1. Definitions

Debt Restructuring: Changing one or more of: tenor extension, interest reduction, moratorium, partial conversion of debt into equity / non-convertible debentures, additional credit.

Loan Workout: Informal / semi-formal out-of-court process before formal restructuring. Includes One-Time Settlement (OTS), refinancing, standstill agreement.

For informal workouts, Indian law presently provides only two routes: First, RBI's June 7 Circular, which provides out-of-court restructuring option. Second, scheme of arrangement under Companies Act, 2013 through NCLT.

2. Evolution of RBI Framework in India

1. CDR 2001: Corporate Debt Restructuring for benefit of all concerned by reviving corporates facing financial difficulties. Lenders >20cr, 3+ lenders.
2. SDR, S4A, 5/25: Sustainable Structuring of Stressed Assets - at least 50% of debt should be serviced in same period as existing loan.
3. 12 Feb 2018 Circular: Struck down by Supreme Court in Dharani Sugars.
4. 7 June 2019 Circular - Current Law: All previous frameworks withdrawn. Single framework.

3. Current RBI 7 June 2019 Framework - Step-by-Step

Trigger: Default - even 1-day default. Lender must start Review Period within 30 days.

Review Period: 30 days to decide Resolution Plan (RP) / IBC.

Implementation Timeline: RP must be implemented within 180 days from end of Review Period.

Inter-Creditor Agreement (ICA): Mandatory for consortium. Decision by 75% by value and 60% by number.

Resolution Tools Allowed:

• Extension of residual tenor with or without payment moratorium
• Conversion of portion of debt into equity or other marketable non-convertible debt securities issued by borrower, provided amortisation and coupon similar to terms post implementation
• Additional finance + sale of exposure
• Change in ownership

Regulatory Requirements:

• Promoters personal guarantee should be obtained in all cases of restructuring, corporate guarantee cannot substitute
• Conversion of debt into preference shares only as last resort, capped to 10% of restructured debt
• Asset classification benefit only if RP implemented in time, else provisioning 20-35%

4. Loan Workout Procedures - Practical

A. Informal Workout (Pre-RBI):

1. Borrower approaches with CMA data, TEV study
2. Bank conducts viability study - 3 months debt servicing after restructuring?
3. Standstill - No coercive action during negotiation
4. OTS - Lump sum payment, sacrifice quantified, reported to CIBIL as "Settled"

B. Formal Workout under June 7 Framework:

1. Invocation + ICA signing
2. RP drafting + rating by credit agencies
3. Board approval + signing of DCA/ICA
4. Implementation + monitoring + reporting to CRILC

Typical restructuring takes: Informal OTS 3-6 months, formal RBI framework 180 days.

5. Case Laws - Most Important for Exams & Practice

CASE 1: Yes Bank AT1 Bond Write-Off - Supreme Court 2026 [Yes Bank vs Axis Trusteeship]

Facts: March 2020, Yes Bank crisis - rising bad loans. RBI administrator wrote off Additional Tier-1 bonds worth Rs 8,415 crore ($884M) as part of reconstruction scheme. Final scheme omitted provision that was in draft reconstruction scheme regarding write-off.

Bombay HC 20 Jan 2023: Quashed write-off.

Supreme Court Oct 15, 2026 - Justices Dipankar Datta and Augustine George Masih: Upheld HC, dismissed appeals by Yes Bank, RBI, Central Govt.

"We see no reason to interfere with impugned judgment. Difference between draft reconstruction scheme and final version approved by central government was central disputed point. That provision was omitted from final scheme, decisive."

Principle for Restructuring: Administrator has no inherent power to extinguish securities beyond scheme. Reconstruction scheme must explicitly provide for write-down. If not, write-off illegal. Huge precedent for future bank bail-in.

CASE 2: Failure to Fulfil Pre-Conditions ≠ Novation - Supreme Court [Argus-P Reported]

Principle: Supreme Court held failure to fulfil pre-conditions of loan restructuring does not amount to novation and restores original financing terms.

Relied on United Bank of India v. Ramdas Mahadeo Prashad (2004) 1 SCC 252: In absence of fulfilment of conditions precedent, novation does not take effect.

Application: If borrower fails to bring promoter equity, personal guarantee, etc., restructuring fails, original loan terms revive. Borrower cannot claim restructured terms as defence.

CASE 3: Supreme Court - Unapproved Debenture Restructuring Cannot Prevent IBC [Catalyst Trusteeship Case]

Facts: Corporate debtor defaulted on debentures, sought 18-month moratorium and restructuring via communications with ECL Finance. Debenture trustee maintained no restructuring approved as required by Debenture Trust Deed. NCLT dismissed Sec 7 plea, NCLAT affirmed dismissal saying restructuring accepted through conduct.

SC Reversed: Application under Sec 7 IBC cannot be refused on basis of unapproved restructuring loan facility proposal when Debenture Trust Deed was never modified in contractually prescribed manner and default established. Contractual obligations over informal restructuring.

Restores Rs 600 crore insolvency plea. Primacy of contract.

CASE 4: NCLAT - Majority Consideration Does Not Bar Individual Member [Majority's Consideration Of Debt Restructuring]

Held: Fact that majority of consortium lenders are considering debt restructuring with Corporate Debtor does not preclude individual member from independently initiating insolvency proceedings under Sec 7 IBC as per facility agreement.

For Lenders: No consortium can force dissenting lender to wait.

CASE 5: NCLAT - Fresh Default Post-Restructuring Gives New Cause of Action [Bombay Rayon Case - 13 July 2025]

Held: Fresh Sec 7 IBC application maintainable on post-restructuring default despite prior default falling within Sec 10A moratorium period (COVID suspension). Fresh default under restructured debt agreement gives new cause of action, not barred by Sec 10A.

Principle: Restructured debt is new contract. Default on it is fresh default.

CASE 6: NCLT Kochi - Indian Bank v. Aks Cold Storage CP(IBC)/19/KOB/2026

Held: Corporate debtor cannot use dispute between lenders over restructuring to delay insolvency proceedings. Borrower cannot use dispute between consortium lenders over restructuring to block insolvency when financial debt and default otherwise established.

CASE 7: Supreme Court - SC Upholds CIRP Against Hotel Companies Over Proven Loan Defaults [GSTAAD Hotels]

Dismissed appeals challenging CIRP where dispute concerned defaults in ECLGS facilities. Once debt and default proven, restructuring talks irrelevant.

6. Workout Accounting & CIBIL Impact

• Any restructuring or "Settled" status on loan will be reported to credit bureaus - CIBIL score impacted for 3 years
• Lender must reverse interest, provide for sacrifice, and mark account as Restructured
• Borrower must disclose contingent liability if personal guarantee continues

Checklist for Auditor / Banker:

1. Was ICA signed within 30 days?
2. Was RP implemented within 180 days?
3. Are pre-conditions fulfilled? If not, novation fails.
4. Is fresh default post-restructuring tracked separately?
5. Has 20% provisioning been done if implementation failed?