Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): Coram of Justice Ashok Bhushan (Chairperson) and Justice Jarat Kumar Jain, Judicial Member and Dr Alok Srivastava, Technical Member heard appeals filed against the decision passed by National Company Law Tribunal, Mumbai.

A petition was filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 through the Resolution Professional against the three appellants. Adjudicating Authority passed an order on the application filed through the Resolution Professional directing the Resolution Professional to exercise the powers enumerated under Section 99 of the I&B Code and submit the recommendations with reasons in writing for acceptance or rejection of application within the stipulated time as envisaged under Section 99.

Aggrieved by the above order, appeals were filed.

Analysis, Law and Decision

Section 97 of the I&B Code which deals with ‘appointment of resolution professional’ with reference to Insolvency Resolution Process under Chapter III, following is a statutory scheme as delineated by Section 97(1) and (2).

Appellate Tribunal expressed that there cannot be any dispute with the statutory scheme as contained in Section 97 that when application is filed by the Resolution Professional under Section 95, the Adjudicating Authority shall direct the Board within seven days of the date of the application to confirm that disciplinary proceedings pending against the Resolution Professional or not and the Board was required within seven days to communicate in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional.

Coram stated that in the present matter, appellant’s case was not that any disciplinary proceedings were pending against the Resolution Professional who had filed the application, Appellate Tribunal saw no useful purpose in again directing the Adjudicating Authority to send the recommendation to the Board for confirmation.

The order having been passed more than three months’ prior to the passing of the order, hence Appellate Tribunal opined that due to the said reason the order of the Adjudicating Authority does not need to be interfered with.

Coming to another submission that Adjudicating Authority was not required at the stage when report was still to be filed by the Resolution Professional to record a finding regarding default, Appellate Tribunal was of the view that the said submission was fully supported by the decision Ravi Ajit Kulkarni

In the impugned judgment, the Adjudicating Authority had made observations to the following effect at page 33:-

“Based on the submissions made by the Applicant and the documents produced and placed on record before this Bench, the Bench has no doubt in its mind that there is a ‘default’ on the part of the Personal Guarantor by not fulfilling the debt owed to the Corporate Debtor, i.e., Anoushka Medicare & Diagnostics Private Limited as per the Deed of Personal Guarantee entered between the parties through the Deed of Personal Guarantee dated 01.08.2017.”

Appellate Tribunal found substance in the appellant counsel’s submission that the observation regarding default deserved to be deleted from the Judgment and was ordered to be deleted.

Counsel for the Respondent submitted that in the last paragraph, the Adjudicating Authority gave full liberty to the Resolution Professional to make a recommendation with reasons in writing for acceptance or rejection of the Application. The above directions do clearly mention that report has to be submitted as per Section 99, but to avoid any prejudice to any of the parties, Coram opined that the observations as quoted above are required to be deleted from the judgment.

Appeals were partly allowed. [Kanchan Nanubhai Desai Personal Guarantor v. Finquest Financial Solutions (P) Ltd., 2022 SCC OnLine NCLAT 8, decided on 3-1-2022]

Op EdsOP. ED.

The contours of enquiry as per the Supreme Court and NCLAT’s response

The order dated 13-4-2021 passed by National Company Law Appellate Tribunal (NCLAT) in Union of India v. Vijaykumar V. Iyer1 and connected matters, seeks to reopen questions which were settled by the  Supreme Court after multiple protracted round of litigations witnessed during 2016-2019. The aforesaid order throws open a lot of questions especially in relation to the objections/challenges that can be raised by various stakeholders in a resolution process at an advance stage or even in concluded resolution processes.

The NCLAT was seized, inter alia, of an appeal arising from an order approving the resolution plan for Aircel group. In the meantime, the Supreme Court of India (Supreme Court) in Union of India v. Association of Unified Telecom Service Providers of India,2(Unified Telecom) directed NCLAT to consider certain questions which inter alia include:

  • whether the licence to use the spectrum is a contractual relationship between Department of Telecommunications (DoT) and telecom service providers i.e. corporate debtor;
  • whether the spectrum on the basis of right to use is an asset of licensee/corporate debtor;
  • whether the spectrum can be subjected to proceedings under the Insolvency and Bankruptcy Code, 20163 (I&B Code); and
  • whether dues towards the spectrum under the licence can be said to be operational dues.

To sum up the findings, NCLAT came to the following conclusions:

  • relationship between DoT and corporate debtor is contractual;
  • spectrum is an intangible licence of the corporate debtor;
  • spectrum, being an intangible asset of the licensee i.e. corporate debtor, can be subjected to insolvency/liquidation proceeding; and
  • dues of DoT under licence are in the nature of operational debt.

