For a company that is struggling with its debts but has a viable business, insolvency is not always the right answer. Insolvency hands control to a resolution professional and opens the company to outside bidders. A compromise or arrangement under Section 230 of the Companies Act takes a different approach: the company proposes a scheme to its creditors, such as extended repayment, reduced interest, conversion of debt into equity or a partial write-off, and if the required majority of each class of creditors approves, the NCLT can sanction it. Once sanctioned, the scheme binds every creditor in the class, including those who voted against it.
Section 230 schemes are used for debt restructuring, for settlements with groups of creditors, and in liquidation as a last attempt to save the company. They demand careful classification of creditors and full disclosure. This page explains how they work and when they make sense compared with insolvency.
हिंदी में सारांश
अगर कंपनी करà¥à¤œà¤¼ में है लेकिन कारोबार में दम है, तो दिवाला (IBC) के बजाय कंपनी अधिनियम की धारा 230 के तहत लेनदारों के साथ समà¤à¥Œà¤¤à¤¾ (compromise) या वà¥à¤¯à¤µà¤¸à¥à¤¥à¤¾ (arrangement) की सà¥à¤•à¥€à¤® लाई जा सकती है — जैसे à¤à¥à¤—तान अवधि बढ़ाना, बà¥à¤¯à¤¾à¤œ घटाना या करà¥à¤œà¤¼ को शेयर में बदलना। हर वरà¥à¤— के लेनदारों में संखà¥à¤¯à¤¾ के बहà¥à¤®à¤¤ और मूलà¥à¤¯ के तीन-चौथाई की मंज़ूरी के बाद NCLT सà¥à¤•à¥€à¤® को मंज़ूर करता है, और फिर यह उस वरà¥à¤— के सà¤à¥€ लेनदारों पर लागू होती है।
Is this your situation?
- Your company cannot pay its debts on current terms but the business is viable
- Most of your lenders support a restructuring, but a few are holding out
- You want to avoid handing control to a resolution professional
- You have many small creditors, such as depositors, who need a common settlement
- A company in liquidation might be saved through a scheme
- You are a creditor asked to vote on a scheme and want to understand your rights
Key features of a Section 230 scheme
Who can propose
The company, a creditor, a member, or, for a company being wound up, its liquidator, can apply to the NCLT.
Classes of creditors
Creditors with similar rights vote as a class, for example secured lenders, unsecured lenders, operational creditors or depositors. Wrong classification is a common reason schemes fail.
Approval threshold
Each class must approve by a majority in number representing three-fourths in value of creditors present and voting.
Binding effect
Once sanctioned, the scheme binds all creditors in the class, the company and its members.
Objection threshold
Objections can be raised only by persons holding at least 10% of the shareholding, or having outstanding debt of at least 5% of the company's total outstanding debt as per its latest audited financial statements.
Debt restructuring disclosures
Where the scheme involves corporate debt restructuring, it must disclose, among other things, the consent of at least 75% of secured creditors in value, a valuation report and a safeguard for other creditors.
How a scheme is approved
Financial assessment and proposal
We work with financial advisers to prepare a realistic restructuring proposal and identify the creditor classes. Informal discussions with major creditors test support before anything is filed.
Scheme drafting and disclosures
The scheme sets out the terms for each class, the reasons, the effect on creditors and members, and the required disclosures, supported by valuation and auditor's reports.
First motion application
The NCLT is asked to order meetings of each class of creditors (and members if affected), and gives directions on notices and advertisement.
Notices to regulators
Notices go to the central government, ROC, income tax authorities, RBI, SEBI and others as relevant, who may make representations within the time allowed.
Class meetings and vote
Meetings are held under a chairperson appointed by the NCLT, often with electronic voting. The chairperson reports the results.
Sanction petition and order
If each class approves, a petition for sanction is filed. The NCLT considers fairness, compliance and objections, and sanctions the scheme with or without modifications. The order is filed with the ROC.
