Akaant MittalExperts Corner

Introduction

A liquidation proceeding stands initiated once the corporate insolvency resolution process fails. Section 33 of the Insolvency and Bankruptcy Code, 2016 (IB Code) sets out the conditions laying down three scenarios wherein liquidation proceedings can be initiated against the corporate debtor.

 

First, when the adjudicating authority does not receive the resolution plan upon expiry of the insolvency process or it rejects the resolution plan.[1]

 

Second, when the resolution professional intimates the adjudicating authority that the committee of creditors has decided to liquidate the corporate debtor.[2]

 

Third, when any person, whose interests are prejudicially affected when the approved resolution plan is contravened by the corporate debtor, makes an application to the adjudicating authority to initiate liquidation proceedings.[3]

 

Once the liquidation process is initiated, the same concludes with the distribution of the assets of the corporate debtor in accordance with the waterfall (distribution) mechanism provided under Section 53 of the IB Code.

 

This column seeks to discuss about one peculiar aspect of liquidation wherein it is sought to be ensured that workers of a corporate debtor suffer the least on account of the expiration of the corporate debtor.

 

“Gratuity” and its Interplay with IB Code

While the Payment of Gratuity Act has not explicitly defined the term “gratuity”, it can be understood to be a sum payable by the employer to his workers upon completing service for the prescribed period of time.[4] Now once the company is brought to an end by the liquidation, then clearly such payment is to be paid to the workers.

 

Simultaneously, the IB Code provides for the formation of a “liquidation estate”[5] containing all the assets of the debtor. It is these proceeds that will be distributed to the respective stakeholders (creditors) in terms of waterfall mechanism under Section 53 of the IB Code.

 

Issue arises because if the gratuity falls under the “liquidation estate” and is to be distributed in terms of Section 53, then the workers may not get their dues in total. For instance, assuming that the only asset of the company is the gratuity sum to the tune of Rs 1 crore. Now if this sum forms part of the liquidation estate, then this sum of Rs 1 crore will be distributed firstly towards the insolvency resolution process costs and liquidation costs. If these costs run over Rs 1 crore, then the entire gratuity amount will be consumed under these expenses only. Otherwise, if these costs are, let us say, Rs 50 lakhs, then the remaining Rs 50 lakhs will be distributed towards the workers’ dues for the period of 24 months preceding the liquidation commencement date and dues towards secured creditors. The list goes so on and so forth.

 

However, Section 36 of the IB Code stipulates certain payments that are not to form part of the “liquidation estate”. Section 36(4)(a)(iii) of the IB Code stipulates that:

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:

(a) assets owned by a third party which are in possession of the corporate debtor, including–

(i)-(ii)                             ***

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;

 

In other words, any amount due to the workers from the pension fund, provident fund, and the gratuity fund will not form a part of the liquidation estate of the corporate debtor and will not be used for recovery in liquidation.

 

Since in many instances, liquidation results in the complete closure of the business of the ailing debtor, which results in the termination of the employment of the workers. In legal parlance, this discharge of workers amounts to their retrenchment i.e. the termination of service of workers by the employer for any reason other than punishment inflicted by way of disciplinary action.[6] Naturally to protect the workers, funds such as pension fund, provident fund, and the gratuity fund are kept out of the liquidation distribution and to be used solely for the benefit of the workers.

 

This question was even dealt with by the National Company Law Appellate Tribunal (NCLAT) in Somesh Bagchi v. Nicco Corpn. Ltd.[7] (Somesh Bagchi) as well SBI v. Moser Baer Karamchari Union[8] (Moser Baer – NCLAT) wherein the Appellate Tribunal had held that gratuity does not form a part of the liquidation estate.

 

Unsettled Legal Issues Arising with Gratuity

Now further issue arises on whether a liquidator can be directed to make provision for the payment of gratuity to the workers in case the erstwhile management of the corporate debtor did not create such fund for the workers.

 

The recent ruling by the National Company Law Tribunal (NCLT) Allahabad in Standard Chartered Bank v. JVL Agro Industries Ltd.[9] (Agro Industries) brings out the trouble in how to counter balance the workers benefit wherein the employer had faulted in not providing for gratuity; all the while respecting the statutory limitations of the authority of a liquidator.

 

In Agro Industries[10], a resolution proceeding was initiated and consequently a moratorium was declared and a resolution professional was appointed. Since, no resolution plan was approved by the committee of creditors, the liquidation proceeding was initiated. The corporate debtor had nearly 500 employees some of whom had filed an application for payment of their dues after the public announcement of liquidation was made. The corporate debtor had taken gratuity policy for 92 of its employees from Life Insurance Corporation (LIC), and the other 403 were not covered by it. It was further represented before the NCLT that the corporate debtor has requisite funds to cover the gratuity payments of the rest of its employees as well as pay the renewals for the already existing policyholders.

 

The NCLT referring to the ruling in Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Ltd.[11] (Moser Baer – NCLT) which had been upheld by the NCLAT allowed the same and directed the liquidator to pay for the existing holders whose premiums are due as well as procure a new gratuity policy for the other 403 employees.

 

The precedent of Moser Baer – NCLT[12] referred to by the NCLT in Agro Industries[13] was primarily on the issue of whether gratuity funds could be used to make up the “liquidation estate” and consequently available for distribution amongst other creditors in terms of Section 53 of the IB Code. Allowing the prayer of the workers, the NCLT held that amount due towards the workers cannot be used for the purposes of distribution in terms of Section 53 of the IB Code.

 

In Moser Baer – NCLT[14], the Court further directed the liquidator that in cases there is any deficiency to the provident, pension or the gratuity funds; the liquidator shall ensure that the fund is available in these accounts, “even if their employer has not diverted the requisite amount”.

 

This order was impugned by the State Bank of India – a secured creditor of Moser Baer in SBI v. Moser Baer Karamchari Union,[15] where the limited question that came before the NCLAT was whether the gratuity dues formed a part of the liquidation estate. Holding the answer in negative, the NCLAT decided not to interfere with the order of the NCLT.

 

However, complications arise from the facts that confronted the NCLAT in its ruling in Savan Godiwala v. Apalla Siva Kumar[16] (Siva Kumar) wherein the NCLAT had held that if there has been no fund set aside for the payment of gratuity, provident and pension dues then the liquidator cannot be directed to do so.

 

The ex employees of the corporate debtor herein had contended that since corporate debtor had failed to maintain a gratuity fund or obtain insurance for the fulfilment of its liability towards payment of the gratuity to its employees, the gratuity dues payable to the employees shall be treated as an asset of the employee lying in possession of corporate debtor and as such, cannot be treated as a claim at par with other creditors.

 

In the counter the liquidator submitted that if there is no separate fund for gratuity payments, the same cannot be done from the running accounts of the corporate debtor, presumably because under the statutory scheme[17] of the IB Code the gratuity funds are excluded from the ambit of “liquidation estate”.

 

The NCLAT, firstly, discussed judicial precedent in Moser Baer – NCLAT[18] and Section 36(4)(a)(iii) as to how funds such as gratuity and provident funds do not form part of liquidation estate, therefore, are outside the purview of any discussion on “liquidation estate”. Secondly, it referred to Section 36(2)[19] of the IB Code to reason that the liquidator holds the funds in the “liquidation estate” in a fiduciary capacity for the purposes of distribution amongst creditors in terms of Section 53 of the IB Code, therefore such funds cannot be used for any other purpose except the distribution mechanism under Section 53 of the IB Code. Thirdly and finally, the NCLAT referred to the facts and circumstances, where there was no separate fund provided by the erstwhile management for the purposes of gratuity funds.

 

Resultantly, the NCLAT concluded:

  1. [i]n a case, where no fund is created by a company, in violation of the statutory provision of Section 4 of the Payment of Gratuity Act, 1972, then in that situation also, the liquidator cannot be directed to make the payment of gratuity to the employees because the liquidator has no domain to deal with the properties of the corporate debtor, which are not part of the liquidation estate.[20]

 

The Agro Industries[21] case refers to a situation where funds for payment of gratuity have been set aside by the corporate debtor but are not enough to cover the dues. Siva Kumar[22] talks about a situation where the corporate debtor has failed to comply with its statutory obligation of creation of gratuity funds under the Payment of Gratuity Act – in such a situation no funds can be set aside by the liquidator since she/he lacks the domain to do so. Therefore, the ratio of Siva Kumar[23] seems to hold that unless there are funds specifically set aside for the payments of premium for gratuity; funds from the “liquidation estate” cannot be used for the payments of such payments. On the other hand, the Moser Baer – NCLT[24] as a matter of principle rules that provident, pension and gratuity funds should be kept duly furnished by the liqudiator even if the employer did not divert the requisite amount.