NCLAT venturing beyond the scope of reference and mandate of the I&B Code

After having provided the responses to the questions framed by the  Supreme Court, the NCLAT went ahead and rendered observations on the validity of the admission order passed under Section 10 of the I&B Code4. It was observed that since the resolution plan would have the effect of wiping out the dues payable to DoT/Central Government (which was nothing but an operational creditor), the initiation of corporate insolvency resolution process (CIRP) at behest of the corporate debtor under Section 10 of the I&B Code was fraudulent. Such an application was made by the erstwhile management with the malicious intent of withholding the huge arrears payable to the Government. In particular, the NCLAT went ahead to cast a mandate on the adjudicating authorities to examine the bona fides of the applications under Section 10 of the I&B Code at the resolution plan approval stage. In this regard, the observations of the NCLAT in para 87 are of particular importance which reads as:

  1. The adjudicating authority in the given circumstances should have examined the bona fide of the Aircel entities in initiating CIRP by filing applications under Section 10 of the I&B Code which, on the face of it, aimed at monetising most of the assets for meeting obligations of the resolution applicant towards the banks which too would depend on when and how the spectrum would be sold, more so as the Aircel entities had stopped operations before initiating insolvency proceedings and the spectrum continued to go waste and unutilised.5

In our view, the NCLAT ought to have refrained from providing observations which tantamount to reopening the question of validity of initiation of the resolution process, when the entire resolution process had run its course and the resolution plan was being tested on the limited touchstone of Section 30 of the I&B Code6 read with the Regulations framed thereunder.

It seems that while providing its response to the specific queries posed by the Supreme Court, NCLAT lost sight of the contours enshrined in UnifiedTelecom7as well as the legislative intent enshrined under Sections 10, 318, 619. The NCLAT also did not take into consideration the law laid by  the Supreme Court with regard to power of NCLT/NCLAT at time of considering resolution plan under Section 31 in Essar Steel India Ltd. v. Satish Kumar Gupta10, (Essar Steel); Ghanashyam Mishra and Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.,11(Ghanashyam Mishra) and Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd. 12(Jaypee).

NCLAT’s observations — Impact on the scheme of the I&B Code

NCLAT categorically observed that dues payable to DoT was operational debt and DoT itself had filed its claim as operational creditor which has been factored in the resolution plan by the successful resolution applicant. However, the basis of the imputing malafides to the initiation of CIRP under Section 10 has been traced to the fact that the approved resolution plan envisages wiping out/extinguishment of operational debts.

The Supreme Court in Essar Steel13 had unequivocally pointed out that a successful resolution applicant has to necessarily commence on a fresh slate after the conclusion of CIRP meaning thereby, all/most of the resolution plans would envisage extinguishment/wiping out of claims, in some or the other form. If such is not the case, the successful resolution applicant would be faced with undecided claims i.e. the proverbial “hydra heads” would start popping up, after the implementation of the resolution plan.

If one were to proceed in terms of the dicta of the NCLAT, we are pained to say that none of the CIRPs would ever see light of the day at the end of tunnel. As a result thereof, the very aim and underlying objection of the I&B Code i.e. to (a) promote entrepreneurship and availability of credit; (b) ensure the balanced interests of all stakeholders; and (c) promote time-bound resolution of insolvency in case of corporate persons, partnership firms and individuals, would fall crumbling into the dust.

Approach of the NCLAT vis-à-vis the legislative intent

In fact, at the time of amending Section 31 of the I&B Code through the Insolvency and Bankruptcy Code (Amendment) Bill, 201914, the Finance Minister in Rajya Sabha on 29-7-2019 (which is much prior to Aircel order dated 13-4-202115 passed by NCLAT) stated as under16:

“79. … There is also this question about indemnity for successful resolution applicant. The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. So that is going to be a major, major sense of assurance for the people who are using the resolution plan….I would want all the hon. members to recognise this message and communicate further that this Code, therefore, gives that comfort to all new bidders. So now, they need not be scared that the taxman will come after them for the faults of the earlier promoters. No.…”

(emphasis supplied)

The above statement was relied upon by the Supreme Court in Ghanashyam Mishra17 to declare that pre-CIRP claims are governed by the approved resolution plan. Further, 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.

In view of the above, the treatment of government dues as operational debt is the clear legislative intent and if all other operational debt is being extinguished, government dues cannot be accorded any favourable treatment. Such a resolution plan would ex facie be in teeth of Section 30(2) of the I&B Code. Therefore, no malice to the initiation of a CIRP could be imputed on such a ground and such an extraneous criterion (which finds no mention in either Sections 718, 919 or Section 10 of the I&B Code) for determining fraud or malice would throw the otherwise settled jurisprudence, into a realm of uncertainty.

NCLAT’s observations are in teeth of doctrine of finality of a lis

We believe that the NCLAT ought to have considered the doctrine of finality in relation to a lis based on interest reipublicae ut sit finis litium and nemo debet bis vexari, si constet curiae quod sit pro una et eadem causa, before rendering its findings.