Section 230 scheme or IBC insolvency?
| Point | Section 230 scheme | IBC insolvency (CIRP) |
|---|---|---|
| Who runs the company | Existing management | Resolution professional |
| Moratorium | No automatic moratorium | Automatic on admission |
| Who decides | Creditors by class (majority in number and three-fourths in value) | Committee of financial creditors (66%) |
| Outside bidders | Not necessary | Plans invited from the market |
| Speed | Depends on meetings and objections | Statutory timelines (180 to 330 days) |
| Best suited for | Viable companies with broad creditor support | Companies needing a new owner or where creditors cannot agree |
Schemes in liquidation
Even after a company has been ordered into liquidation under the IBC, the liquidation regulations allow a compromise or arrangement under Section 230 to be proposed within a limited period. The scheme still needs class approvals and NCLT sanction. However, in Arun Kumar Jagatramka v Jindal Steel and Power (2021), the Supreme Court held that persons ineligible under Section 29A cannot propose such a scheme. Promoters who are disqualified cannot use this route to regain the company. See liquidation and Section 29A eligibility.
For creditors asked to vote
Check your class
Make sure you are placed with creditors whose rights are similar to yours. Being outvoted by a differently placed group is a ground of objection.
Read the disclosures
Look at the valuation, the treatment of each class and what you would get in liquidation.
Raise objections properly
Objections can be made at the sanction stage if you meet the 10% shareholding or 5% debt threshold, or through your class vote.
Watch for unfair discrimination
Within a class, creditors should be treated alike unless there is a good reason.
Time and typical cost
Our fees are agreed in writing for each stage and do not depend on the outcome.
| Stage | Usual time | What it involves |
|---|---|---|
| Assessment and proposal | 4 to 8 weeks | Financial advisers, creditor soundings |
| Drafting and first motion | 1 to 2 months | Scheme, reports, NCLT directions |
| Notices and meetings | 1 to 2 months | Advertisement, chairperson's meetings |
| Sanction | 2 to 4 months | Petition, objections, hearing |
Documents you will need
Company
- Audited financial statements and latest management accounts
- List of creditors by class, with amounts and security
- Board resolution approving the scheme
The proposal
- Draft scheme and financial projections
- Valuation report
- Auditor's certificate
- Evidence of support from major creditors
Regulatory
- Disclosures required for debt restructuring
- Details of pending insolvency or recovery proceedings
A textile company and its holdout lender
Here's a made-up example. A Ludhiana textile company had five secured lenders. Four, holding 85% of the secured debt, agreed to extend the repayment period by four years and reduce interest. The fifth, holding 15%, refused and threatened insolvency.
We prepared a scheme under Section 230 with secured lenders as one class and trade creditors as another, with full disclosure of the restructuring and a valuation report. At the meeting directed by NCLT Chandigarh, secured lenders representing 85% in value and four of the five in number approved; trade creditors also approved. The fifth lender objected, but the NCLT found the classification fair and the scheme reasonable, and sanctioned it, binding all secured lenders.
Mistakes companies make with Section 230 schemes
- Wrong creditor classes: grouping creditors with different rights together invites objections and can lead the NCLT to refuse sanction.
- Thin disclosure: creditors must have enough information to vote sensibly. Missing valuations or hidden liabilities undermine the vote.
- No soundings before filing: filing without knowing whether the largest creditors will support the scheme wastes time and money.
- Assuming a moratorium: there is no automatic freeze on creditor action. Plan for creditors who may file insolvency petitions while the scheme is pending.
- Unequal treatment within a class: creditors in the same class should be treated alike unless there is a sound reason.
- Ignoring Section 29A in liquidation: promoters ineligible under Section 29A cannot propose a scheme in liquidation.
