The Inter-Creditor Agreement Under the June 2019 RBI Framework
The Reserve Bank of India's Prudential Framework for Resolution of Stressed Assets, issued on 7 June 2019, established the Inter-Creditor Agreement (ICA) as the principal mechanism for resolving stressed corporate accounts outside the formal IBC process. The framework's operation has been refined over the subsequent years, but the structural architecture remains the working basis for multi-lender resolution.
The framework
The 7 June 2019 framework replaced the earlier Revised Framework for Resolution of Stressed Assets (the 12 February 2018 framework, which had been struck down by the Supreme Court in Dharani Sugars). The 2019 framework is more flexible — it does not impose mandatory referral to IBC; it permits negotiated resolution within defined parameters; and it grants prudential incentives to lenders who participate in the framework.
The principal mechanism is the Inter-Creditor Agreement. Where a borrower defaults, lenders with exposure to the borrower may enter into an ICA setting out the parameters for resolution. The ICA binds participating lenders; non-participating lenders must accept the resolution if approved by the requisite majority.
The 75% rule
The structural feature of the 2019 framework is the 75%/60% threshold. A resolution plan agreed by lenders representing 75% by value and 60% by number of the participating creditors binds all participating creditors. Non-participating lenders must accept the resolution at the agreed terms or exit at a stipulated price.
The threshold is the working pressure point of any ICA negotiation. Lenders sufficient to cross the 75% by value can compel the resolution; lenders short of that threshold must negotiate broader consensus.
The ICA architecture
The ICA is structured around several integrated components.
First, the review period: the framework provides a 30-day review period from the date of default, during which the lenders assess the situation and decide whether to enter into the ICA. The review period is extendable to 180 days in defined circumstances.
Second, the resolution period: once the ICA is entered into, the resolution must be implemented within 180 days. Failure to implement within the resolution period requires the lenders to refer the borrower to the IBC.
Third, the resolution plan: the plan can include restructuring of dues, additional lending, conversion of debt to equity, sale of assets, or any combination. The resolution plan is approved by the 75%/60% threshold and binds the dissenting lenders.
Fourth, the provisioning incentive: lenders participating in the framework benefit from accelerated provisioning relief if the resolution is implemented within prescribed timelines, and incremental provisioning if the resolution is not implemented or is delayed.
The dissenting-lender mechanism
The dissenting lender — one who does not approve the resolution plan but is bound by the 75%/60% threshold — has, under the framework, three options.
First, the dissenting lender can accept the plan, with the binding effect of the threshold. This is the practical default for lenders without strategic concerns about the plan.
Second, the dissenting lender can exit at the price stipulated in the ICA — typically the liquidation value of the lender's share of the assets. The exit option enables the dissenting lender to extract its share without participating in the implementation.
Third, the dissenting lender can seek judicial review. The grounds of review are limited — typically procedural defects in the ICA process, departures from the framework's threshold requirements, or violations of statutory protections. Substantive disagreement with the plan is not a ground of review.
The interaction with IBC
The 2019 framework operates alongside the IBC, not in substitution of it. Where the resolution under the framework fails — whether by failure to reach the 75%/60% threshold, failure to implement within the resolution period, or failure of the implemented resolution — the lenders must refer the borrower to the IBC.
The framework therefore acts as a structured pre-IBC resolution mechanism. The discipline that the framework imposes on lenders — engagement with the borrower, structured plan formulation, time-bound implementation — typically produces better outcomes than IBC referral, both in recovery rates and in preservation of operating business value.
The ICA framework is a negotiated process with a hard fallback. The fallback is the IBC; the negotiation is conducted with that fallback in clear view.
The drafting protocols
An effective ICA must address several drafting questions:
First, the parties and exposures. The ICA must identify all participating lenders, with their respective exposures recorded for the threshold computation. The exposure base is typically the principal amount outstanding plus accrued interest at the date of default.
Second, the governance structure. The ICA must constitute a steering committee or similar body to manage the resolution process. The committee composition, decision-making procedures, and reporting protocols are typically detailed in the agreement.
Third, the resolution-plan formulation. The ICA must set out the procedure for formulating the resolution plan — typically through engagement of independent advisors, valuation experts, and operational consultants.
Fourth, the dissenting-lender protections. The ICA must specify the exit price for dissenting lenders, the procedure for exit, and the consequences of failure to approve.
Fifth, the implementation framework. The ICA must address how the approved plan is implemented — disbursement of additional funds, security restructuring, equity conversion, asset sales — with timelines and milestones.
The enforcement question
The enforceability of the ICA, as between the participating lenders, is grounded in contract law. The agreement is a binding commercial contract, and breach attracts the remedies of contract law — damages, specific performance, injunctive relief.
The enforceability of the ICA against dissenting lenders has been the subject of judicial consideration. The framework's binding effect depends on the lender being a "participating lender" — a lender who has signed the ICA. A lender who has not signed cannot, on contract-law principles, be bound by the agreement.
The RBI framework, however, contemplates that all lenders to the borrower will, in practice, participate. The prudential consequences of non-participation (loss of accelerated provisioning, regulatory scrutiny) are designed to incentivise participation. In practice, non-participation by a significant lender is rare.
Working observations
Three observations from current practice. First: the 30-day review period is the foundation of the resolution. The lenders who use the review period for substantive engagement with the borrower — financial diligence, operational assessment, identification of recovery options — produce better resolution plans than lenders who use the period for formality. The substantive work in the review period largely determines the quality of the eventual plan.
Second: the 75%/60% threshold is mathematical. The negotiating strategy is to identify, before the formal vote, which lenders are likely to support and which to dissent — and to structure the plan to secure the supportive group. A plan that depends on close votes is structurally vulnerable.
Third: the IBC fallback is the discipline of the framework. Lenders should not approach ICA negotiations as if IBC referral were a remote possibility; the IBC is the structural alternative, and a plan that does not produce a better outcome than IBC referral will not, ultimately, be approved.