One cannot be oblivious of the provisions of Sections 10 and 61, respectively. It is only at the stage of application under Section 10 that NCLT has the power to examine whether the initiation of insolvency proceedings was fraudulent or malicious. NCLAT at the time of considering an appeal under Section 61 impugning the order admitting Section 10 application, can conduct a similar enquiry. NCLAT ought not to have lost sight of the fact that if no appeal was preferred against an order admitting Section 10 application or appeal was preferred and dismissed, neither NCLT nor NCLAT, in subsequent proceedings, have any power to re-examine any issue surrounding the initiation of the insolvency proceedings much less, the issues of malicious or fraudulent intent (and that too on its own accord).

It is pertinent to mention that NCLAT was considering the appeal against approved resolution in terms of Sections 30(2) and 31 and was not dealing with an appeal against the order admitting insolvency proceedings under Section 10. Hence, NCLAT while wearing a different jurisdictional  ought not to have ventured into the issue of fraudulent or malicious commencement of insolvency proceedings.

In view of the aforesaid, NCLAT not only travelled beyond the directions of the Supreme Court in Unified Telecom20 but also the express provisions of the I&B Code as expounded by the Supreme Court in the abovementioned catena of judgments. In our view, NCLAT ought to have, as a matter of judicial propriety, limited its inquiry to the questions framed by the Supreme Court.


*Alumni (2009-2014) National Law University Odisha. Currently working as In-house Counsel at an Indian Conglomerate and may be reached at anuragnluo@gmail.com. The views expressed herein are personal and do not represent views of any organisation.

**(2010-15) National Law University Odisha. Currently working as Managing Associate at L&L Partners Law Offices. The views expressed herein are personal and do not represent views of any organisation.

12021 SCC OnLine NCLAT 355.

2Union of India v. Assn. of Unified Telecom Service Providers of India, (2020) 9 SCC 748.

3 Insolvency and Bankruptcy Code, 2016.

4 Section 10, I&B Code.

5Union of India v. Vijaykumar V. Iyer, 2021 SCC OnLine NCLAT 355.

6 Section 30, I&B Code.

7 Union of India v. Assn. of Unified Telecom Service Providers of India, (2020) 9 SCC 748.

8 Section 31, I&B Code.

9 Section 61, I&B Code.

10(2020) 8 SCC 531.

112021 SCC OnLine SC 313.

122021 SCC OnLine SC 253.

13(2020) 8 SCC 531.

14 Insolvency and Bankruptcy Code (Amendment) Bill, 2019.

15Union of India v. Vijaykumar V. Iyer, 2021 SCC OnLine NCLAT 355.

16Ghanashyam Mishra, 2021 SCC OnLine SC 313, para 72.

17Ghanashyam Mishra, 2021 SCC OnLine SC 313, para 72.

18 Section 7, I&B Code.

19 Section 9, I&B Code.

20 Union of India v. Assn. of Unified Telecom Service Providers of India, (2020) 9 SCC 748.

Op EdsOP. ED.

The Insolvency and Bankruptcy Code, 20161 (I&B Code) is a complete code, containing all the necessary provisions for providing a safe haven to corporate debtors under distress. However, the I&B Code being a relatively new enactment, still seems to be working out the kinks. One such ambiguity is that the I&B Code fails to provide a defined procedure for conduct of proceedings that tend to last beyond the duration of Corporate Insolvency Resolution Process (CIRP).

Avoidable transactions or vulnerable transactions, sub-classified into preferential transactions (Sections 43[2]-44[3]), undervalued transactions (Section 45[4]) transactions defrauding creditors (Section 49[5]) and extortionate credit transaction (Section 50[6]) are red-flagged transactions that may be avoided by the corporate debtor for shifting undue onerous burden that places the corporate debtor into distress or defrauds the creditors of the corporate debtor. The resolution professional (RP) in the course of CIRP, is required to identify such vulnerable transactions and files an application before the adjudicating authority for avoiding the said liability. While the said proceedings are an integral part of the I&B Code, they run parallel to the main proceedings which are more focused towards resolution of the corporate debtor and ensuring maximisation of value of assets of the corporate debtor. However, the question as to what happens if the corporate debtor is successfully resolved, thereby concluding CIRP, before the avoidance proceedings are adjudicated or even heard, has not been clearly laid down under the I&B Code. In many of the instances, it has been seen that such proceedings have continued even after the passing of the order under Section 31[7] of the I&B Code (thereby concluding the CIRP), for instance, Bhushan Steel, Essar Steel, etc.

The High Court of Delhi recently identified the present ambiguity in Venus Recruiters (P) Ltd.  v. Union of India[8] (Venus Recruiters). The High Court of Delhi, observed that the present matter raises three important questions:

  1. (i) Whether a RP can continue to act beyond the approval of the resolution plan?