 

Conclusion

It is now a settled position of law that gratuity funds due towards the workers fall outside the scope of the liquidation estate, and cannot be used for payments of dues of other creditors.

 

That still leaves a difficult position (at least in equity) if the statutory duty to cover the workers with gratuity and provident is avoided purely on account of the illegality of the erstwhile management who originally did not create any funds for the payments of premiums towards these funds. The only consequence is that the workers stand to lose the rightful coverage.

 


† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the NUJS, Kolkata and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice. 

†† 4th year law student at the National University of Juridical Sciences, Kolkata. She can be contacted at lavanya218024@nujs.edu

[1] S. 33(1), Insolvency and Bankruptcy Code, 2016.

[2] S. 33(2), Insolvency and Bankruptcy Code, 2016.

[3] S. 33(3), Insolvency and Bankruptcy Code, 2016.

[4]Payment of Gratuity Act, 1972.

[5]IB Code, S. 36.

[6]S. 2(oo), Industrial Disputes Act, 1947.

[7]2018 SCC OnLine NCLAT 833 .

[8]2019 SCC OnLine NCLAT 447.

[9] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[10] Ibid.

[11]2019 SCC OnLine NCLT 118.

[12]Ibid.

[13] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[14] 2019 SCC OnLine NCLT 118.

[15]2019 SCC OnLine NCLAT 447.

[16]2020 SCC OnLine NCLAT 191.

[17]See IB Code, S. 36(4)(a)(iii).

[18] 2019 SCC OnLine NCLAT 447.

[19]IB Code, S. 36(2) stipulates:

“(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.”

[20]2020 SCC OnLine NCLAT 191.

[21] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[22] 2020 SCC OnLine NCLAT 191.

[23] Ibid.

[24] 2019 SCC OnLine NCLT 118.

Op EdsOP. ED.

Introduction

Financial distress and insolvency in the context of non-profit organisations (NPOs) have been widely discussed in other jurisdictions, however, Indian NPOs are yet to meet a similar fate, despite India containing in itself a huge NPO sector.[1] In India, NPOs majorly comprise of companies with charitable objects (Section 8 companies), societies, trade unions, trusts, cooperative societies, etc. This article talks of insolvency resolution only in the context of Section 8 companies.

Section 8 of the Companies Act, 2013[2] (CA’13) provides a framework for companies having charitable objectives like, promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment, etc. Such companies cannot distribute dividends in members and are required to use the profits to promote their objectives. They are required to use terms like Foundation, Confederation, Association, etc. in their names instead of “‘Private”, “Private Limited”, etc.

The Insolvency and Bankruptcy Code, 2016 (IBC)[3] defines a “corporate person” under Section 3(7)[4], which, inter alia, includes a “company” under Section 2(20) of CA’13. Hence, a literal interpretation of the provisions does not bar IBC’s application to Section 8 companies. Further, Section 8 companies are not covered under the exclusionary clause of Section 3(7) of the IBC. Further, Section 2(a) makes the IBC applicable to “any company incorporated under the Companies Act” and does not create a differentia based on the objectives of different companies. Thus, clearly, Section 8 companies are covered under the IBC as a corporate person.

The pertinent question that arises is whether the application of IBC to such companies is appropriate? In other words, should the charitable motive of Section 8 companies affect the applicability of the IBC?

Application of the Insolvency and Bankruptcy Code, 2016 to Section 8 companies

The IBC envisages two potential outcomes – revival or liquidation. It intends to revive distressed businesses, even at the cost of some haircuts to creditors’ claims. During Corporate Insolvency Resolution Procedure (CIRP), the Committee of Creditors considers and votes on resolution plans (plans) submitted by various resolution applicants willing to take over the company by fully or partially paying off its debts. The primary goal of the process is to maximise the value of the company so that good plans are attracted to rejuvenate it. For revival of the company through the CIRP, there must exist the potential for profitability as a going concern for such company to attract good plans and avoid liquidation. One of the reasons for high liquidation to resolution ratio under IBC is that the companies under CIRP lack profitable viability.

By virtue of the nature of Section 8 companies, there is minimal scope of monetary returns for the members, neither is there a distribution of dividend in the long run. Hence, if a Section 8 company undergoes CIRP, most of them are unlikely to attract good plans. Alternatively, a restructuring of the company under which it is converted into a for-profit company is possible under a plan. However, this would dilute the public interest that the charitable company served.

Thus, absent a resolution plan, the company would get liquidated. Liquidation is undesirable for it destroys the company’s organisational capital, in addition to diminishing its assets’ values. For charitable companies, liquidation also jeopardises the larger public interest by destroying their intangible assets. For example, charitable companies dedicated to promoting arts are often sole custodians of certain intangible assets that enrich the society by providing cultural, civic, and social benefits for people at large, however they have no liquidation value.[5]

Proposed solution: A middle ground?

The above discussion does not intend to suggest that charitable companies should be completely exempted from the IBC. After all, these companies, like any other companies, require sources of funding, employees and strategic plans for their operations. For example, the extent of donations or credit a company obtains depends upon the credibility/influence it has in society, which in turn depends on the nature of projects undertaken and their success. Meaning that, while the core purpose of these companies is charitable with non-profit motive, their operations are similar to a for-profit company in terms of daily management. So, their creditors should not be devoid of the rights/benefits otherwise available under the IBC. Further, IBC is an economic legislation aimed at augmenting the economic viability of distressed companies and preserving their organisational capital (BLRC Report)[6]. So, if a Section 8 company is under distress, IBC should aid in its rescue.

Given that, one needs to reach some middle ground. Owing to the different nature and object of these companies, the CA’13 provides slightly different amalgamation and winding-up provisions for these companies than their for-profit counterparts. As per Section 8(10)[7], a Section 8 company can only be amalgamated with another Section 8 company having similar objects. Further, on winding up, the residual assets of the company are to be transferred to another Section 8 company having similar objects, or the proceeds go to the insolvency and bankruptcy fund formed under Section 224 of IBC[8]. The idea is to preserve the company’s objectives as far as practicable. The authors argue that similar concessional arrangement for them under the IBC is feasible and desirable.

A charitable company focuses on social welfare rather than economic benefits to its members. On the other hand, the IBC aims to maximise the value of the company under distress. Thus, there is an apparent mismatch between the objectives of Section 8 companies and the IBC. Similar consideration made an National Company Law Tribunal (NCLT) Judge, in Harsh Pinge v. Hindustan Antibiotics Limited[9] say that certain public sector undertakings, like the Hindustan Antibiotics Limited, are corporate entities but as their larger objective is social welfare and not making huge money, hence this should absolve them from the clutches of the IBC in event of default.

