Op EdsOP. ED.

I. Prelude

In the era of globalisation, the national economies have integrated into a global economic system and the cross-border trade has increased drastically which changed the entire fabric of businesses. Globalisation and growth in international trade have resulted in companies having business in multiple jurisdictions across the globe. When an investor invests in a multinational enterprise having assets and creditors in foreign nations and the event that enterprise becomes insolvent, such insolvency would have cross-border consequences, leading to conflicts between the national laws concerning insolvency and liquidation. When a company goes into insolvency, both foreign-based and domestic investor would seek to protect their rights and interests and this is when cross-border insolvency laws come into the picture.

The insolvency regime of a sovereign nation reflects the priorities of that State. India, on 28-5-2016, took a step forward in this direction and introduced the Insolvency and Bankruptcy Code, 2016[1] (hereinafter referred to as “IBC or “the Code”). The Code, primarily, provides the mechanism for the creditors of an entity to initiate corporate insolvency resolution process (hereinafter referred to as “CIRP”) in the event of default in the payment of debts by the corporate debtor. However, resorting only to national laws in relation to multinational players could be ineffective. In turn, a robust institutional arrangement is needed to efficiently deal with such disputes having cross-border consequences. Earlier, countries had intra-jurisdiction focused insolvency laws operating within their borders[2] and therefore, leading to conflicts in the restructuring of the foreign-based corporate debtor. Hence, with the ultimate aim to facilitate a uniform approach, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (hereinafter referred to as “the Model Law”).

Unlike other multilateral conventions, the Model Law merely offers legislative guidance for States. Its primary objective is to assist States to equip their insolvency laws with a modern, harmonised and fair framework to address cross-border insolvency disputes efficiently and swiftly.[3] The World Bank noted that insolvency proceedings may involve diverse interests and therefore, the legal system of a nationmust provide for unambiguous law concerning jurisdiction, recognition of foreign proceedings, cooperation with foreign courts, and choice of law.[4] Also, in the light of the growing significance of cross-border insolvencies, the International Monetary Fund (IMF) encourages States to adopt the Model Law as it provides an effective mechanism for recognition of foreign proceedings and cooperation among different courts and administrators.[5]

II. Existing mechanism for cross-border insolvency under IBC

The cross-border insolvency law guarantees an efficient restructuring mechanism to both creditor and corporate debtor by equitably safeguarding their interest and ensuring legal certainty of trade and investment. At present, following the recommendations of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, the Code contains two provisions surrounding cross-border issues, yet to be implemented by the Central Government.[6]

Section 234: Agreements with foreign countries

In order to enforce the provisions of IBC, the Central Government is empowered to enter into bilateral agreements with other nations to administer the cross-border ramifications and may also direct the application of the Code when assets or property of a corporate debtor or its personal guarantor is situated at any place in the country with which reciprocal arrangement has been expressly signed.

Section 235: Letter of request

This provision calls for the application of the doctrine of reciprocity, when, in the course of the insolvency resolution process, any evidence or action relating to the assets of a corporate debtor or its personal guarantor is required, the resolution professional or the liquidator or the bankruptcy trustee make an application to the National Company Law Tribunal (hereinafter referred to as “NCLT”) and NCLT, if satisfied, may issue a letter of request to a court or an authority of the country with which an agreement has been made to deal with such request.

The prima facie objective behind incorporating the abovementioned provisions in the Code is to maximise the asset value of the corporate debtor, however until now, for that purpose, India has not signed any reciprocal agreement with any other nation and also, no effective measures have been taken to implement the inter-government agreements.[7]

 The rationale behind uncertainty regarding implementation stems from the very fact that treaties with different nations would have varying provisions involved and therefore require lengthy negotiations between nations in their individual capacities. However, the burden on the judiciary will certainly be lessened if the nations adopt a uniform framework concerning cross-border insolvencies.

III. The Model Law and the 2nd Insolvency Law Committee Report: How significant are they?

With the object of having a hassle-free solution for the international insolvency resolution process, the Secretariat of UNCITRAL, on 30-5-1997, issued the UNCITRAL Model Law on Cross-Border Insolvency (hereinafter referred to as “the Model Law”)[8]. It is indeed the most widely accepted legal framework to deal with cross-border insolvencies and has been adopted in 44 States with varying modifications suitable for their domestic legal systems.[9]

Considering the inadequacy of laws dealing with cross-border insolvencies in India, the Insolvency Law Committee (hereinafter referred to as “ILC”) in its second report on 16-10-2018, recommended incorporating the Model Law, with certain modifications, into the existing IBC. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee and the N.L. Mitra Committee in the years 2000 and 2001 respectively. The Model Law, if adopted, would be helpful in numerous ways such as for improving the ranking in ease of doing business thereby significantly increasing the inflow of FDI, prioritising proceedings and domestic stakeholders (in the event when foreign proceedings are against domestic public policy), remedying Indian creditors in other jurisdictions, devising a mechanism for cooperation, etc.