(ii) Whether an avoidance application can be heard and adjudicated after the approval of the resolution plan?

(iii) Who would get the benefit of an adjudication of the avoidance application after the approval of the resolution plan?

While the High Court of Delhi decided the aforesaid questions in a comprehensive manner, the authors herein restrict the scope of the present article to the below mentioned findings/ observations and their implications:

(i) Resolution applicant cannot be permitted to file an avoidance application: A successful resolution applicant (RA) whose resolution plan is approved itself cannot file an avoidance application. The avoidance applications are neither for the benefit of the resolution applicants nor for the company after the resolution is complete. It is for the benefit of the corporate debtor and the creditors of the corporate debtor.

(ii) Avoidance application cannot be adjudicated beyond the period of CIRP: Where preferential transactions are permitted to be adjudicated after the resolution plan is approved, it would, in effect, lead the National Company Law Tribunal (NCLT) to step into the shoes of the new management to decide what is good or bad for the company. Once a resolution plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not.

The ambiguity and the loose ends

The I&B Code had always envisaged that the avoidance proceedings were to proceed independent of the CIRP proceedings. This can be inferred from Section 26[9] which provides that the filing of an avoidance application by the RP shall not affect the CIRP proceedings. However, the Venus Recruiters[10] judgment has linked the two proceedings that may lead to contradictions within the I&B Code. Correspondingly, Regulation 44 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016[11] (Liquidation Regulations) also states that liquidator shall liquidate the corporate debtor within a period of one-year from the liquidation commencement date, notwithstanding pendency of any avoidance application under Chapter III of Part II of the I&B Code.

While the Venus Recruiters[12] judgment held that the resolved corporate debtor can take any decision in respect of an agreement which is deemed to be not beneficial, including termination of the onerous contracts, the I&B Code does not contain any provision for terminating existing contracts by way of a resolution plan. In fact, the NCLT, Mumbai Bench has specifically held that resolution applicants do not have any right to terminate legally binding contract unilaterally without following the due process for termination as per applicable law under the garb of a resolution plan13. Therefore, the same would have to be done without any assistance of the statutory scheme, for taking over or acquiring the corporate debtors, envisaged under the I&B Code.  The judgment seems to have not factored the views of the Insolvency and Bankruptcy Board of India (IBBI) on avoidable transactions. IBBI has specifically observed that there is a distinction between preferential transactions and undervalued transactions. In preferential transaction, the question of intent is not involved and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time, while undervalued transaction requires different enquiry under Sections 45 and 46[14] where the adjudicating authority is required to examine the intent, to examine if such transactions were to defraud the creditors.

The Venus Recruiters[15] judgment observes that avoidance proceedings are only for the benefit of the creditors of the corporate debtor. However, a perusal of the reliefs contemplated under Sections 44 and 48[16] of the I&B Code leads to an inescapable conclusion that the said provisions are all status quo ante in nature i.e. such directions were required to be issued that would place the corporate debtor in its original position before such onerous contracts were executed, therefore, it is clear that the avoidance proceedings are not just for the benefit of the creditors of the corporate debtor but for the resolved corporate debtor as well. Further, the Report of the Insolvency Law Committee published by the Ministry of Corporate Affairs in February 2020 (ILC Report) leaves the discretion to the adjudicating authority to decide the way the proceeds from the avoidance proceedings are to be distributed among the stakeholders.

At this juncture, it is also pertinent to state that the Supreme Court in Jaypee[17] laid out an elaborate mechanism for identification of avoidance transactions by the resolution professional and the determination of avoidance applications by the adjudicating authorities[18].  As is evident from the Jaypee[19] judgment, the Supreme Court have envisaged a high standard for ensuring that tainted transactions are identified and the proceeds are restored to the benefit of the lenders of the corporate debtor as well as the corporate debtor itself.

Pertinently, the I&B Code imposes no bar for the avoidance proceedings to continue beyond the conclusion of CIRP.  In fact, Regulation 39(2)[20] of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides that the resolution professional must, at the time of approval of the resolution plans, place the resolution plans along with the details of avoidance transactions and orders, if any, passed therein before the committee of creditors. The use of the words “if any” connotes a liberal interpretation to the timeline for such avoidance proceedings and appears to envisage continuance of such proceedings beyond the period of CIRP. Similarly, Form H of CIRP Regulations i.e. Compliance Certificate, also requires the RP to disclose pendency of avoidance applications at the time of submission of the resolution plan for approval before the adjudicating authority. While this argument has been rejected by the High Court of Delhi, it appears that the cumulative effect of Section 26 of the I&B Code, Regulation 44 of the Liquidation Regulations and the aforementioned provisions was not analysed in the judgment. The aforesaid argument also finds favour in the Indian Institute of Insolvency Professionals of India in its report titled Statement of Best Practices 1:”Role of IPs in Avoidance Proceedings”[21] and the ILC Report[22].