Insights from the United States and the United Kingdom

The US Bankruptcy Code exempts charitable companies from involuntary bankruptcy proceedings, initiated by the creditors. However, some scholars criticise this provision as it insulates the fraudulent charitable fiduciaries in companies from creditor-demanded bankruptcy.[10] However, for those companies that face insolvency due to genuine business failures, the UK model offers some insights. The UK Insolvency Act, 1986, that is a creditor-in-control model provides for an American style debtor in possession provision as well viz. the Company Voluntary Arrangement (CVA). Under CVA, the directors of a company may propose to its creditors an arrangement for satisfaction of its debts under which there would be debt haircut, delay in payment provision, or both. The directors then nominate an insolvency practitioner who then, in 28 days submits his report to the court opining if the arrangement has reasonable prospects of approval and implementation. For small-scale companies, the directors can also obtain a moratorium when CVA is proposed, to avoid individual recovery proceedings. On the court’s order, the CVA is discussed and voted by the creditors and if approved, goes for final court approval. After approval, the insolvency practitioner supervises the implementation after which the control goes back to the directors. This provision is in addition to the administration/winding-up provisions.[11]

In the Indian context, the apprehensions over the complete exemption under the US model hold merits. A blanket exemption from the IBC may open floodgates for unfair dealings or fraudulent conduct. In that case, the creditors should always have an option to approach the NCLT and follow the regular CIRP. An arrangement on lines of the UK CVA model should also be provided for Section 8 companies. This model is well suited for these companies that can avoid the rigours of the CIRP and also satisfy their debts and preserve their enterprises. On failure, the creditors can resort to the CIRP. Nevertheless, a rational creditor would prefer CVA over CIRP, for the former would be speedier and more certain. Adopting a procedure like CVA for such companies would allow early resolution and will be in the larger public interest. Implicit in such model is minimum governmental intervention in the process. It is important because these companies already face the problem of excessive governmental regulations in incorporation, functioning, receiving foreign contributions [regulated through the Foreign Contribution (Regulation) Act, 2010[12]], etc.[13], extending the same to restructuring (as is the current process of amalgamation)[14] would not be in the best interests of the company and the public. Making it a court-monitored, creditor-debtor-insolvency professional driven process would do far better, in terms of both its economic and social outcomes.

Conclusion

While Section 8 companies are not exempted and should not be exempted from the clutches of IBC, the inherent nature and objectives of these companies demands reconsideration on the role of IBC to rescue them from distress. The authors propose an option of the UK-style CVA model to be provided for these companies for rescue. Nevertheless, in determining whether to extend the benefit of CVA to a particular company or to directly subject it to the CIRP, the actual functioning of that company, possibility of misconduct, mala fide practices, etc. should be duly considered. But absence these cases, where a Section 8 company faces distress due to genuine business failure, a CVA-style arrangement should be preferred, and CIRP may act as the final resort.


*3rd year student (6th Semester), BA LLB (Hons.), National Law University, Delhi. Author can be reached at kumari.saloni18@nludelhi.ac.in

[1]As per MCA data, total number of charitable companies incorporated under Section 25 of the Companies Act, 1956 stood close to 5000 right before the implementation of the Companies Act, 2013. Further, a 2014 Report concludes that India has one NGO on 600 people of its population.

[2] Companies Act, 2013, Section 8. .

[3] Insolvency and Bankruptcy Code, 2016.

[4] Ibid, Section 3(7)

[5]Reid K. Weisbord, Charitable Insolvency and Corporate Governance in Bankruptcy Reorganisation, (2013) 10 Berkeley Bus LJ 305, 315.

[6]Report of the Bankruptcy Law Reforms Committee, Vol. I: Rationale and Design (November 2015). 

[7]Companies Act, 2013, Section 8(10).

[8]IBC, Section 224.

[9] C.P. No. (IB) 2482/2018, order dated 16-7-2019 (NCLT Mumbai Bench).

[10] Supra Note 5, 347.

[11]UK Insolvency Act, 1986 c. 45, Part I Company Voluntary Arrangements.

[12]Foreign Contribution (Regulation) Act, 2010.

[13]Pushpa Sundar, Why India’s Non-Profit Sector Needs Comprehensive Legal Reform (The Wire, 10-5-2017).

[14]As is provided under the Companies Act wherein amalgamation can happen if the Central Government is of that opinion [Section 8(10)].

Akaant MittalExperts Corner

Recapitulation

In the previous column, we discussed the initial issues in the interplay of Insolvency and Bankruptcy Code, 2016 (IB Code) with the law on limitation and how they were resolved by the insertion of Section 238-A to the IB Code and the Supreme Court rulings in B.K. Educational Services[1] and Vashdeo R.  Bhojwani v. Abhyudaya Cooperative Bank Ltd.[2]

 

We then discussed that currently there are three major issues that require a modicum of certainty, namely, whether the creditors can use the following provisions of the Limitation Act to extend/renew the period of limitation while seeking initiation of resolution process against a corporate debtor:

 

(i) Section 14 of the Limitation Act, 1963, which states “exclusion of time of proceeding bona fide in court without jurisdiction” is applicable.

(ii) Section 18 of the Limitation Act, 1963 which provides for the “effect of acknowledgment in writing”.

(iii) Section 19 of the Limitation Act, 1963 which stipulates the “effect of payment on account of debt or of interest on legacy”.

 

In the previous column, we had discussed that the recent ruling of the Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.[3] does provide some respite as far as Section 14 of the Limitation Act is concerned and a creditor can use that provision to seek extension of limitation period. But there were still some lingering doubts on whether Section 14 could still come to the rescue of the creditors even when rightly pursuing remedy in another court or tribunal before coming to the National Company Law Tribunal (NCLT) in an application under Section 7 or Section 9 or Section10 of the IB Code.

 

Brief on Section 18 of the Limitation Act, 1963

Coming to issue (ii), Section 18 of the Limitation Act, 1963 provides:

 

  1. Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

 

Section 18 of the Limitation Act requires acknowledgment of liability to be made before the expiration of the prescribed period and to be in the form of, or in writing signed by the party against whom such right is claimed, in order to be effective to extend limitation.[4]

 

The fact that a debtor has acknowledged that there is debt is sufficient to restart the period of limitation.[5] It is however essential that a person either making acknowledgment of liability or a person making the payment must make acknowledgment or payment by his own writing signed by him or in writing at least signed by him and such acknowledgment must be before the expiration of the existing period of limitation[6]. In other words, there must be a written acknowledgment containing an admission of a subsisting liability, and a mere admission of past liability is not sufficient to constitute such an “acknowledgment”.[7]

 

Judicial Discourse on the Applicability of Section 18

The issue of Section 18 was explicitly a matter of issue in Babulal Vardharji. In Babulal Vardharji[8], the appellant before the National Company Law Appellate Tribunal (NCLAT) argued that the default took place in July 2011 and the application under Section 7 being filed in March 2018 was barred by limitation. The respondent, in turn, contended that there is a continuous cause of action. The NCLAT noted the proceedings undertaken by the respondent creditor before the Debts Recovery Tribunal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) and the same were pending. The financial creditor also brought on record a letter dated 31-7-2018 issued by the appellant seeking a one-time settlement (OTS) with the creditor bank. Based on a culmination of these factors, the NCLAT found that the claim is not time barred as well.

 

However, when the matter in Babulal Vardharji went into appeal before the Supreme Court[9] the Supreme Court set aside the order of the NCLAT. The Supreme Court held that since the date of default is 8-7-2011, therefore, on account of the Limitation Act, the application under Section 7 is time barred. The Court also specifically discussed the reliance made by the NCLAT on the pendency of the application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the fact that corporate debtor had made a prayer for OTS in July 2018. The Supreme Court on these grounds stated that “noticeably, though the Appellate Tribunal has referred to [these factors] … [but the NCLAT] has not recorded any specific finding about the effect of these factors.”[10]

 

While the Court sought to answer if Section 18 of the Limitation Act is applicable, in the end, it seems to have confined its findings only to the facts of the case. It stated:

 

  1. even if it be assumed that the principles relating to acknowledgment as per Section 18 of the Limitation Act are applicable for extension of time for the purpose of the application under Section 7 of the Code, in our view, neither the said provision and principles come in operation in the present case nor do they enure to the benefit of Respondent 2 for the fundamental reason that in the application made before NCLT, Respondent. 2 specifically stated the date of default as “8-7-2011 being the date of NPA” .

35.1. … [i]n other words, even if Section 18 of the Limitation Act and principles thereof were applicable, the same would not apply to the application under consideration in the present case, looking to the very averment regarding default therein and for want of any other averment in regard to acknowledgment.[11]

 

Therefore, it is submitted that the ruling in Babulal Vardharji[12] still left the issue of applicability of Section 18 of the Limitation Act unaddressed. The Supreme Court has overlooked (a) the acknowledgment of debt on account of the OTS offer; (b) the pending litigation before Debts Recovery Tribunal; and (c) the differentiation that NCLAT made between the limitation in filing the application vis-à-vis the time barred of the debt amount. The NCLAT applied Article 137 to the filing of an application under the IB Code to only hold that the application itself is not barred on account of the law of limitation. Regarding the bar on the debt amount itself, the NCLAT analysed that all the due attempts are being made to recover the debt amount before the appropriate forum (before the IB Code came to be enacted).

