Vol 21 (2024) - Issue 4

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Recent Developments in Indian Insolvency Law: The Role of Third Party Security Providers

Synopsis
The treatment of third party secured creditors under India’s insolvency regime has proved to be a highly contentious issue. Third party secured creditors are entities in whose benefit a security interest is created by a third party (other than the borrower) to secure a loan availed by a borrower. When insolvency processes commence against such security provider, the question that arises is whether the security interest ought to be preserved or discharged. Recently, the Indian Supreme Court has upheld the preservation of pre-existing security interest after the commencement of insolvency processes. I argue that this approach has significant ramifications on the practice of commercial lending and the functioning of the credit market in India generally, and can also debilitate the operation of the insolvency resolution process. As an alternative, I propose certain contractual covenants that can be included in transaction documents to adequately protect third party secured creditors. Exercising these contractual rights would eliminate the need for preservation of preexisting security interests during corporate insolvency resolution processes.