Insolvency Resolution

A company can carry so much debt that it cannot function normally. Someone has to either fix it or sell it to someone who can.

The Insolvency and Bankruptcy Code, 2016 (IBC) created a formal legal route for this. The workbook calls the outcome 'insolvency resolution' — the process of helping a debt-burdened company either turn around, or get acquired by new owners through an auction conducted under the Code.

For an AIF, this is not just a legal process happening to someone else's company. It is a genuine investment opportunity. Private debt funds increasingly provide refinancing settlements with banks, or step into insolvency resolution schemes, as a form of distressed-asset investing.

The workbook places insolvency resolution alongside the growth of private debt funds in India, describing it as one of two related but distinct ways distressed debt financing is catching on: (1) refinancing settlements with banks, and (2) insolvency resolution schemes under IBC proceedings.

It also links insolvency resolution to the broader growth of the AIF industry: the introduction of the IBC in 2016 'created a new space for special situation funds to step in, looking for suitable opportunities in the distressed asset sector pertaining to old economy companies.'

The workbook gives no timelines, thresholds or percentages of its own for the insolvency resolution process itself — no resolution period, no minimum debt size. Those figures belong to the IBC's own statutory framework, which this chapter does not set out. What the chapter does specify is the SEBI-regulated vehicle built around it: a special situation fund may invest in securities of a company 'under corporate insolvency resolution' where the borrowings carry a credit rating downgraded to 'D' or equivalent — the eligibility test for that specific regulated fund type, covered separately.

Girnar Alloys Ltd defaults on a Rs 300 crore term loan and is admitted into the corporate insolvency resolution process. Rather than wait for liquidation, its lenders invite bids for a resolution plan.

Vindhya Distressed Opportunities Fund, a Category I special situation fund, studies the auction and concludes Girnar's core manufacturing business is viable if its debt is restructured. It bids as a resolution applicant, offering to inject Rs 90 crore in fresh capital in exchange for control, while the remaining lenders take a haircut on their outstanding claims.

Once its resolution plan is approved, Girnar continues operating as a going concern under Vindhya's ownership — the debt-burden problem is resolved by acquisition and restructuring, rather than by the company being wound up and its assets sold piecemeal.

Chapter 2 (Alternative Investment Funds in India), in the discussion of debt funds and the growth drivers of the AIF industry, introduces insolvency resolution as both a legal outcome under the IBC and a source of investment opportunity for private debt and special situation funds. Expect a question distinguishing 'insolvency resolution' as a general market opportunity from the specific eligibility conditions of a special situation fund, which is tested separately with its own figures.

• Insolvency resolution itself carries no numeric thresholds in this chapter. Do not confuse it with the special situation fund's own conditions — the 90-day default period and the 'D' rating downgrade — which are a separate, later-taught regulatory test.
• Insolvency resolution can mean turning a company around, or acquiring it through auction — the workbook gives both outcomes, not just liquidation.
• Do not confuse this corporate-insolvency-resolution context with the personal insolvency and bankruptcy of an individual guarantor under a different part of the IBC — a different topic entirely.
• Private debt funds are classified by the workbook as a form of private equity fund, not as a separate alternative asset class of their own, even when they are doing distressed or insolvency-linked investing.