 

The Court had the opportune occasion to categorically put to rest any debate on the applicability of Section 18 of the Limitation Act to extend limitation for an application under Section 7 or Section 9 under the IB Code. However, the same was a missed opportunity.

 

The ruling in Babulal Vardharji[13] formed the basis of the NCLT ruling in Lampex Electronics Ltd. v. AMI Tech (India) (P) Ltd.[14] and a Calcutta High Court ruling in Gouri Shankar Chatterjee v. SBI[15] where relying on Babulal Vardharji[16], the courts held that Section 18 is inapplicable.

 

However, in a decision dated 26-3-2021, the Supreme Court in Laxmi Pat Surana v. Union Bank of India[17] seems to have put to rest this issue with respect to Section 18.

 

The corporate debtor – guarantor in this case argued that the date of default was in the year 2010 when the account of the principal borrower was declared non-performing asset. The respondent creditor – bank, in turn, submitted that on account of the time-to-time acknowledgments of debt given by the principal borrower and even the guarantor – corporate debtor, the last of which was given on 8-12-2018 means that the debt is not time barred.

 

The Court, firstly, addressed the purport of Babulal Vardharji[18] with respect to the issue of whether Section 18 of the Limitation Act applies to an application under the IB Code. It put to rest that in that ruling the Supreme Court had not ruled out the application of Section 18 of the Limitation Act to the proceedings under the IB Code, if the fact situation of the case so warrants.

 

Subsequently taking note of the provision of Section 238-A of the IB Code, the Court opined that once the provisions of Limitation Act have been made applicable to the proceedings under the IB Code, as far as such provisions may be applicable, there remains no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiated under the IB Code.

 

Therefore, it was directed that a fresh period of limitation be computed from the date of acknowledgment of a debt by the principal borrower and/or the corporate guarantor, including in particular the last communication dated 8-12-2018. Resultantly, the application of the financial creditor under Section 7 of the IB Code was found to be within the limitation by granting the benefit of exclusion of time period under Section 18 of the Limitation Act.

 

The same also formed the basis for the Supreme Court ruling in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal,[19] where the Court set aside the 5- Judge ruling of the NCLAT in V. Padmakumar,[20] which had held that entries in balance sheets would not amount to an acknowledgment of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

 

The Court relied on the observations in Sesh Nath Singh[21] and the categorical position laid down in Laxmi Pat[22] to firstly conclude that Section 18 of the Limitation Act applies to the proceedings under the IB Code. The Court also set aside the ruling of the Calcutta High Court in Gouri Shankar Chatterjee.[23]

 

Then, the Court went on to discuss that how entries in a balance sheet may amount to an acknowledgment for the purposes of Section 18 of the Limitation Act.

 

The implication of this decision may be a matter of discussion since accounting rules, if conservative, may require recognition of claims even if the corporate debtor is contesting the same. Therefore, even when a dispute is under contest for a period of over 3 years, still the balance sheet of the company may show under the head of contingent liability of the notes in the balance sheet. Just to prevent any misinterpretation, the Court was cognizant of the same and even noted this circumstance and discussed as to when an entry in a balance sheet may not necessarily mean an acknowledgment of liability. The Court stated:

 

  1. 19. … this judgment holds that though the filing of a balance sheet is by compulsion of law, the acknowledgment of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgment of debt for reasons given in the said note.

                                               ***

  1. 32. … the statement of law contained in Bengal Silk Mills[24], that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case-by-case basis to establish whether an acknowledgment of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.[25]

 

With the rulings in Laxmi Pat[26] and Asset Reconstruction Co.[27], it is submitted that the issue of the application of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code is settled unequivocally and put to a categorical end.

 

Conclusion

The Supreme Court while reiterating the applicability of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code has set out the interpretative standards for future references. The missed opportunities of Babulal Vardharji[28] which was subsequently followed by the tribunals, and the High Courts now stand settled conclusively by the ruling in Laxmi Pat[29]. Similarly the erroneous determination by the NCLAT in V. Padmakumar[30] of the limitation issues concerning the acknowledgment of debt under Section 18 by virtue of entries in balance sheets of a company was equally enigmatic. While correcting this error, the Supreme Court reiterated the position settled in Laxmi Pat[31], putting a conclusive end to the issue of the application of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code.

 

† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting lecturer at the NUJS, Kolkata and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

The author gratefully acknowledges the research and assistance of Sh. Yash Borana, 4th Year, B.A.LLB. (Hons.), Student at National Law University, Nagpur, in writing this article.

 

[1] B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528.

[2] (2019) 9 SCC 158 : (2019) 4 SCC (Civ) 308.

[3] 2021 SCC OnLine SC 244.

[4] Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium Corpn. of India, (1971) 1 SCC 67 : AIR 1971 SC 1482; Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267.

[5] See also Shalini Publicity Creative (P) Ltd. v. Dena Bank, 2019 SCC OnLine NCLAT 91, para 7.

[6] Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267, para 37.

[7] Valliamma Champaka Pillai v. Sivathanu Pillai, (1979) 4 SCC 429.

[8] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., 2019 SCC OnLine NCLAT 295.

[9] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 : 2020 SCC OnLine SC 647.

[10] Ibid, para 12 (additions made]).

[11] Ibid, paras 35 and 35.1 (emphasis added).

[12] Ibid.

[13] Ibid.

[14] C.P. No. 1810/IBC/MB/2018.

[15] C.O. 1257 of 2020.

[16] (2020) 15 SCC 1 : 2020 SCC OnLine SC 647

[17]  2021 SCC OnLine SC 267.

[18]  (2020) 15 SCC 1 : 2020 SCC OnLine SC 647.

[19] 2021 SCC OnLine SC 321.

[20] V. Padmakumar v. Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT 417.

[21] Sesh Nath Singh  v. Baidyabati Sheoraphuli Cooperative Bank Ltd., 2021 SCC OnLine SC 244.

[22] 2021 SCC OnLine SC 267.

[23] Civil appeal arising out of SLP (Civil) No. 1168 of 2021 in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, 2021 SCC OnLine SC 321.

[24] Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128.

[25] 2021 SCC OnLine SC 321, paras 19 and 32 (emphasis added).

[26] 2021 SCC OnLine SC 267.

[27] 2021 SCC OnLine SC 321.

[28] (2020) 15 SCC 1 : 2020 SCC OnLine SC 647

[29] 2021 SCC OnLine SC 267.

[30] 2020 SCC OnLine NCLAT 417.

[31] 2021 SCC OnLine SC 267.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai* and Hrishikesh Roy, JJ has held that any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under sub­-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016.

Resolution Plan – When becomes binding?

After taking note of Section 31 of IBC, the Court observed that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders.

“Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.”

The Court explained one of the principal objects of IBC is, providing for revival of the Corporate Debtor and to make it a going concern. Here’s the scheme of the Code:

  • Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum.
  • The resolution applicants submit their plans on the basis of the details provided in the information memorandum.
  • The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on-going concern.
  • After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the IBC. Only thereafter, the Adjudicating Authority can grant its approval to the plan.
  • It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan.

“The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.”

2019 Amendment – Nature and effect of  

After the 2019 amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

The mischief, which was noticed prior to amendment of Section 31 of IBC was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity the State/Central Government authorities continued with the proceedings in respect of the debts owed to them.

In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.

Further, the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of IBC and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief.

Therefore, the 2019 amendment is declaratory and clarificatory in nature and   therefore retrospective in operation.

“Creditor” and “Other Stakeholders” – If includes Central Government, State Governments or local authorities

“Creditor” – If covers Government

“Creditor” has been defined to mean ‘any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder’.

“Operational creditor” has been defined to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

“Operational debt” has been defined to mean a claim in respect of the provision of goods or   services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

Harmonious construction of subsection (10) of Section 3 of the IBC read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of ‘operational debt’.

The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of ‘operational creditor’ as defined under sub¬section (20) of Section 5 of the IBC.  Consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under sub-section (10) of Section 3 of the IBC.

“As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term ‘creditor’ and in any case, by the term ‘other stakeholders’ as provided in subsection (1) of Section 31 of the IBC.”

Key findings

(i) Once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of   Section 31 of Insolvency and Bankruptcy Code, 2016, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders.