The Model Law seeks to provide a uniform approach to cross-border insolvency proceedings by harmonising national insolvency laws dealing with it. It does not provide for substantive unification of insolvency laws, rather it respects the diversity found in the laws relating to insolvency of various jurisdictions and allows the States to draft their national laws in consonance with the Model Law after certain modifications as they deem necessary. The proposed amendment by the ILC is based on following main principles of the Model Law.

The “access” principle

As per the provisions of the Model Law, it will remove or subside many current barriers that are experienced by foreign liquidators with respect to jurisdiction, standing and right to be heard, and will allow any foreign representative to apply directly to access the court of a State which has adopted the Model Law so that they can also initiate domestic insolvency proceedings.[10]

The “recognition” principle

It allows recognition of foreign proceedings and the relief by the domestic court that flows from that recognition. With the intent to determine the level of control that the jurisdiction has over the insolvency resolution proceedings and type and extent of relief that NCLT may grant in foreign proceedings, the Committee Report of 2018 recognises two types of foreign proceedings:

(i) Foreign Main Proceedings (proceedings in the State where the corporate debtor has a centre of its main interests); and

(ii) Foreign Non-main Proceedings (proceedings in the State where the corporate debtor has an establishment).[11]

The “relief” principle

It specifies the relief that could be granted in both the foreign main and non-main proceedings. If NCLT determines that a proceeding is a foreign main proceeding then the ongoing domestic proceedings will be put on stay and the estate therein will be handled by the foreign representative so-appointed. Whereas, if a proceeding is termed as foreign non-main proceeding, then such relief is at the discretion of the domestic court.[12]

The “cooperation” and “coordination” principle

The Model Law lays down the basic framework for the maximum possible cooperation and communication between domestic and foreign courts, and insolvency professionals. It also provides a framework for concurrent insolvency proceedings i.e. for the commencement of domestic proceedings, when a foreign proceeding has already started or vice versa. It also provides for coordination among two or more concurrent insolvency proceedings taking place in different countries by facilitating cooperation among them.[13]

Moreover, the Model Law also contains a public policy exemption provision according to which a court may refuse to grant recognition to foreign proceedings or to take suitable action against it under the Model Law if admission or recognition of such proceedings is inconsistent with the public policy of its nation. A significant number of countries, including the USA, the UK and Singapore, have adopted the public policy exemption with varying degrees into their domestic legal systems.

Considering its universality and the flexibility that it provides by accommodating the domestic laws with necessary modifications, the second Insolvency Law Committee Report of 2018 has advocated for introduction of cross-border insolvency provisions based on the Model Law in the IBC. Adoption of the Model Law will serve as a strong signalling factor and may be seen as a progressive and forward-looking market reform while projecting a positive international image.

IV. The role of Indian judiciary in solving cross-border insolvency cases

There arise multiple complexities when it comes to the implementation of the law governing cross-border insolvencies in jurisdictions across the globe. Nations with common law have long been debating the impact of Court of Appeal decision in Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux[14], wherein it was held that full discharge of debtor’s liability towards certain creditors granted by a foreign court in a contract made and performed in England may not be readily acceptable in English Court.

The Gibbs rule though criticised off later but was followed grudgingly in the English courts. Several other courts have, time and again, highlighted the need to do away with the Gibbs rule. [15] It has been opined that, if a foreign creditor participates in the insolvency proceedings, he ought to be deemed to have submitted itself in personam to the jurisdiction of the insolvency court and cannot seek his claim independently. However, such restructuring puts the corporate debtor in an unfortunate situation bearing the costs of attaining the discharge of his liability in multiple jurisdictions.

These complexities in cross-border insolvencies do not end there but can be found in bankruptcy laws of other jurisdictions as well. Considering the Indian scenario, the last two years have witnessed the admission of certain high-valued companies to the insolvency resolution process, having assets and creditors outside the territorial scope of India, thereby raising concerns regarding the procedure to be adopted in such situations. India saw it first cross-border insolvency in 1908 in P. MacFadyen & Co., In re, wherein the proceeding was concerning the liquidation of an Anglo-Indian partnership, after the death of one of the partners. Consequently, the London and Madras Trustees entered into an agreement, confirmed by the respective courts, by which it was promised that surplus sum would be remitted to the other proceeding for global distribution. When the validity of this agreement was challenged, the English courts stated that the agreement was “clearly a proper and commonsense business arrangement” and that it was “manifestly for the benefit of all parties interested”.[16]

Hence, with no constructive law in place dealing categorically with the cross-border insolvency parlance, the judiciary had no option but to set out an encouraging precedent for all such future matters.