Implications and fallouts

The Venus Recruiters[23] judgment has sought to delineate from the present framework of the I&B Code and attempted to link the two proceedings together. The present modification will have a cascading effect resulting in one of the two following eventualities:

Event 1: The adjudicating authority will mandatorily be required to determine the avoidance proceedings prior to approval of the resolution plan under Section 31 of the I&B Code resulting in further delay in resolution of the corporate debtor under CIRP.

Fallout

(a) It appears that the dual objective, namely, timely resolution of the corporate debtor and identification and annulment of onerous and fraudulent contracts, for which the two proceedings were delinked would not be successfully achieved. Essentially, it would lead to a situation where one is achieved at the cost of the other.

(b) Alternatively, the only way in which the aforesaid dual objective would be obtained is if the avoidance proceedings are dealt summarily. However, considering the procedure formulated by the Supreme Court in Jaypee[24], it can safely be stated that the avoidance applications cannot be disposed off summarily and the linkage of the two proceedings may inevitably lead to a cascading effect.

(c) The emphasis on timely resolution emanated from the needs of India’s plagued financial sector. Time-bound resolution, which is critical for the I&B Code to be a success, would be compromised.

(d) It has been noticed by the Supreme Court in Essar[25] that NCLTs have limited infrastructure and the outside time-limit of 330 days is not mandatory. The issue of lack of institution infrastructure, in particular National Company Law Appellate Tribunal (NCLATs) (which was only established Delhi at the time), was also raised in Swiss Ribbons[26]. The Court, while observing that litigants should be allowed to avail remedy under law and cannot be prejudiced due to lack of infrastructure, had received specific assurance from the learned Attorney General at the time that more NCLATs will be established as soon as it is practicable. Since the requirements to dispose off these applications before the conclusion of CIRP has been introduced vide the Venus Recruiters[27] judgment, the NCLT’s would be left with no other alternative but to find justifications to extend the CIRP in order to dispose of these applications.

Event 2: It will be the duty of the RP to ensure determination of avoidance applications before approval of the resolution plan, failing which the avoidance application will be deemed to be infructuous.

(a) This will provide a window of escape to the offenders engaging in fraudulent transactions and further burden the resolved corporate debtor in protracted rounds of litigation for terminating the onerous contracts.

(b) The disposal of avoidance proceedings without a hearing will be a form of blessing towards the illegal/wrongful transactions made by the errant promoters and provide such errant promoters to escape liability. Such a conclusion is completely antithetical to the I&B Code as it does not intend to grant any benefits for the errant promoters.

(c) The only remedy available with the successful resolution applicants would be to terminate the contracts/transactions after implementing the resolution plan. The termination of the said contracts will expose the resolution applicants to protracted rounds of litigation on a contract which, in all likelihood, would be inordinately favourable to the counterparties and also expose the resolved corporate debtor to damages. Ultimately, the resolution of the corporate debtor will become a near impossibility.


  Naman Singh Bagga (2010-2015) National Law University Odisha, now working as Senior Associate at L&L Partners Law Offices and may be reached at e-mail: namansinghbagga@gmail.com.

†† Maneesh Subramaniam (2014-2019), Amity Law School, Amity University, now working as an Associate at L&L Partners Law Offices and may be reached at e-mail: maneesh.ms10@gmail.com.

†† Anurag Tripathi (2009-2014) National Law University Odisha, now working as in-house counsel at an Indian Conglomerate and may be reached at e-mail: anuragnluo@gmail.com.

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

2 <http://www.scconline.com/DocumentLink/9kKr2L6f>.

3 <http://www.scconline.com/DocumentLink/6k1QKjWn>.

4 <http://www.scconline.com/DocumentLink/G98723Qc>.

5 <http://www.scconline.com/DocumentLink/52aWIpgI>.

6 <http://www.scconline.com/DocumentLink/h2o3bY7O>.

7 <http://www.scconline.com/DocumentLink/gvPKCciX>.

8 2020 SCC OnLine Del 1479

9 <http://www.scconline.com/DocumentLink/KaRKCw3S>.

10 2020 SCC OnLine Del 1479

11 <http://www.scconline.com/DocumentLink/PRN1Rndd>.

12 2020 SCC OnLine Del 1479

13 DBM Geotechnics and Constructions (P) Ltd. v. Dighi Port Ltd., 2019 SCC OnLine NCLT 8142

14 <http://www.scconline.com/DocumentLink/pit9G4eg>.

15 2020 SCC OnLine Del 1479

16 <http://www.scconline.com/DocumentLink/rB6ALe98>.