Further, on the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

(ii) 2019 amendment to Section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which IBC has come into effect;

(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

[Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, 2021 SCC OnLine SC 313, decided on 13.04.2021]


*Judgment by Justice BR Gavai

Know Thy Judge| Justice B.R. Gavai

For Appellants: Senior Advocates Dr. A.M. Singhvi, Neeraj Kishan Kaul

For respondents: Senior Advocate Gurukrishna Kumar, Advocate Prashant Bhushan

For State Authorities: Advocate V. Shekhar

 

 

Case BriefsSupreme Court

Supreme Court: The Division Bench of Rohinton Fali Nariman* and B.R. Gavai, JJ., addressed the instant appeal involving the question that whether an insolvency proceedings could be initiated after the winding up application had been admitted under the Companies Act. The Bench stated,

“…every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country.”

The Appellant was an operational creditor of Respondent 2, Shree Ram Urban Infrastructure Limited (SRUIL). A winding up petition was filed by the respondent 3 herein, Action Barter Pvt. Ltd. against SRUIL, stood admitted on 05.10.2016, due to failure of SRUIL and subsequently, the physical possession of the assets of the company was taken over by the provisional liquidator.

Meanwhile, Indiabulls, a secured creditor of the company, filed an application to realise its security outside such winding up proceeding, which had been allowed by the Company judge and the Provisional Liquidator was directed to handover possession of the Mortgaged Property of the company to Indiabulls. Though, it had been directed that Indiabulls should conduct the sale of the property in consultation with the Official Liquidator. The property was sold and the said sale was challenged by the provisional liquidator in the Bombay High Court, alleging that the conditions of the order were flouted, and that what was sold was much more than what was mortgaged to the secured creditor, and that too at a gross undervalue.  The said representation by the provisional liquidator is still pending in the Court.

Additionally, the respondent 1, SREI Equipment Finance Ltd. (SREI) filed a petition under Section 7 of the IBC before the NCLT, which petition was admitted by the NCLT. In the instant case the appellant was contesting that the petition under Section 7 of the IBC would have to be held to be non-maintainable that no suit or other legal proceeding can be initiated once there is admission of a winding up petition. The appellant argued that post admission of a winding up petition; no petition under Section 7 of the IBC could be filed. It was also contended that the fact that the company was under winding up had been suppressed in the petition filed under Section 7 of the IBC.

In Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held that, “the IBC is a special statute dealing with revival of companies that are in the red, winding up only being resorted to in case all attempts of revival fail. Vis-à-vis the Companies Act, which is a general statute dealing with companies, including companies that are in the red, the IBC is not only a special statute which must prevail in the event of conflict, but has a non-obstante clause contained in Section 238, which makes it even clearer that in case of conflict, the provisions of the IBC will prevail.”

Relying on the decision in Forech (India) Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., (2019) 18 SCC 549, the Bench stated, in a situation in which notice had been issued in a winding up petition the said petition could be transferred to the NCLT, wherein it would be treated as a proceeding under the IBC. The Bench stated, a conspectus of the aforesaid authorities would show that a petition either under Section 7 or Section 9 of the IBC is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company.

Given the object sought to be achieved by the IBC, it is clear that only where a company in winding up is near corporate death that no transfer of the winding up proceeding would then take place to the NCLT to be tried as a proceeding under the IBC.

The Bench stated, it is settled law that a secured creditor stands outside the winding up and can realise its security dehors winding up proceedings. Relying on S. 230(1) of the Companies Act, 2013, the Bench expressed that a compromise or arrangement is admissible in law in an IBC proceeding if liquidation is ordered.

In Food Controller v. Cork, (1923) A.C. 647, it had been explained that;

“The phrase ‘outside the winding up’ is an intelligible phrase if used, as it often is, with reference to a secured creditor, say a mortgagee. The mortgagee of a company in liquidation is in a position to say “the mortgaged property is to the extent of the mortgage my property. It is immaterial to me whether my mortgage is in winding up or not. I remain outside the winding up” and shall enforce my rights as mortgagee. This is to be contrasted with the case in which such a creditor prefers to assert his right, not as a mortgagee, but as a creditor. He may say ‘I will prove in respect of my debt’. If so, he comes into the winding up”.

The Bench expressed, that corporate death is inevitable, every effort should be made to resuscitate the corporate debtor in the larger public interest, which includes not only the workmen of the corporate debtor, but also its creditors and the goods it produces in the larger interest of the economy of the country.

Once a winding up petition is admitted, the winding up petition should not trump any subsequent attempt at revival of the company through a Section 7 or Section 9 petition filed under the IBC.

Consequently, though no application for transfer of the winding up proceeding pending in the Bombay High Court has been filed, the High Court had itself, directed the provisional liquidator to hand over the records and assets of SRUIL to the resolution professional (IRP) in the Section 7 proceeding that is pending before the NCLT.

In the light of above, the Bench held that any “suppression” of the winding up proceeding would, therefore, not be of any effect in deciding a Section 7 petition on the basis of the provisions contained in the IBC. Hence, the appeal was dismissed.

[A. Navinchandra Steels (P) Ltd. v. SREI Equipment Finance Ltd., 2021 SCC OnLine SC 149, decided on 01-03-2021]


Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice Rohinton Fali Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearance before the Court:

For the appellant: Sr. Adv. Abhishek Manu Singhvi and Sr. Adv. Ranjit Kumar,

For SREI: Adv. Abhijeet Sinha,

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that there is nothing wrong with the bar imposed under Section 10A of Insolvency and Bankruptcy Code, 2016 on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020 retrospectively to application filed before June 5, 2020.


ISSUE


Whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the provision came into force) in respect of a default which has occurred after 25 March 2020?


ARGUMENTS


By appellant

(i) Section 10A creates a bar to the ‘filing of applications’ under Sections 7, 9 and 10 in relation to defaults committed on or after 25 March 2020 for a period of six months, which can be extended up to one year;

(ii) The Ordinance and the Act which replaced it do not provide for the retrospective application of Section 10A either expressly or by necessary implication to applications which had already been filed and were pending on 5 June 2020;

(iii) Section 10A prohibits the filing of a fresh application in relation to defaults occurring on or after 25 March 2020, once Section 10A has been notified (i.e., after 5 June 2020);

(iv) Section 10A uses the expressions “shall be filed” and “shall ever filed” which are indicative of the prospective nature of the statutory provision in its application to proceedings which were initiated after 5 June 2020; and

(v) The IBC makes a clear distinction between the “initiation date” under Section 5(11) and the “insolvency commencement date” under Section 5(12).

(vi) In each case it is necessary for the Court and the tribunals to deduce as to whether the cause of financial distress is or is not attributable to the Covid-19 pandemic.

By Respondent

(i) The legislative intent in the insertion of Section 10A was to deal with an extraordinary event, the outbreak of Covid-19 pandemic, which led to financial distress faced by corporate entities;

(ii) Section 10A is prefaced with a non-obstante clause which overrides Sections 7, 9 and 10; and 9

(iii) Section 10A provides a cut-off date of 25 March 2020 and it is evident from the substantive part of the provision, as well as from the proviso and the explanation, that no application can be filed for the initiation of the CIRP for a default occurring on and after 25 March 2020, for a period of six months or as extended upon a notification.


PROVISION IN QUESTION


Section 10A is prefaced with a non-obstante provision which has the effect of overriding Sections 7, 9 and 10. Section 10A provides that:

(i) no application for the initiation of the CIRP by a corporate debtor shall be filed;

(ii) for any default arising on or after 25 March 2020; and

(iii) for a period of six months or such further period not exceeding one year from such date as may be notified in this behalf.

The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP of a corporate debtor “for the said default occurring during the said period”. The explanation which has been inserted for the removal of doubts clarifies that Section 10A shall not apply to any default which has been committed under Sections 7, 9 and 10 before 25 March 2020.


WHAT THE SUPREME COURT SAID


“The correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated.”

Going into the legislative intent, the Court noticed that the date of 25 March 2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the national lockdown was declared in India due to the onset of the Covid-19 pandemic.

The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date.

  • The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP “for the said default occurring during the said period”.
  • The expression “shall ever be filed” is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified.
  • The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020. The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation.