Unfolding the Jet Airways saga: First Indian cross-border insolvency case

Recently, in 2019, Jet Airways became the first Indian company to undergo cross-border insolvency as a consequence of the ruling of the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) directing a “Joint Corporate Insolvency Resolution Process” under IBC[17], thus setting a breakthrough for the evolving insolvency law of the country. The crucial case is concerning the defunct debt-ridden Mumbai-based Indian-international airline that was estimated to owe a total liability of more than Rs 36,000 crores to its domestic and foreign lenders including the operational creditors.

The prominent question that rekindled the debate in the instant case is regarding the jurisdiction of the Netherlands court to try the matter relating to the bankruptcy of the airline registered and incorporated in India and to pass the suitable orders for its restructuring.

In the early June 2019, State Bank of India (hereinafter referred to as “SBI”) led consortium of creditors approached NCLT seeking an official declaration of Jet as bankrupt and initiation of CIRP proceedings against it to preclude the transfer of assets under Section 14 of IBC.[18] Subsequently, on June 20, Jet was admitted to CIRP following which the adjudicating tribunal was apprised of the fact that two months earlier, in fact, a bankruptcy petition had been filed against the airline in the Noord-Holland District Court of Netherlands for asserted claims of unpaid dues worth nearly Rs 280 crores, by the two European creditors of the group seeking the seizure of one of the Jet Airways’ Boeing 777 aircraft that was parked in the Schiphol Airport in Amsterdam. Following which, a month later, the Dutch Court appointed a Netherlands-based bankruptcy Administrator to take charge of Jet assets located in the Netherlands.

Soon after the admission of the Jet Airways to CIRP in India, the administrator appointed by the Dutch Court approached NCLT, Mumbai Bench requesting it to recognise the insolvency proceedings in the Netherlands and to withhold the CIRP proceedings taking place in India, as the bankruptcy proceedings are already taking place against the airline in the competent court claiming its jurisdiction under Article 2(4) of the Dutch Bankruptcy Act and, therefore, the two parallel proceedings happening in different jurisdictions would vitiate the restructuring process and have an adverse impact on the creditors. However, the NCLT refused to withhold the Indian proceedings on the rationale that the twin provisions, they being, Sections 234 and 235 dealing with cross-border insolvency under the IBC had not yet been notified by the Government, and in the absence of such a law, the Tribunal outrightly barred the Administrator so appointed by the Dutch Court from participating in the proceedings going on under the IBC and, further, in para 29 of its order categorically declares the overseas proceedings null and void.

Aggrieved by the decision of the adjudicating authority, the Dutch Court appointed administrator appealed against the NCLT’s order.  The Appellate Tribunal, on the assurance that the administrator would not alienate any offshore assets of the airline, set aside the order of the NCLT and further, allowed the Dutch Administrator to cooperate with the Indian Insolvency Resolution Professional and to participate in the meetings of the Committee of Creditors (hereinafter referred to as “CoC”). The NCLAT went further and allowed seamless cooperation between the Indian parties and their Dutch counterpart to conclude a resolution plan in the best interest of the Jet Airways and all its stakeholders. Thus, the curious case of Jet Airways brought forth an interesting attempt by the judiciary to incorporate Model Law framework into the Indian insolvency law and practice until such time as the law is enacted.

In consonance with the directions of the Appellate Tribunal, Resolution Professional and the Dutch Court-appointed Administrator agreed upon the “cross-border insolvency protocol” construed on the principles of Model Law framework, recognising India as the “centre of main interest” and therefore the proceedings taking place in the Netherlands as the “non-main insolvency proceedings”. The NCLAT taking the onus while issuing suitable directions for coordination, significantly not afforded the Dutch Administrator the right to vote in CoC, however, allowed him to attend the meetings only to the extent of preventing any potential overlap of powers.

The complication that exists in the present case is that the distinct doctrinal perspectives on cross-border insolvency adopted by India and Netherlands, wherein, the former adheres to the “universalist approach” of cross-border insolvency, which stipulates the institution and administration of insolvency proceedings by one court in the jurisdiction where the corporate debtor is domiciled or has the registered office, taking into account all his assets irrespective of their location while the latter adhere to a sort of “territoriality approach” of cross-border insolvency, which limits the jurisdiction of the court only to the assets present within the territory of the State and abstains the administrator so-appointed to take charge of the assets not situated within its particular territory. However, the Dutch Supreme Court in Yukos Finance v. Liquidator, OAO Yukos Oil Company[19], had allowed the foreign administrator to effectively exercise its powers without harming the interests of the creditors located in the Netherlands, based on a condition precedent that his actions are in accordance with the laws of the jurisdiction in which the insolvency proceedings are being commenced.

