1. Definitions

Restructuring: Modification of loan terms - tenure, interest, moratorium, conversion to equity/preference, without settling. RBI's compromise-settlement framework states that where agreed settlement amount is payable over more than 3 months, arrangement is treated as restructuring.

Settlement / Compromise Settlement / OTS (One Time Settlement): Lender agrees to accept less than outstanding as full and final. Account closed as "Settled" in CIBIL. If recovery proceedings pending before judicial forum, settlement may require concerned judicial authority's consent decree.

2. RBI Framework - Current (Master Directions 2023-24)

A. Prudential Framework for Resolution of Stressed Assets (June 7, 2019) - Replaces Feb 12, 2018 circular struck down by SC

• Applies to exposures > ₹2000 cr need to be resolved within 180 days
• Requires Inter-Creditor Agreement (ICA), 75% by value + 60% by number
• Personal guarantee of promoters mandatory in all cases of restructuring, corporate guarantee cannot be substitute
• Conversion of debt into preference shares only as last resort, restricted to 10% of restructured debt

B. Compromise Settlement Framework (June 8, 2023) - RBI/2023-24/40

• Banks can do compromise settlement for NPA & wilful defaulters
• Settlement proposals for wilful defaulter/fraud accounts require mandatory Board-level approval; fraud-classified borrowers barred from institutional finance for 5 years
• Settlement paid over more than 3 months is reclassified as restructuring, not settlement
• RBI FAQ June 20, 2023 clarifies eligibility - wilful defaulters can settle but with higher scrutiny

C. Other Schemes:

• S4A - Sustainable Structuring of Stressed Assets: At least 50% of debt should be serviced in same period as existing loan. 50% can be converted to equity.
• OTS for MSME: RBI One-Time Restructuring for MSME up to ₹25 cr

RBI Condition for Restructuring: Borrower requests restructuring for genuine financial stress. Bank evaluates viability.

3. IBC vs Restructuring

• IBC Sec 7: Financial creditor can file CIRP if debt & default proved. Mere pendency of restructuring arrangements cannot stall CIRP.
• IBC cannot be used as debt recovery tool in purely contractual disputes.

4. Landmark Case Laws

Case 1: Dharani Sugars & Chemicals vs RBI (SC, 2019) - Striking Down Feb 12 Circular
SC struck down RBI circular on resolution of stressed assets that prescribed 180-day mandatory resolution for >₹2000 cr exposure. Held: Section 35AA requires Central Govt authorisation + specific default before RBI can direct insolvency. This led to new June 7, 2019 Prudential Framework. Foundation case for restructuring rules.

Case 2: B. Prashanth Hegde vs State Bank of India (SC, Feb 2026)
SC upheld admission of CIRP u/s 7, holding application within limitation due to repeated acknowledgements of debt through restructuring agreements, consortium arrangements & balance-sheet entries. Held: Working-capital consortium agreements and balance-sheet disclosures signed on 30-09-2015 constituted valid acknowledgement under Sec 18 Limitation Act. Ruling: Debt restructuring = acknowledgement of debt, extends limitation period for filing IBC. Also held application that substantially complies cannot be rejected on technical grounds.

Case 3: Mere Pendency of Restructuring Cannot Stall CIRP - SC (Feb 24, 2025)
Justices Sanjay Kumar and K Vinod Chandran held merely because arrangement of restructuring a debt-laden corporate debtor is in place, would not bar initiation of CIRP. Set aside NCLAT decision that rejected Sec 7 on premise restructuring in place. Principle: Restructuring is commercial negotiation, CIRP is statutory right if default continues.

Case 4: India Resurgence ARC vs Amit Metaliks Ltd (SC, 2021)
SC held dissenting secured creditor cannot challenge resolution plan approved under IBC insisting higher amount should be paid based on security interest. Restructuring via Resolution Plan binds all.

Case 5: Dena Bank vs C. Shivakumar Reddy (SC, 2021)
SC clarified Limitation for IBC: Provisions of Limitation Act apply to IBC. Acknowledgment of debt under Sec 18 extends limitation. Final judgment/decree of DRT or Recovery Certificate provides fresh cause of action for Sec 7. Critical for OTS - if borrower fails OTS, fresh limitation starts.

Case 6: Swiss Ribbons vs Union of India (SC, 2019)
Upheld constitutional validity of IBC. Held Sec 29A (bar on promoters bidding) is valid. Defines boundary between restructuring via IBC and promoter control.

Case 7: RBI vs Wilful Defaulters - OTS Eligibility (2019 Circular)
RBI said borrowers who committed fraud or wilful defaults would be ineligible for restructuring except where existing promoters entirely replaced by new promoters and company totally delinked from erstwhile promoters. Even then lender discretion based on viability, and criminal proceedings continue.

Case 8: Master Restructuring Agreement vs Sec 7 - NCLAT (2024)
NCLAT dismissed scheme where scheme to transfer debt under Bucket 2B to SPV not approved, leading to default. Held Master Restructuring Agreement did not cover facilities for which Sec 7 filed. Debtor's One-Time Settlement proposal acknowledged debt and default. Financial creditor proved debt.

5. Practical Rules for Settlement

1. CIBIL Impact: Restructured = "Restructured" tag for 2-3 years, less severe than Settlement which stays 7 years.
2. Can Bank Refuse? Yes, subject to lender's evaluation and RBI guidelines - not borrower right.
3. Process: Application for financial stress -> Viability study -> ICA -> Board approval -> Modification agreement -> No coercion
4. OTS: Lump sum within 90 days = settlement, else = restructuring with higher provision (Banks need 100% provision for settlement)