17 Jaypee Infratech Ltd., Interim Resolution Professional  v. Axis Bank Ltd., (2020) 8 SCC 401 

18 Id., paras 28.1 and 28.2.

19 (2020) 8 SCC 401 

20  <http://www.scconline.com/DocumentLink/LhNrU8Vb>

21 IIIPI in its report, titled Statement of Best Practices 1: “Role of IPs in Avoidance Proceedings”, had observed that the pendency of proceedings will not bar the resolution/liquidation or voluntary liquidation of the corporate debtor. It further observed that the two proceedings should be treated separately and even if the corporate debtor is resolved/ liquidated, the application of avoidance transactions will be carried on.

22 Similarly, ILC Report also states that where the adjudicating authority comes to the conclusion that the avoidance proceedings may not be concluded prior to dissolution of the corporate debtor, due to any countervailing factors, it should also provide the manner of continuation of the proceeding after such dissolution.

23 2020 SCC OnLine Del 1479

24 (2020) 8 SCC 401

25 Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531

26 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 

27 2020 SCC OnLine Del 1479

New releasesNews

An event was organised on 12th December at noon to launch the commentary on Insolvency and Bankruptcy: Law and Practice by Mr Akaant Kumar Mittal. The book is foreworded by Justice Suryakant, Judge, Supreme Court of India, with messages from Dr MS Sahoo, Chairperson Insolvency and Bankruptcy Board of India and Prof. (Dr.) Ranbir Singh, Former Vice-Chancellor of National Law University, Delhi. 

 The launch of the book took place online and had several prominent people 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. The book launch was followed by a panel discussion on  “4 Years of IBC – The Revolution Witnessed and the Promise for Future”. This discussion was moderated by Ms Haripriya Padmanabhan, Advocate, Supreme Court of India.

About the Book

Insolvency and Bankruptcy Code: Law and Practice by Akaant Kumar Mittal is a practitioner’s guide on the jurisprudence that has developed on the Insolvency and Bankruptcy Code, 2016 so far. The commentary deals with both corporate insolvency and individual-related insolvency and bankruptcy. It discusses the procedure stipulated under the IB Code along with the relevant Rules and Regulations framed by the Government and the Insolvency and Bankruptcy Board of India. The book touches upon the issues of cross-border insolvency and group insolvency. It covers almost all the decisions of the Supreme Court and National Company Law Appellate Tribunal along with rulings from different High Courts and National Company Law Tribunal Benches.

The commentary discusses the interplay of the IB Code with different statutes such as arbitration law, SEBI, money laundering, etc.


Reviews

In India’s otherwise infamous regulatory quagmire, the IBC stands out as a cohesive piece of legislation. The author documents this evolution of our nascent insolvency framework through detailed appreciation of judicial decisions, and like an erudite academician, he subtly hints at future trends. Such a contrast in focus between the past and the future, progressiveness, and reflexivity, makes this commentary a must-read both for professionals seeking to transition from the old regime to the new, as well as for fresh entrants to the field of insolvency.

–Justice Surya Kant
Judge, Supreme Court of India

I find that this publication “Insolvency and Bankruptcy Code: Law and Practice” by Shri Akaant Kumar Mittal is an exemplary initiative in this direction. I am sure, this will prove to be a great resource for practitioners, policymakers, researchers and academics to understand in detail the change that is in the offing. I am certain that this will motivate more inquisitive minds to delve deeper into various aspects of the Code from an interdisciplinary perspective, enriching the Indian literature on bankruptcy and insolvency in the days ahead. It will also build institutional capacity in the economy to implement and contribute to the insolvency and bankruptcy reforms in the country in letter and spirit.

—Dr M.S. Sahoo
Chairperson, Insolvency and Bankruptcy Board of India

The author, Akaant Mittal has through this book, made a conscious attempt to make every reader aware of the rules and regulations of the existing insolvency laws in India. I am sure, this “Handbook” will be a useful addition to the Insolvency & Bankruptcy Law in India and will help every reader in having an in-depth knowledge of the existing insolvency regime. It is a very useful and well-thought material for both practitioners and students. I wish this venture za great success.

—Prof. (Dr) Ranbir Singh
 Vice-Chancellor, National Law University, Delhi


Buy your copy here: Insolvency and Bankruptcy Code: Law and Practice

Case BriefsSupreme Court

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

NCLAT’s position

Aggrieved with the above position, Financial Creditor preferred the appeal before NCLAT on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

NCLAT opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

——————————————————————————-

Supreme Court’s position

In the above background, Bench observed at the outset that, NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court stated that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere,  2020 SCC OnLine SC 837, decided on 19-08-2020]


Also Read:

[SC ALERT] NCLAT’s decoder on appointment of a person as Resolution Professional: Will an ex-employee of Financial Creditor be eligible for appointment? Read on

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) directed the National Company Law Tribunal (Ahmedabad) to pass appropriate order on application filed by Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 without adjourning the matter further.

