrower's condition and the lenders' objectives. Where a borrower is fundamentally viable and the lenders can agree, restructuring under the Prudential Framework is faster, cheaper, and less disruptive, and it keeps the borrower's management in place. Where agreement cannot be reached, or the borrower's position requires the moratorium, the binding effect on all stakeholders, and the change of control that insolvency provides, the formal process under the Code becomes the appropriate route. Lenders should assess both paths at the outset and be prepared to move from restructuring to insolvency if the out-of-court route fails.

Frequently Asked Questions

Can a lender simultaneously pursue the RBI Prudential Framework and initiate IBC proceedings?

Not simultaneously in the strict sense. The Prudential Framework requires a Review Period and a 180-day resolution window. If a Resolution Plan is not implemented within that window, the RBI framework effectively redirects lenders to the IBC. Initiating IBC proceedings while an ICA restructuring is active can constitute a breach of the ICA by the filing lender.

Is the ICA majority binding on a lender that did not sign the ICA?

No. The ICA is a contractual document. A lender that has not executed the ICA is not bound by the majority decision. However, the Prudential Framework effectively requires regulated lenders (banks, NBFCs) to execute the ICA when a resolution is being pursued, so non-participation has its own regulatory consequences.

What happens if the RBI restructuring plan fails and IBC proceedings are initiated?

The IBC CIRP starts fresh. The resolution professional evaluates all claims, forms a CoC, and a resolution plan is sought. Prior restructuring agreements between the borrower and lenders do not bind the CIRP process, though they are relevant background and may affect the quantum of admitted claims.

Can a borrower block an IBC application by pointing to an ongoing RBI restructuring?

Not automatically. The NCLT has discretion to consider whether a restructuring process is ongoing when deciding whether to admit an application, but the pendency of RBI-framework negotiations is not a statutory bar to IBC admission. Where there is a genuine and active restructuring, the NCLT may take it into account, but there is no guaranteed stay of IBC proceedings.

Does the RBI Prudential Framework apply to all lenders, including foreign banks?

The Prudential Framework applies to all commercial banks in India, including foreign banks operating through branches. It has also been extended to cover larger NBFCs. Foreign banks operating as subsidiaries in India are also covered. The key is whether the entity is regulated by the RBI.

What is the difference between a One-Time Settlement and a Resolution Plan under the Prudential Framework?

A One-Time Settlement is a bilateral agreement between the borrower and the lender for payment of a lump sum in final settlement of the outstanding debt. A Resolution Plan under the Prudential Framework is a multilateral restructuring agreement involving all lenders under the ICA mechanism, which may include rescheduling of debt, interest rate reductions, conversion of debt to equity, or injection of fresh funds.

What are the tax implications of debt waiver under an out-of-court restructuring?

Debt waiver in an out-of-court restructuring is generally treated as income in the hands of the borrower under Section 28(iv) or Section 41(1) of the Income Tax Act, 1961. This differs from IBC restructuring where certain tax exemptions are available. Borrowers should obtain tax advice before agreeing to a debt waiver in an RBI framework restructuring.

What are the SMA sub-categories used to classify early-stage stress before default?

The Prudential Framework requires lenders to classify a borrower account as a Special Mention Account once any instalment or interest payment becomes overdue, using three sub-categories: SMA-0 for overdue up to 30 days, SMA-1 for overdue between 31 and 60 days, and SMA-2 for overdue between 61 and 90 days, after which the account becomes a non-performing asset. This early classification is designed to prompt lenders to engage with a stressed borrower well before a formal default triggers the 30-day Review Period, giving both sides a longer runway to explore restructuring.

Can a lender exit an Inter-Creditor Agreement after signing it?

An Inter-Creditor Agreement is generally binding on a signatory lender for the duration of the resolution process it governs, and a lender does not have a unilateral right to walk away mid-process simply because it disagrees with the direction the majority is taking; a dissenting lender's usual remedy under the agreement is to be bought out by the other lenders at a value not worse than liquidation value, rather than exiting outright. A lender can, however, transfer or sell its exposure to another entity, which then takes over the seller's position under the agreement.

What happens to a personal guarantee when the underlying corporate debt is restructured under the RBI framework?

A personal guarantee is a separate contract from the underlying loan, so restructuring the corporate debtor's obligations under the Prudential Framework does not automatically discharge a personal guarantor unless the restructuring agreement expressly releases the guarantee or the modification is fundamental enough to discharge the guarantor under ordinary contract principles. Lenders typically require the guarantor's specific consent to the restructured terms to avoid this risk, and a guarantee that stays silent on restructuring can become the subject of later dispute over whether the guarantor remains bound.

Does a One-Time Settlement extinguish the borrower's liability for the full original debt?

A One-Time Settlement is accepted by the lender in full and final settlement of the outstanding dues, so once the agreed lump sum is paid, the borrower's liability to that lender for the settled debt is extinguished and the lender cannot later claim the shortfall between the original outstanding amount and the settled amount. This differs from a Resolution Plan under the Prudential Framework, which restructures the debt going forward through revised terms or partial waiver rather than closing the account with a single payment. A borrower should obtain a written settlement letter evidencing that the liability has been extinguished.

Can a borrower access fresh credit from other lenders while restructuring is ongoing under the RBI framework?

A borrower undergoing restructuring under the Prudential Framework is not automatically barred from approaching other lenders for fresh credit, but a lender extending new credit will factor in the borrower's Special Mention Account classification and ongoing restructuring, which typically affects the borrower's credit rating and the terms on which fresh credit becomes available, if at all. Existing lenders in the Inter-Creditor Agreement usually require that any fresh funding be coordinated with the restructuring plan, since uncoordinated fresh borrowing can undermine the resolution and prejudice existing lenders' recovery.

What happens to provisioning once a Resolution Plan is successfully implemented within 180 days?

Once a Resolution Plan is implemented within the 180-day timeline prescribed by the Prudential Framework, the additional provisioning that would otherwise apply for delay is not triggered, though the lender continues to hold provisions appropriate to the account's revised risk classification under the Reserve Bank of India's standard asset classification and provisioning norms. Timely implementation therefore avoids the escalating provisioning penalty that applies to delay, which is itself one of the framework's principal incentives for lenders to complete restructuring within the stipulated period.

What role does an Independent Credit Evaluation play for large exposures under the Prudential Framework?

Where the aggregate lender exposure to a borrower is one hundred crore rupees or more, the Prudential Framework requires the residual debt under a Resolution Plan to receive an Independent Credit Evaluation from a credit rating agency authorised by the Reserve Bank of India, and exposures of five hundred crore rupees or more require two such evaluations. Only a Resolution Plan whose residual debt receives a credit opinion of RP4 or better can be implemented, giving an external check on whether the restructured debt is realistically serviceable rather than a device to defer recognising the stress.