NCLAT in its ruling succeeded in striking out a “balance between the relief granted to the foreign representatives and the interests of those affected by such relief”, in line with the objective of the Model Law framework. The Jet Airways case is, interestingly, one of many such cases which exemplified the need to incorporate the cross-border insolvency regime in the existing laws.

The Curious Case of Videocon Industries: First Indian “Group Insolvency” Case

In August 2019, the Mumbai Bench of NCLT recognised the principle of “substantial consolidation” and allowed to consolidate 13 of the 15 Videocon Group companies.[20] It was for the first time when consolidation of group companies for insolvency proceedings received green signal under IBC given the rationale that it would help in maximising the asset value of the debtor, thereby, setting a benchmark for group insolvency.

The doctrine of “substantial consolidation” is, primarily, an enabling doctrine, by way of which, adjudicating authority combines/merges the assets and liabilities of the individual corporate entities and proceed with a common insolvency resolution and restructuring process in order to achieve a fair value for the stressed assets of group companies while keeping in mind the interests of the creditors.

In December 2017, SBI filed insolvency application against the Videocon Industries at NCLT, Mumbai Bench, seeking to admit and initiate CIRP proceedings. Soon after the admission of Videocon Industries to CIRP, SBI led consortium moved an application seeking “substantial consolidation” of the 15 companies belonging to the corporate debtor, where the consortium was the common creditor. Meanwhile, separate CIRP proceedings were instituted against all the individual entities, however, it failed to obtain any attractive bid because of the lack of collateral assets and their inability to survive individually. In the absence of any express provision in the Code, the Tribunal analysed bankruptcy jurisprudence in the US and the UK and subsequently using its equity jurisdiction decided in favour of the consortium.

Interestingly, in February 2020, NCLT allowed[21] the second round of group insolvency of Videocon Industries with 4 foreign-based companies. The Tribunal ordered to club overseas oil and gas businesses in the ongoing insolvency proceedings on a plea filed by the managing director of the Videocon Group for extension of the moratorium, thereby questioning extraterritorial applicability of IBC and procedure involved in collation of foreign subsidiaries assets with the ones in India. This case, all over again, voiced the issues surrounding coordination theory in cross-border insolvency and expressed the need for legislation governing the same.

First instance of recognition of Indian insolvency proceedings under Chapter 15 of the US Bankruptcy Code

Chapter 15 of the United States Bankruptcy Code provides for the procedure through which bankruptcy courts recognise the foreign insolvency proceedings. The United States, in 2005, adopted the UNCITRAL Model Law framework for the efficient administration of cross-border insolvencies by devising a mechanism which necessarily rules out the possibility of initiating separate proceedings in different jurisdictions. Pursuant to the Model Law, in November 2019, in SBI v. SEL Mfg. Co. Ltd.[22], the Indian insolvency proceeding pending before NCLT, Chandigarh Bench secured, for the first time ever, recognition as “foreign main proceeding” within the meaning of Section 1502(4) of the US Bankruptcy Code[23], by the US bankruptcy court. This came after the application filed by the foreign representative attributed India as the “centre of main interests” of the foreign debtor, which was SEL manufacturing.

The Court, in this case, held that the recognition of the Indian insolvency proceeding is not contrary to the public policy of the United States. Further, it went on to state that it is equally pertinent to entitle the foreign representative and the debtor to all the reliefs in consonance with Section 1520 of the Code[24], to ensure maximisation of asset value without recklessly disregarding interests of the creditors.

V. Concluding remarks

Given the lack of a legal framework to deal with cross-border disputes under IBC, the observations of the courts in recent decisions indicate a positive judicial trend as regards the potential of India to devise a corporate-friendly approach. Such cases should, however, serve as a clarion call for the Government so that the process of incorporating cross-border insolvency provisions is expediated. Notably, the draft provisions, as proposed by the ILC, if adopted, would provide a framework that could go a long way in ensuring coordination and communication among States to successfully resolve the cross-border insolvency disputes. A law in line with the Model Law, if enforced, will sufficiently strengthen the Code and would encourage foreign direct investment (FDI), therefore, pave the way for ease of doing business in India, which is the need of the hour. Moreover, though Sections 234 and 235 of the IBC suggests a way to deal with international insolvencies, their implementation in more practical scenarios attracts complexities. The entire process involves signing bilateral agreements with different nations having different terms of arrangement and entailing lengthy negotiations to work that out. For example, what is a fallback plan in situations when there exists no bilateral arrangement with the foreign nation? Such implications necessitate the adoption of uniform and stable framework like Model Law to resolve cross-border insolvency cases and thus, easing the whole process. Hence, IBC being completely silent on cross-border insolvency is akin to a half-baked cake.