The present appeal was preferred by Corporate Debtor against an order of NCLT whereby it had adjourned the matter giving time to Financial Creditor for submitting clarifications/removal of defects. Pratik Tripathi, Company Secretary appearing for Corporate Debtor submitted that the matter was pending for one year and NCLT had not passed any order either admitting or rejecting the application filed under Section 7.

The Appellate Tribunal noted that the matter in issue was already settled in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 which made clear that NCLT is not required to decide mismatch of ‘debt’ and it cannot be a ground reject the claim if the amount due is more than Rs 1 lakh and there is a ‘default’. The Appellate Tribunal did not see any reason as to why NCLT kept adjourning the case which was pending for admission since 2017. It was categorically observed,

“The Insolvency Code provides a specific time frame to complete the process and the Adjudicating Authority should take it seriously and cannot adjourn the matter on one or the other ground…”

In such view of the matter, the appeal was disposed of by directing NCLT decide the pending application on merits on the next date without adjourning the matter. [Dhar Textile Mills Ltd. v. Asset Reconstruction Co. (India) Ltd., 2019 SCC OnLine NCLAT 3, Order dated 07-01-2019]

Case BriefsSupreme Court

Supreme Court: A Bench comprising of R.F. Nariman and M.R. Shah, JJ. allowed an appeal filed against the order of Rajasthan High Court whereby it refused to transfer winding up proceedings pending before it to National Company Law Tribunal (NCLT).

The account of Jaipur Metals and Electrical Ltd. had become a non-performing asset. A reference was made to Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985 (SIC Act), which forwarded opinion to the High Court that company ought to be wound up. Ultimately, the High Court appointed official liquidator and the winding up process has begun. Meanwhile, Alchemist Asset Reconstruction Co. (financial Creditor) filed an application under Section 7 of Insolvency and Bankruptcy Code, 2016 before NCLT for initiation of Corporate Insolvency Resolution Process which was admitted. Thereafter, the High Court passed the order impugned where it refused to transfer winding up proceedings pending before it and set aside NCLT’s order. Aggrieved thereby, the appellants preferred instant appeal.

The Supreme Court perused in detail various Sections of the Companies Act, 2013 as well as I&B Code. Focus was laid on Section 434 of Companies Act, 2013 which deals with “transfer of certain pending proceedings”. Section 238 I&B Code, Rules 5 & 6 of Companies (Transfer of Pending Proceedings) Rules, 2016 were considered in detail. The Court explained, “all proceedings under Section 20 of the SIC Act pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post 17-08-2018 (when Section 434, Companies Act was amended).  Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.” Furthermore, the proceedings under Section 7, I&B Code application were independent which had nothing to do with the transfer of winding up proceedings. It was open to Alchemist at any time before winding up order was passed to apply under Section 7 of the Code. It was also clarified that if there is any inconsistency between Section 434, Companies Act and provisions of the Code, the latter must prevail. In such view of the matter, it was held that NCLT was correct in admitting the application. The order of the High Court was set aside and NCLT proceedings were directed to continue from the stage where they had been left off. The appeal was allowed.[ Jaipur Metal & Electricals Employee Organization v. Jaipur Metals & Electricals Ltd.,2018 SCC OnLine SC 2801, decided on 12-12-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial)  dismissed an appeal filed against the order of the National Company Law Tribunal, Chennai whereby the application filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 was admitted.

Firstly, the appellant (shareholder of the Corporate Debtor) submitted that the respondent is not a Financial Creditor as defined in Section 5(7) read with Section 5(8). However, on facts, the Appellate Tribunal rejected the submission. It was found that the Rajkumar Impex Ghana Ltd. (subsidiary of the Corporate Debtor) had applied for a loan which was provided by Stanbic Bank Ghana Ltd. The Corporate Debtor executed guarantee in favour of the Bank for the said loan. As such, the Bank became a Financial Creditor. Secondly, the admission of application filed by the respondent under Section 7 for initiation of Corporate Insolvency Resolution Process was assailed. It was challenged on the ground that NCLT while admitting the application, did not record reasons in writing.

The Appellate Tribunal rejected the second submission filed by the appellant as well. It observed that application under Section 7 is not a recovery proceeding or proceeding for determining of a claim on merit that can be decided only by a court of competent jurisdiction. An application under Sections 7, 9 or 10 of the Code not being a money claim or suit and not being an adversarial litigation, NCLT is not required to write a detailed decision as to which are the evidence relied upon for its satisfaction. NCLT is only required to be satisfied that there is a debt and default had occurred. In the present case, NCLT had held that a prima facie case was made out by the applicant. As such, NCLT expressed its satisfaction about existence of debt and default. Thus, the appeal was dismissed holding it to be sans merit. [V.R. Hemantraj v. Stanbic Bank Ghana Ltd.,2018 SCC OnLine NCLAT 451, dated 29-08-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal:  A two-member bench comprising of S.J. Mukhopadhaya and Bansi Lal Bhat, J., dismissed a company appeal filed against the order of the National Company Law Tribunal which dismissed the appellant’s application filed under Section 7 of the Insolvency and Bankruptcy Code 2016, for initiation of Corporate Insolvency Resolution Process.