Key terms in plain words
| Term | What it means |
|---|---|
| Compromise | An agreement where creditors give up part of their claims |
| Arrangement | A broader reorganisation of rights, such as rescheduling or conversion to equity |
| Class of creditors | Creditors whose rights are similar enough to vote together |
| Chairperson | The person appointed by the NCLT to conduct meetings and report results |
| Sanction | The NCLT's approval making the scheme binding |
| Corporate debt restructuring | A restructuring of debts owed to lenders, with specific disclosure requirements |
Interplay with insolvency petitions
A Section 230 scheme does not stop a creditor from filing an insolvency petition. If a creditor files under the IBC while the scheme is pending, and the petition is admitted, the moratorium and the insolvency process take over. Companies pursuing a scheme should therefore engage early with creditors who might file, and may seek interim directions from the NCLT in suitable cases. Conversely, once a scheme is sanctioned and binding, creditors in the class are bound by its terms, which affects whether a later petition can be founded on the restructured debt.
Schemes for depositors and small creditors
Section 230 schemes are useful where a company owes money to many small creditors, such as depositors or customers, who cannot practically negotiate one by one. A scheme can set uniform terms for the whole class, with meetings conducted through electronic voting. The NCLT pays close attention to fairness in such schemes, because small creditors are often less able to assess proposals. Clear explanations in plain language, independent valuation and protection for vulnerable creditors improve the chances of sanction.
Checklist before proposing a scheme
- Identify each class of creditors and shareholders affected
- Prepare a clear statement of what each class gives up and receives
- Get the latest audited accounts and a current statement of affairs
- Obtain a valuation and, where relevant, a liquidation value comparison
- Talk to key creditors early to gauge support
- Check for pending insolvency applications against the company
- Plan the timetable for meetings and NCLT hearings
- Prepare disclosure on any investigations against the company
Schemes during liquidation
Section 230 can also be used when a company is already in liquidation under the Code. The Liquidation Regulations allow a liquidator to propose a compromise or arrangement within a limited time of the liquidation order. The Supreme Court in Arun Kumar Jagatramka v Jindal Steel and Power (2021) held that a person ineligible under Section 29A cannot propose such a scheme. This route is sometimes used by investors who want to take over the company as a going concern rather than buying its assets. See liquidation under IBC and Section 29A eligibility.
Outside insolvency, a scheme can be used to restructure debt, convert debt into equity, or vary the rights of shareholders. Because a scheme binds dissenters once the required majorities approve it and the NCLT sanctions it, it is a powerful tool for companies with many creditors.
Restructuring debentures
Here's a made-up example. A Bengaluru real estate company had issued non-convertible debentures to 300 investors and was struggling to repay on time. Insolvency would have stopped construction, harming both investors and homebuyers.
The company proposed a scheme under Section 230 to extend the repayment by two years, with a higher interest rate and additional security. Meetings of debenture holders were held under NCLT Bengaluru's directions; 82% in value approved. The NCLT sanctioned the scheme, binding all debenture holders. Construction continued and repayments began on the new schedule.
Frequently Asked Questions
What is a compromise or arrangement under Section 230?
A scheme between a company and its creditors (or members), approved by the required majorities and sanctioned by the NCLT, that binds all in each class.
What majority is needed?
A majority in number representing three-fourths in value of each class present and voting.
Can a scheme bind creditors who vote against it?
Yes. Once sanctioned, it binds all creditors in the class.
Is there a moratorium during the scheme?
Not automatically. The NCLT may grant interim protection in suitable cases, but there is no statutory freeze like insolvency.
Who can object at the sanction stage?
Persons holding at least 10% of shares, or with debt of at least 5% of the company's total outstanding debt.
Is this better than insolvency?
It suits viable companies with broad creditor support that want to keep management. Insolvency suits cases needing a new owner or where creditors cannot agree.
Can promoters propose a scheme in liquidation?
Only if they are eligible under Section 29A.
How are your fees decided?
By complexity and stage, agreed in writing. They do not depend on the result.
Need to Restructure Outside Insolvency?
Share your creditor list and a summary of the proposal. We will assess whether a Section 230 scheme can work and how to build support.
This page gives general information about the law as it stood when it was last reviewed. It is not legal advice on your case and does not promise any result. IBC rules and NCLT procedures change often, so outcomes depend on your own documents, dates and facts.
Need help with Compromise or Arrangement with Creditors?
Send us the notice, the petition or the order. We will tell you where you stand, which bench hears it and the date the next step is due, in plain words.