* BA LLB (Hons.) 3rd year law student, Damodaram Sanjivayya National Law University, Visakhapatnam.

**BA LLB (Hons.) 2nd year law student, Damodaram Sanjivayya National Law University, Visakhapatnam

[1] Insolvency and Bankruptcy Code, 2016.

[2] Ran Chakrabarti, Key Issues in Cross-Border Insolvency, 30 National Law School of India Review 119-135 (2018).

[3] Sudhaker Shukla et al., Cross Border Insolvency: A Case to Cross the Border beyond the UNCITRAL, IBBI.

[4]Principles for Effective Insolvency and Creditor/Debtor Regimes, World Bank (2015), <http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor-Debtor-Regimes-2016.pdf.>.

[5]Orderly and Effective Insolvency Procedures, International Monetary Fund (1999).

[6] Himanshu Handa, Orchestrating the UNCITRAL Model Law on Cross-Border Insolvency in India, 1 International Journal of Law Management & Humanities (2018).

[7] Nishith Desai Associates, Introduction to Cross-Border Insolvency, Nishith Desai (April 2020).

[8]Dr Binoy J. Kattadiyil and CS Nitika Manchanda, Cross-Border Insolvency Framework in India, 9 International Journal of Multidisciplinary Educational Research (2020).

[9] Id. at 4.

[10] Andre J. Berends, The UNCITRAL Model Law on Cross-Border Insolvency: A Comprehensive Overview, 6 Tul. J. Int’l & Comp. L. 309 (1998).

[11] Supra Note at 4.

[12] Supra Note at 5.

[13] PRS Legislative Research, Report Summary Insolvency Law Committee on Cross-Border Insolvency, PRS India(1-11-2018), https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/ILC%20Summary%20%20Cross%20Border%20Insolvency.pdf.

[14] (1890) 25 QBD 399.

[15] Pacific Andes Resources Development Ltd., In re, 2016 SGHC 210.

[16] (1908) 1 KB 675.

[17] SBI v. Jet Airways (India) Ltd., CP 2205 (IB)/MB/2019

[18] Insolvency and Bankruptcy Code, 2016, Section 14.

[19] No. 07/11447.

[20]State Bank of India v. Videocon Industries Ltd., 2019 SCC OnLine NCLT 745

[21]State Bank of India v. Videocon Industries Ltd., MA 2385/2019 in C.P.(IB)-02/MB/2018, decided on 12-2-2020.

[22] 26 CP (IB) No. 114/Chd/Pb/2017.

[23] 27 US Bankruptcy Code, 1978, § 1502(4).

[24] Id., § 1520.

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: In an important ruling relating to the corporate insolvency resolution process concerning the corporate debtor, Jaypee Infratech Limited, the 3-judge bench of AM Khanwilkar, Dinesh Maheshwari* and Sanjiv Khanna, JJ has granted further 45 days for submission of the modified/fresh resolution plans by the resolution applicants, for their consideration by CoC and for submission of report by IRP to the Adjudicating Authority. The Court held that while the Adjudicating authority has the authority to disapprove the resolution plan approved by the Committee of Creditors (CoC), it cannot modify the same.

“If, within its limited jurisdiction, the Adjudicating Authority finds any shortcoming in the resolution plan vis-à-vis the specified parameters, it would only send the resolution plan back to the Committee of Creditors, for re-submission after satisfying the parameters delineated by the Code and exposited by this Court.”

Background

The ruling came in the dispute relating to the resolution plan in the corporate insolvency resolution process concerning the corporate debtor, Jaypee Infratech Limited (JIL), impacting a large number of persons/entities, including the buyers of flats/apartments in its real estate development projects.

Even though the resolution plan submitted by the resolution applicant, NBCC (India) Limited was approved by the CoC by a substantial majority of 97.36% of voting share of the financial creditors, NCLT, by its order dated 03.03.2020, approved the resolution plan with some modifications and certain directions while accepting some of the objections like those of the dissenting financial creditor bank and the land providing agency but while rejecting some other, including those of the holding company of JIL and while leaving a few propositions open for adjudication in the appropriate forum.

Here are the key findings by the Court in the matter:

A. Adjudicating Authority has limited jurisdiction in the matter of approval of a resolution plan, which is well-defined and circumscribed by Sections 30(2) and 31 of the Insolvency and Bankruptcy Code, 2016. There is no scope for interference with the commercial aspects of the decision of the CoC; and there is no scope for substituting any commercial term of the resolution plan approved by Committee of Creditors.

B. The process of simultaneous voting over two plans for electing one of them cannot be faulted in the present case; and approval of the resolution plan of NBCC is not vitiated because of simultaneous consideration and voting over two resolution plans by the Committee of Creditors.