Reading the provisions together, the Court noticed that the Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Therefore,

“Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020.”

The Court, however, noticed that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.

Section 10A does not contain any requirement that the Adjudicating Authority must launch into an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic.

“Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies (…), which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern.”

Hence, the embargo contained in Section 10A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision.

The Court further explained that the date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application.

To explain this further, the Court referred to the NCLAT’s order which stated that while ‘initiation date’ is referable to filing of application by the eligible applicant, ‘commencement date’ refers to passing of order of admission of application by the Adjudicating Authority.

“The ‘initiation date’ ascribes a role to the eligible applicant whereas the ‘commencement date rests upon exercise of power vested in the Adjudicating Authority. Adopting this interpretation would leave no scope for initiation of CIRP of a Corporate Debtor at the instance of eligible applicant in respect of Default arising on or after 25th March, 2020 as the provision engrafted in Section 10A clearly bars filing of such application by the eligible applicant for initiation of CIRP of Corporate Debtor in respect of such default.”

NCLAT had also noted that the bar created is retrospective as the cut-off date has been fixed as 25th March, 2020 while the newly inserted Section 10A introduced through the Ordinance has come into effect on 5th June, 2020.

“The object of the legislation has been to suspend operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020 i.e. the date on which Nationwide lockdown was enforced disrupting normal business operations and impacting the economy globally. Indeed, the explanation removes the doubt 19 by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.”

[Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd, 2021 SCC OnLine SC 72, decided on 09.02.2021]


*Judgment by: Justice Dr. DY Chandrachud

Appearances before the Court by

For appellant: Senior Advocate Neeraj Kishan Kaul

For respondent: Senior Advocate Gopal Jain

Op EdsOP. ED.

Bilateral Netting of Qualified Financial Contracts Act was introduced in the Parliament and received the parliamentary assent on 28-09-2020 and was made effective from 1-10-2020; it is also known as the Netting Act. This Act was created by the Parliament in order to reduce the credit risk exposure and systematic risk prevailing in the financial markets. The purpose of this Act is to “ensure stability and promote competitiveness in Indian financial markets by providing enforceability of bilateral netting of qualified financial contracts and for matters connected therewith or incidental thereto.”[1] The key purpose of the Act is to consolidate, regulate and establish a legal foundation for the bilateral netting of qualified financial contracts, which have been the major instruments of the OTC (over-the-counter) derivatives market in India.

This Act is based on the Model Netting Act created by the ISDA (International Swaps and Derivatives Association) with specific changes and adaptations in compliance with the legal and regulatory system prevailing in India. India has adopted the ISDA’s advisory to take a more flexible and principle-based approach.

Applicability of the Act

If we look at Section 3 of the Act2, it says that this Act will apply to the qualified financial contracts between two qualified financial market participants where one party must be regulated by the specific regulatory authorities mentioned under Schedule I of the Act3.

Key concepts

  • Netting

The term netting is defined under Section 2(1)(j) of the Act as—

“netting” means determination of net claim or obligations after setting off or adjusting all the claims or obligations based or arising from mutual dealings between the parties to qualified financial contracts and includes close-out netting;4

In simple terms, netting allows two parties in a bilateral financial arrangement to balance their charges/claims against each other in order to assess a single net payment due from one party to another in the case of default.

In the absence of a regulatory mechanism for bilateral netting, the banks are required to calculate the credit exposure of the counterparty for the over-the-counter (OTC) derivative contracts on a gross basis rather than on a net basis.

(i) Qualified financial contracts

It is a simple term which means a financial contract which is notified by the appropriate authority.5 The appropriate authority or regulators under the Act6 are:

 “Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), International Financial Services Centres Authority (IFSCA) and through notification, the Central Government can exempt contracts with certain parties or with certain terms from being designated as QFCs.”

(ii) Close-out netting

It is defined under Section 2(1)(e) of the Act as—

“close-out netting” means a process involving termination of obligations under a qualified financial contract with a party in default and subsequent combining of positive and negative replacement values into a single net payable or receivable as set out in Section 6;7

Basically, it gives the party the right to cancel its obligations under the contract and to blend positive and negative substitution amounts in order to determine the net sum payable of receivable. Section 6 of the Act8 talks about the invocation of close-out netting. Under Section 6, the process can be triggered by a party to the QFC in the event of9 (i) default (failure to comply with the obligations of the QFC) by the other party; or (ii) termination, as defined in the netting agreement, which grants either or more parties the right to cancel transactions under the agreement.

(iii) Qualified financial market participant

The authorities to be regarded as qualified financial market participant are defined under Section 2(1)(o) of the Act which is as follows:10

“qualified financial market participant” includes: —

(i) a banking institution, or a non-banking financial company, or such other financial institution which is subject to regulation or prudential supervision by the Reserve Bank of India;

(ii) an individual, partnership firm, company, or any other person or body corporate whether incorporated under any law for the time being in force in India or under the laws of any other country and includes any international or regional development bank or other international or regional organisation;

(iii) an insurance or reinsurance company which is subject to regulation or prudential supervision by the Insurance Regulatory and Development Authority of India established under the Insurance Regulatory and Development Authority Act, 199911;

(iv) a pension fund regulated by the Pension Fund Regulatory and Development Authority established under the Pension Fund Regulatory and Development Authority Act, 201312;

(v) a financial institution regulated by the International Financial Services Centres Authority established under the International Financial Services Centres Authority Act, 201913; and

(vi) any other entity notified by the relevant authority under clause (b) of Section 4;14

As per this sub-section the authorities mentioned under Schedule I of the Act are to be considered as the qualified financial contract participants and any other agency as notified by the appropriate Government under the given Act.

Importance of this law

Previously, when RBI used to set norms for the derivative markets or the qualified financial contracts, it has been regularly observed by the Central Bank that there is certain irregularity or ambiguity in the enforceability of the bilateral netting from the legal perspective.

The existing law would offer a major incentive for productive marginalisation, legislative reforms to RBI and allow financial firms to measure their market worth not on a gross basis but on a net basis.

The interaction of the Act with the Insolvency and Bankruptcy Code, 201615

One of the main benefits of this Act is that it has been granted the authority to circumvent other legislations, especially the Insolvency Code, which creates greater safety netting for the parties. This is made in accordance with the International Swaps and Derivatives Association’s suggestion that the key aim of the netting regulation should be to guarantee the enforceability of a netting arrangement against a party that is subject to insolvency proceedings. Similar guidance is set out in the rules regulating the financial markets dealing with the functioning of the central clearing counterparties. The Model Netting Act created under the shadow of the ISDA also makes a special reference to the cases of the insolvency resolution of the financial institutions and highlights the need to reconcile the goals of netting law with the need to assure that the resolution mechanisms are reliable. However, no specific mention is made under this Act.

If we look previously, the market participants have expressed questions over the unequal netting treatment under various legislations relating to the insolvency of the statutory entities and banking institutions, as opposed to the corporations established under the company law. Other than this, the Act also expressly overrides the rules of such enumerated laws and any legislation by which the market participants i.e. the RBI, SEBI, IRDAI, PFRDA, IFSCA has been incorporated, constituted or governed.

Critical analysis

This law, no doubt is a big government financial initiative, particularly in this pandemic period, when we can only hear stories relating to how our banking system is collapsing in these difficult times. This law will help the financial institutions of the country to participate more freely in the derivative markets or the corporate bonds market. It will not only strengthen the corporate bond market in India but it will help the country to achieve financial stability as it is a tested method which is used by almost all the countries in the world. This Act will offer more funding to the businesses through the purchasing of bonds as they obtain a sense of security through a credit swap contract or a netting agreement.

As said earlier, this Act will give life to the dull Indian corporate bond market. Previously, RBI noted that one of the major reasons for lack of interest in the credit defaults was the restriction on the netting position of the mark on the market for capital adequacy and exposure standards. The modification brought by the Act will make a positive impact on the bond market. However, in my view, the Act will not be in a capacity to transform the dynamics of the corporate bond industry by itself and may need more reforms and changes, including the simplification of the corporate bond operating rules, optimisation of pricing and expanded long-term investor engagement.