The appellant (operational creditor) cited a long list of cases to substantiate its application. The question before the Tribunal was whether an application under Section 7 of the Insolvency and Bankruptcy Code 2016 was maintainable even when the winding up proceedings against the corporate debtor had already been initiated. It was an admitted fact that the Bombay High Court had already ordered the winding of the corporate debtor. Referring to various judgments, the Tribunal, held that an application for initiation of Corporate Insolvency Resolution Process was not maintainable. The Tribunal observed that winding up order is the second stage and corporate insolvency resolution process is the first. Therefore, the order for initiation of the first stage cannot be passed after order directing the compliance of the second stage had already been issued. As a result, the Tribunal dismissed the company appeal preferred by the appellant. [Indiabulls Housing Finance Ltd. v. Sree Ram Urban Infrastructure Ltd., 2018 SCC OnLine NCLAT 282, order dated 30-05-2018]

Foreign LegislationLegislation Updates

The President gave his assent on 06-06-2018, to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.

The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors. This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers. Another major beneficiary would be Micro, Small and Medium Sector Enterprises (MSME), which form the backbone of the Indian economy as the biggest employer, next only to the agriculture sector. Recognizing the importance of MSME Sector in terms of employment generation and economic growth, the Ordinance empowers the Government to provide them with a special dispensation under the Code. The immediate benefit it provides is that, it does not disqualify the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP) provided he is not a willful defaulter and does not attract other disqualifications not related to default. It also empowers the Central Government to allow further exemptions or modifications with respect to the MSME sector, if required, in public interest.

In order to protect the sanctity of the CIRP, the Ordinance lays down a strict procedure if an applicant wants to withdraw a case after its admission under IBC 2016.  Henceforth, such withdrawal would be permissible only with the approval of the Committee of Creditors with 90 percent of the voting share.  Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI).  In other words, there can be no withdrawal once the commercial process of EoIs and bids commences. Separately, the Regulations will bring in further clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process.  Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value  of assets.

With a view to encouraging resolution as opposed to liquidation, the voting threshold has been brought down to 66 percent from 75 % for all major decisions such as approval of resolution plan, extension of CIRP period, etc.  Further, in order to facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51 %.

The Ordinance also provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in meetings of the Committee of Creditors, through the authorized representation.

The existing Section 29 (A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities from being disqualified on account of NPA.  Similarly, a resolution application holding an NPA by virtue of acquiring  it  in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition.  In other words, such NPA shall not disqualify the resolution application during the currency of the three-year grace period.

Taking into account the wide range of disqualifications contained in Section 29 (A) of the Code, the Ordinance provides that the Resolution Applicant shall submit an affidavit certifying its eligibility to bid.  This places the primary onus on the resolution applicant to certify its eligibility.

The Ordinance provides for a minimum one-year grace period for the successful resolution applicant to fulfill various statutory obligations required under different laws.  This would go a long way in enabling the new management to successfully implement the resolution plan.

The other changes brought about by the Ordinance include non-applicability of moratorium period to enforcement of guarantee; introducing the requirement of special resolution for corporate debtors  to themselves trigger insolvency resolution under the Code; liberalizing terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period; and giving the IBBI a specific development role along with  powers to levy fee in respect of services rendered.

The above mentioned changes are expected to further strengthen the Insolvency Resolution Framework in the country and produce better outcomes in terms ofresolution as opposed to liquidation, time taken, cost incurred and recovery rate.

[Press Release no. 1534497]

Ministry of Corporate Affairs

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: Order of the Adjudicating Authority rejecting the application filed by the petitioners under Section 7 of the Insolvency and Bankruptcy Code 2016, was set aside by a two-member bench comprising of S.J. Mukhopadhaya, Chairperson and Bansi Lal Bhat, Judicial Member.

The petitioners were financial creditors of the respondent company. They filed an application under Section 7 for initiating the insolvency resolution process. However, such an application was rejected by the Adjudicating Authority observing that the application did not disclose ‘dates of default’. The petitioners were in appeal against the said order of the Adjudicating Authority.

The NCLAT after considering the record held that the impugned order was not sustainable. The application was rejected on technical grounds. As stated by the petitioners, there was only a typographical defect as to the dates mentioned in the application, which could have easily been corrected. The Tribunal held that before rejecting petitioners’ application, the Authority must give opportunity to the applicants to rectify defect. In absence of such an opportunity, the impugned order was set aside. Appeal was accordingly disposed of. [Satyaprakash Aggarwal v. Vistar Metal Industries (P) Ltd., 2018 SCC OnLine NCLAT 264, dated 21-05-2018]