C. The stipulations in the resolution plan, as regards dealings with YEIDA and with the terms of Concession Agreement, have rightly not been approved by the Adjudicating Authority but, for the stipulations which have not been approved, the only correct course for the Adjudicating Authority was to send the plan back to the Committee of Creditors for reconsideration.

D. The Adjudicating Authority has not erred in disapproving the proposed treatment of dissenting financial creditor like ICICI Bank Limited in the resolution plan; but has erred in modifying the related terms of the resolution plan and in not sending the matter back to the Committee of Creditors for reconsideration.

E. The Adjudicating Authority has erred in issuing directions to the resolution applicant to make provision to clear the dues of unclaimed fixed deposit holders.

F. The issues related with the objections of YES Bank Limited and pertaining to JHL, the subsidiary of the corporate debtor JIL, are left for resolution by the parties concerned, who will work out a viable solution.

G. In the overall scheme of the resolution plan, the stipulation in Clause 21 of Schedule 3 thereof cannot be said to be unfair; and the observations in paragraphs 132 and 133 of the order dated 03.03.2020 justly take care of the right of any aggrieved party (agreement holder) to seek remedy in accordance with law and ensures viability of the resolution plan.

H. It cannot be said that the resolution plan does not adequately deal with the interests of minority shareholders. The grievances as suggested by the minority shareholders cannot be recognised as legal grievances.

I. The homebuyers as a class having assented to the resolution plan of NBCC, any individual homebuyer or any association of homebuyers cannot maintain a challenge to the resolution plan and cannot be treated as a dissenting financial creditor or an aggrieved person; the question of violation of the provisions of the RERA does not arise; the resolution plan in question is not violative of the mandatory requirements of the CIRP Regulations; and when the resolution plan comprehensively deals with all the assets and liabilities of the corporate debtor, no housing project of the corporate debtor could be segregated merely for the reason that same has been completed or is nearing completion.

J. (i) The amount of INR 750 crores (which was deposited by JAL pursuant to the orders passed by this Court in the case of Chitra Sharma) and accrued interest thereupon, is the property of JAL and stipulation in the resolution plan concerning its usage by JIL or the resolution applicant cannot be approved. The part of the order of NCLT placing this amount in the asset pool of JIL is set aside.

(ii) The question as to whether any amount is receivable by JIL and/or its homebuyers from JAL, against advance towards construction and with reference to the admitted liability to the tune of INR 195 crores as on 31.03.2020, shall be determined by NCLT after reconciliation of accounts. The amount, if found receivable by JIL, be made over to JIL and the remaining amount together with accrued interest be refunded to JAL in an appropriate account. It is made clear that the present matter being related to CIRP of JIL, no other orders are passed in relation to the amount that would be refunded to JAL because treatment of the said amount in the asset pool of JAL shall remain subject to such orders as may be passed by the competent authority dealing with the affairs of JAL.

K. (i) Clause 23 of Schedule 3 of the resolution plan, providing for extinguishment of security interest of the lenders of JAL could not have been approved by the Adjudicating Authority, particularly in 363 relation to the security interest that has not been discharged. This part of the order dated 03.03.2020 is set aside.

(ii) Adequate provision is required to be made in the resolution plan as regards utilisation of the land bank of 758 acres, that has become available to JIL free from encumbrance, in terms of the judgment dated 26.02.2020 of this Court in the case of Anuj Jain (supra).

L. (i) The impugned order dated 03.03.2020 shall be read as modified in relation to Clause 7 of Schedule 3 of the resolution plan; and the said clause shall stand approved.

(ii) As regards possession/control over the project sites/lands of JIL, it is left open for the resolution applicant to take recourse to the appropriate proceedings in accordance with law, whenever occasion so arise.

M. The Appellate Authority was not justified in providing for an Interim Monitoring Committee for implementation of the resolution plan in question during the pendency of appeals.

Taking into consideration the aforementioned findings, the Court, granted further 45 days for submission of the modified/fresh resolution plans by the resolution applicants, for their consideration by CoC and for submission of report by IRP to the Adjudicating Authority. This extended time includes the reconciliation of accounts of JIL and JAL. The process of reconciliation of accounts may go on alongside the processing of the resolution plans.

The processing of the modified/fresh resolution plans is required to be completed within the extended time and for that matter, the other aspects like reconciliation of accounts between JAL and JIL or resolution of the issues related with the financial creditor of the subsidiary of the corporate debtor shall be the matters to be dealt with separately and decision on the resolution plan by the Committee of Creditors need not wait the resolution of those issues.