The issue which can be attracted in this Act is that this Act says that the contracts which are entered on a multilateral basis with the Securities Contracts (Regulation) Act, 195616 and the Payment and Settlement Systems Act, 200717 are excluded from the preview of the Act.18 As such, these rules deal with netting and settlement in particular cases (i.e. the operation of the stock markets and centralised counterparties, and the payment processes, respectively) and are better served by the exemption of the statute.19


4th year student BBA LLB (Hons.) School of Law, UPES.

[1]Preamble, Bilateral Netting of Qualified Financial Contracts Act, 2020

2 http://www.scconline.com/DocumentLink/ozOzrYs7

3 http://www.scconline.com/DocumentLink/JDn3ql97

4 S. 2(1)(j) of Bilateral Netting of Qualified Financial Contracts Act, 2020

5 Id., at S. 2(1)(n).

6 Id., at Sch. 1.

7 Id., at S. 2(1)(e).

8 <http://www.scconline.com/DocumentLink/YO47Q1ui>.

9 Supra note 4 at S. 6.

10 Id., at S. 2(1)(o).

11 <http://www.scconline.com/DocumentLink/Q43JYv8R>.

12 <http://www.scconline.com/DocumentLink/hg37x3r0>.

13 <http://www.scconline.com/DocumentLink/2CW1VS4K>.

14 Supra note 10.

15 <http://www.scconline.com/DocumentLink/86F742km>.

16 <http://www.scconline.com/DocumentLink/8Xj668B0>.

17 <http://www.scconline.com/DocumentLink/Q9aQ21VT>.

18 Supra note 4 at S. 4(a).

19 Supra note 17.

New releasesNews

A panel discussion on  “4 Years of IBC – The Revolution Witnessed and the Promise for Future” was held on 12th December, 2020.  The event also marked the release of Mr Akaant Kumar Mittal’s book on Insolvency and Bankruptcy: Law and Practice. It had several prominent personalities in attendance such as Justice AB Singh, Judicial Member, NCLAT, Dr MS Sahoo, President of Insolvency and Bankruptcy Board of India, Ms Mamta Binani, ex- Chairman, ICSI and others. This discussion was moderated by Ms Haripriya Padmanabhan, Advocate, Supreme Court of India.

 

After a brief introduction, Ms Padmanabhan proceeded to ask Justice Singh whether in his extensive experience as a judge of the High Court where he would have had an occasion to decide winding up cases, compared to his present office as Member of the NCLAT, does he think, that the IBC has made the process of insolvency more efficient? Listen to his answer below

To Dr Sahoo, Ms Padmanabhan asked whether that as new cases are time bound as they come under the new code, shouldn’t we consider transferring the existing winding up cases from HC to NCLT and NCLAT? She also asked his opinion on the fact that  the Code was brought in to save businesses, however it has been found that more than half the cases which are closed under the Code ended up in Liquidation and only 14.93% of the cases ended up with a Resolution Plan. Why does he think this is the case? Dr Sahoo’s reply to the question can be seen below. Kindly pardon Dr Sahoo’s video quality because of connectivity issues.

Next Ms Padmanabhan asked Dr Binani that by the time companies reach NCLT they are very sick, the amount of time available for resolution should increase or decrease depending on what is at stake? Also, What does she think are some of the biggest challenges that a Resolution Professional  faces under the Code? To see Dr Binani’s reply, watch the video below.

Ms Padmanabhan next addressed the author, Mr Mittal and asked him his opinion on the recent Supreme Court’s judgment with respect to the limitation act being applied to IBC. His answer can be seen below.

In the second round, Ms Padmanabhan proceeded to ask each panelist what measures can be introduced to make IBC more effective. See the video below for Justice Singh’s reply.

Listen to Dr Sahoo answer Justice AB Singh’s question on prepackaged insolvency and Ms Padmanabhan’s question on group insolvency and how to make IBC better. Kindly pardon the bad audio because of connectivity issues.

Ms Padmanabhan asked Dr Binani whether foreign portfolio investors are permitted to rescue companies under current IBC, the need to create a fund to facilitate the process and how to make the IBC better.

Ms Padmanabhan commented that Mr Mittal’s book contains many reports on the basis of which IBC was evolved. She asked him whether he thinks there are any lacunas in the law which can be addressed. See the video below for Mr Mittal’s reply.

Dr Padmanabhan finally ended the panel discussion by stating that the new law on insolvency has been a resounding success both in terms of reduction of time and recovery of dues and that she is very optimistic about the future of IBC. The webinar concluded with a vote of thanks to all panelists and all the people who contributed to the book in any small or big way.

The book can be bought here.


Nilufer Bhateja, Associate Editor has put this story together 

Legislation UpdatesRules & Regulations

Insolvency and Bankruptcy Board of India releases the Insolvency and Bankruptcy Board of India (Use of Caveats, Limitations, and Disclaimers in Valuation Reports) Guidelines, 2020.

These Guidelines provide guidance to the Registered Valuers in the use of Caveats, Limitations, and Disclaimers in the interest of credibility of the valuation reports. These also provide an illustrative list of the Caveats, Limitations, and Disclaimers which shall not be used in a valuation report.

These Guidelines shall come into force in respect of valuation reports in respect of valuations completed by Registered Valuers (RVs) on or after 1st October, 2020.

These Guidelines are divided into three sections. The first section elaborates on the need for Caveats, Limitations, and Disclaimers in a valuation report.  The second section provides a guidance note on the use of Caveats, Limitations, and Disclaimers, while the third section provides an illustrative list of Caveats, Limitations, and Disclaimers for each asset class provided in the Rules.

Read the detailed Notification here: NOTIFICATION


Insolvency and Bankruptcy Board of India

[Notification dt. 01-09-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench comprising of Justice S.J. Mukhopadhaya (Chairperson) and Justice B.L. Bhat (Judicial member) rejected an appeal challenging an NCLT judgement where it allowed a liquidator to sell the assets of a company which had been attached by the Directorate of Enforcement (ED) during the period of ‘Moratorium’.

The Resolution Professional had filed an application before the NCLT for releasing the attachment of certain assets of Varrsana Ispat Limited (Corporate Debtor) by the ED. The NCLT held that ordering the release of the attached assets would not be maintainable since the attachment order was issued before the order of declaration of ‘Moratorium’ in the present case. The aforesaid NCLT order had been challenged in this appeal.

The Tribunal rejected the appellant’s contentions that Section 14 of the Insolvency and Bankruptcy Code, 2016 would have an overriding effect over the Prevention of Money Laundering Act, 2002 and that creditors and investigative agencies could not disrupt the ‘Corporate Insolvency Resolution Process’ during the period of ‘Moratorium’. The bench observed that since the provisions of the Prevention of Money Laundering Act, 2002 pertained to ‘proceeds of crime,’ Section 14 of the I&B Code would not be applicable to such a proceeding.

The Order stated that the offence of money-laundering has nothing to do with the ‘Corporate Debtor’ but will be applicable to individuals such as ex-Directors and shareholders of the ‘Corporate Debtor,’ who cannot be given protection from the Prevention of Money Laundering Act, 2002 by taking advantage of Section 14 of the I&B Code. Rather, it held that both the Acts would be invoked simultaneously. Since the attachments were made by the ED long before the initiation of the Corporate Insolvency Resolution Process, this would disallow the ‘Resolution Professional’ from taking advantage of Section 14 of the I&B Code. [Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018, decided on 27-07-2020]

Case BriefsSupreme Court

Supreme Court: The bench of AM Khanwilkar and Dinesh Maheshwari, JJ has restored the NCLT order wherein it was held that the lenders of Jaiprakash Associates Limited (JAL) were not the financial creditors of the corporate debtor Jaypee Infratech Limited (JIL) and that the transactions in question were to defraud the lenders of the corporate debtor JIL. The Court held,

“such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL.”

The Court was hearing the case relating to JAL, a public listed company with more than 5 lakh individual shareholders, which was facing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. In the year 2003, JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Coming on the heels of this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL. The banks in question instituted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the NCLT, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.11 crore.

NCLT in it’s order held,

“the transactions in question were to defraud the lenders of the corporate debtor JIL, as 858 acres of unencumbered land owned by the corporate debtor to secure the debt of the related party JAL was mortgaged in the midst of the corporate debtor’s immense financial crunch, while continuing with default towards the home buyers and financial creditors and after it had been declared as Non Performing Asset, in utter disregard to fiduciary duties and duty of care to the creditors; and further that the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor.”