Directing IRP to complete the CIRP within the extended time of 45 days, the Court said that it will be open to the IRP to invite modified/fresh resolution plans only from Suraksha Realty and NBCC respectively, giving them time to submit the same within 2 weeks.The IRP shall not entertain any expression of interest by any other person nor shall be required to issue any new information memorandum. The said resolution applicants shall be expected to proceed on the basis of the information memorandum already issued by IRP and shall also take into account the facts noticed and findings recorded in this judgment.

After receiving the resolution plans as aforementioned, the IRP shall take all further steps in the manner that the processes of voting by the CoC and his submission of report to the Adjudicating Authority (NCLT) are accomplished in all respects within the extended period of 45 days. The Adjudicating Authority shall take final decision in terms of Section 31 of the Code expeditiously upon submission of report by the IRP.

The Court, however, made clear that the aforementioned directions, particularly for enlargement of time to complete the process of CIRP, were issued in exceptional circumstances of the case at hand and shall not be treated as a precedent.

[Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd, 2021 SCC OnLine SC 253, decided on 24.03.2021]


*Judgment by: Justice Dinesh Maheshwari

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code, 2016 (IBC) to submit a resolution plan, is also barred from proposing a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013.

“Section 29A has been construed to be a crucial link in ensuring that the objects of the IBC are not defeated by allowing “ineligible persons”, including but not confined to those in the management who have run the company aground, to return in the new avatar of resolution applicants.”

IBC liquidation and Section 230 scheme: Legislative history

Explaining the legislative history behind the scheme of compromise or arrangement proposed under Section 230, the Court noticed that there is no reference in the body of the IBC this scheme, Sub-section (1) of Section 230 was however amended with effect from 15 November 2016 so as to allow for a scheme of compromise or arrangement being proposed on the application of a liquidator who has been appointed under the provisions of the IBC.

“While there is no direct recognition of the provisions of Section 230 of the Act of 2013 in the IBC, a decision was rendered by the NCLAT on 27 February 2019 in Y Shivram Prasad v. S Dhanapal, 2019 SCC OnLine NCLAT 172. NCLAT in the course of its decision observed that during the liquidation process the steps which are required to be taken by the liquidator include a compromise or arrangement in terms of Section 230 of the Act of 2013, so as to ensure the revival and continuance of the corporate debtor by protecting it from its management and from “a death by liquidation”. The decision by NCLAT took note of the fact that while passing the order under Section 230, the Adjudicating Authority would perform a dual role: one as the Adjudicating Authority in the matter of liquidation under the IBC and the other as a Tribunal for passing an order under Section 230 of the Act of 2013. Following the decision of NCLAT, an amendment was made on 25 July 2019 to the Liquidation Process Regulations by the IBBI so as to refer to the process envisaged under Section 230 of the Act of 2013.”

The three modes in which a revival is contemplated under the provisions of the IBC

The first mode of revival is in the form of the CIRP elucidated in the provisions of Chapter II of the IBC.

The second mode is where the corporate debtor or its business is sold as a going concern within the purview of clauses (e) and (f) of Regulation 32.

The third mode is when a revival is contemplated through the modalities provided in Section 230 of the Act of 2013.

Scope of Section 230 of the Companies Act, 2013

Section 230 of the Act of 2013 is wider in its ambit in the sense that it is not confined only to a company in liquidation or to corporate debtor which is being wound up under Chapter III of the IBC. Obviously, therefore, the rigors of the IBC will not apply to proceedings under Section 230 of the Act of 2013 where the scheme of compromise or arrangement proposed is in relation to an entity which is not the subject of a proceeding under the IBC. But, when the process of invoking the provisions of Section 230 of the Act of 2013 traces its origin or, as it may be described, the trigger to the liquidation proceedings which have been initiated under the IBC, it becomes necessary to read both sets of provisions in harmony.

“A harmonious construction between the two statutes would ensure that while on the one hand a scheme of compromise or arrangement under Section 230 is being pursued, this takes place in a manner which is consistent with the underlying principles of the IBC because the scheme is proposed in respect of an entity which is undergoing liquidation under Chapter III of the IBC.”

Effect of linkage of IBC with Section 230 of the Act of 2013

In the case of a company which is undergoing liquidation pursuant to the provisions of Chapter III of the IBC, a scheme of compromise or arrangement proposed under Section 230 is a facet of the liquidation process. The object of the scheme of compromise or arrangement is to revive the company. Liquidation of the company under the IBC is a matter of last resort.

The statutory scheme underlying the IBC and the legislative history of its linkage with Section 230 of the Act of 2013, in the context of a company which is in liquidation, has the following important consequences:

  • a liquidation under Chapter III of the IBC follows upon the entire gamut of proceedings contemplated under that statute.
  • one of the modes of revival in the course of the liquidation process is envisaged in the enabling provisions of Section 230 of the Act of 2013, to which recourse can be taken by the liquidator appointed under Section 34 of the IBC.
  • the statutorily contemplated activities of the liquidator do not cease while inviting a scheme of compromise or arrangement under Section 230.