While interpreting Section 43 of the Code, the Supreme Court noticed that the transfers in question could be considered outside the purview of sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. It, however, further explained that even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’.

“It is difficult to even surmise that the business of JIL, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of JIL that it would create encumbrances over its properties to secure the debts of its holding company.”

Holding that the NCLAT had not been right in interfering with the well-considered and justified order passed by NCLT, the Supreme Court said,

“the transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code.”

The Court, hence, concluded:

“1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside.

2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within 171 the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly.

3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited.”

[Anuj Jain v. Axis Bank Ltd., 2020 SCC OnLine SC 237, decided on 26.02.2020]

Law School NewsOthers

An Essay Competition is being organised by Gujarat National Law University and Insolvency & Bankruptcy Board of India (IBBI) on the theme of “Potential of Strategic Default in the Insolvency and Bankruptcy Code, 2016 “
About the Competition:
The Insolvency and Bankruptcy Board of India (IBBI). The Insolvency and Bankruptcy (Code) is a major economics reform of this decade and on completion of its two years of implementation, it will be a great resources for the research and academics to understand in details the change that is in the offing. In this context the IBBI is promoting essay competition through Institute of Learning to create awareness about the insolvency and bankruptcy regime amongst the students of Higher Education, Students of graduation and post-graduation courses of any disciplines, Deemed University and Professional Institute ( Institute of Charted Accountants of India, Institute of Cost Accountants of India and Institute of Company Secretaries of India) can participate in this competition.
The IBBI announces the Essay Competition on Insolvency and Bankruptcy legislation through institutes of learning. Under the said scheme the Gujarat National Law University (GNLU) is organising an essay competition for the students of GNLU.
Theme of Essay :
  • Potential of Strategic Default in the Insolvency and Bankruptcy Code, 2016
Prize:
Best essay will receive INR 10000/-
Second best essay will receive INR 5000/-
Who can Participate:
Students of Under Graduate i.e. LLB and Postgraduate Programmes i.e. both LLM and MBA in Financial and Management Laws
Submission Guidelines:
  • Minimum words-4000, maximum words-8000
  • Font Type: Times New Roman; Font Size: Heading-14, Text-12; Line Spacing: 1.5
  • Citation Method: OSCOLA, 4th Edition
  • Co-authorship is not allowed
Entry for the Submission will be open :
  • 10th February to 10th April 2019 (23:59 Hours)
For further details, refer Essay Cpmt Banner
AchievementsLaw School News

A team comprising of Samidha Mathur, Brijraj Deora, Ravin Abhyankar and Anadi Singh Rathore represented GNLU at the 2nd edition of the NLU Delhi Insolvency and Bankruptcy Moot Court Competition held from 15-17 November 2018. The team adjudged as the winners of the moot.  The Moot was based on a relatively new concept of Insolvency and Bankruptcy Code.
Law School NewsMoot Court Achievements & Reports

The National Law University, Delhi, supported by the Insolvency and Bankruptcy Board of India (IBBI), and the UNCITRAL RCAP, in collaboration with INSOL India and Society of Insolvency Practitioners of India (SIPI) have initiated a moot competition on insolvency and bankruptcy. The Moot was organized by the Centre for Transnational Commercial Law (CTCL). The second edition of the competition was held on November 15-17, 2018 at the National Law University, Delhi, India.

The theme of 2018 edition was Process Memorandum and Resolution Plan. The participating teams had to prepare and submit a Resolution Plan as Resolution Applicant based on information memorandum and other relevant information supplied to them. Teams were shortlisted based upon the quality of submission. The shortlisted teams participated in the oral rounds. In the oral rounds, teams presented the Resolution Plan and made arguments on its merits to industry experts acting as judges.

In the finals, University of Petroleum and Energy Studies (UPES) faced Gujarat National Law University (GNLU), in which the latter defeated the former.

Case BriefsForeign Courts

Ninth Arbitration Court of Appeals: In a landmark decision, the Ninth Arbitration Court of Appeals of Russia has held that a bankrupt person’s cryptocurrency can be included in the debtor’s bankruptcy estate; thereby giving it the status of property with value, albeit indirectly.

The dispute originated from a claim filed to the Ninth Arbitration Court of Appeals by the bankruptcy trustee Alexei Leonov in October 2017. A lower court had initially directed the bankrupt Ilya Tsarkov to disclose the contents of his Blockchain.info wallet as part of the real estate estimation process. Leonov had earlier requested the court to order the transfer of Tsarkov’s Bitcoins into the bankruptcy estate, which was rejected at the time, stating that cryptocurrency cannot be used to pay creditors since “the laws of the Russian Federation do not recognize cryptocurrency as property.” The present ruling however sets a instance which recognizes the potential use of digital assets in contractual agreements.

[Source: Bitcoin News]

Hot Off The PressNews

Supreme Court: The 3-judge bench of Dipak Misra, CJ and AM Khanwilkar and Dr. DY Chandrachud, JJ directed 13 directors including 5 promoters of the Jaiprakash Association Ltd., the parent company of Jaypee Infratech, to deposit Rs 150 crore and Rs 125 crore by December 14 and December 31 respectively. The Court, however, restrained the directors from alienating their personal properties or the properties of their immediate family members also and cautioned that any violation of its directive would hold them liable for criminal prosecution.

The Bench appointed Advocate  Pawan Shree Agrawal as amicus curiae and asked him to set up a web portal, which would contain all details including grievances of the hassled homebuyers, within a week.

Senior Advocate Kapil SIbal, appearing for the company, submitted before the Court that adequate time should be given to the firm for arranging money or otherwise it may go the Sahara way.

Hundreds of home buyers have been left in the lurch after the National Company Law Tribunal, on 10.08.2017, admitted the IDBI Bank’s plea to initiate insolvency proceedings against the debt-ridden realty company for defaulting on a Rs 526 crore loan. The plea before the Supreme Court states that around 32,000 people had booked their flats and are now paying installments.

The Supreme Court had, on 04.092017,  stayed insolvency proceedings against the real estate firm at National Company Law Tribunal.

The matter will now be heard on 10.01.2018.

Legislation UpdatesStatutes/Bills/Ordinances

The Insolvency and Bankruptcy Code, 2016 (“Code”) received President’s assent on May 28th, 2016. The Code, seeks to consolidate  and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. The Code contains 255 Sections and 11 Schedules.

The Code extends to the whole of India except Part III of this Code shall not extend to the State of Jammu and Kashmir. The provisions of this Code applies to companies, limited liability partnerships, partnership firms, other corporate persons, and individuals, and any other body specified by the Government. Part II of this Code relating to Insolvency Resolution and Liquidation and Liquidation for Corporate Persons applies to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.

Section 6 of the Code deals with the provision relating Persons who may initiate corporate insolvency resolution process. The provision states that where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter II. Section 7 further states the provision relating to initiation of corporate insolvency resolution process by financial creditor. The adjudicating authority for insolvency issues of a Company/LLP is prescribed to be the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”), and for individuals and partnership firms, it is the Debt Recovery Tribunal (“DRT”) and Debt Recovery Appellate Tribunal (“DRAT”). The Code mandates that an appeal from an order of the Debt Recovery Tribunal under this Code shall be filed within thirty days before the Debt Recovery Appellate Tribunal and an appeal from an order of the Debt Recovery Appellate Tribunal on a question of law under this Code shall be filed within forty-five days before the Supreme Court. Section 184 provides for Punishment for false information, etc., by creditor in insolvency resolution process i.e. If a debtor or creditor provides information which is false in any material particulars to the resolution professional, he shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five lakh rupees, or with both. Section 185 provides for punishment for contravention of provisions i.e. If an insolvency professional deliberately contravenes the provisions of this Part, he shall be punishable with imprisonment for a term which may extend to six months, or with fine, which shall not be less than one lakh rupees, but may extend to five lakhs rupees, or with both.

The Code under Part IV establishes Insolvency and Bankruptcy Board of India which shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power, subject to the provisions of this Code, to acquire, hold and dispose of property, both movable and immovable, and to contract, and shall, by the said name, sue or be sued.

Ministry of Law and Justice