In taking recourse to the provisions of Section 230 of the Act of 2013, the liquidator appointed under the IBC is, above all, to attempt a revival of the corporate debtor so as to save it from the prospect of a corporate death.

“The consequence of the approval of the scheme of revival or compromise, and its sanction thereafter by the Tribunal under Sub-section (6), is that the scheme attains a binding character upon stakeholders including the liquidator who has been appointed under the IBC.”

Why the back-door entry of ineligible persons is banned?

“As such, the company has to be protected from its management and a corporate death. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a compromise or arrangement under Section 230 of the Act of 2013.”

Section 29A was designed to prevent a back-door entry to a class of persons considered to be ineligible to participate in the resolution process. Section 35(1)(f) extends the ineligibility where the liquidator is conducting a sale of the assets of the corporate debtor in liquidation.

In the context of the statutory linkage provided by the provisions of Section 230 of the Act of 2013 with Chapter III of the IBC, where a scheme is proposed of a company which is in liquidation under the IBC, it would be far-fetched to hold that the ineligibilities which attach under Section 35(1)(f) read with Section 29A would not apply when Section 230 is sought to be invoked. Such an interpretation would result in defeating the provisions of the IBC and must be eschewed.

“The stages of submitting a resolution plan, selling assets of a company in liquidation and selling the company as a going concern during liquidation, all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages.”

[Arun Kumar Jagatramka v. Jindal Steel and Power Ltd., 2021 SCC OnLine SC 220, decided on 15.03.2021]


*Judgement by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by:

For appellant: Advocates Sandeep Bajaj and Shiv Shankar Banerjee

For Respondent: Senior Advocates Amit Sibal and Gopal Jain

ALSO READ

NCLAT | Law on maintainability of Compromise and Arrangement application by Promoter during pendency of Liquidation under IBC clarified

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of AM Khanwilkar, BR Gavai and Krishna Murari has held that the commercial wisdom of Committee of Creditors (CoC) is not to be interfered with, excepting the limited scope as provided under Sections 30 and 31 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Taking note of various decision of the Supreme Court, the Court held that the legislative scheme is unambiguous. The legislature has consciously not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the Adjudicating Authority and that the decision of CoC’s ‘commercial wisdom’ is made non-justiciable.

“… the appeal is a creature of statute and that the statute has not invested jurisdiction and authority either with NCLT or NCLAT, to review the commercial decision exercised by CoC of approving the resolution plan or rejecting the same.”

deciding key economic question in the bankruptcy process, the only one correct forum for evaluating such possibilities, and making a decision was, a creditors committee, wherein all financial creditors have votes in proportion to the magnitude of debt that they hold.

It is not open to the Adjudicating Authority or Appellate Authority to reckon any other factor other than specified in Sections 30(2)or 61(3) of IBC.

The commercial wisdom of CoC has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the IBC. The opinion expressed by CoC after due deliberations in the meetings through voting, as per voting shares, is a collective business decision.

“… the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.”

In an enquiry under Section 31, the limited enquiry that the Adjudicating Authority is permitted is, as to whether the resolution plan provides:

(i) the payment of insolvency resolution process costs in a specified manner in priority to the repayment of other debts of the corporate debtor,

(ii) the repayment of the debts of operational creditors in prescribed manner,

(iii) the management of the affairs of the corporate debtor,

(iv) the implementation and supervision of the resolution plan,

(v) the plan does not contravene any of the provisions of the law for the time being in force,

(vi) conforms to such other requirements as may be specified by the Board.

[Kalparaj Dharamshi v. Kotak Investment Advisors Ltd, 2021 SCC OnLine SC 204, decided on 10.03.2021]


*Judgment by: Justice BR Gavai

Appearances before the Court by:

For Kalparaj: Senior Advocates Mukul Rohatgi, Dr. Abhishek Manu Singhvi and Pinaki Mishra,

For Deutsche Bank and CoC: Senior Advocate K.V. Viswanathan

For Fourth Dimension Solutions Limited: Senior Advocates C.A. Sundaram, Gopal Sankar Narayanan and P.P. Chaudary,

For RP: Senior Advocates Shyam Divan

For KIAL: Senior Advocate: Senior Advocate Neeraj Kishan Kaul

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that under Insolvency and Bankruptcy Code, 2016 (IBC), NCLT has jurisdiction to adjudicate disputes which arise solely from or which relate to the insolvency of the Corporate Debtor. The Court, however, issued a note of caution to the NCLT and NCLAT to ensure that “they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor. The nexus with the insolvency of the Corporate Debtor must exist.”

Jurisdiction of the NCLT/NCLAT over contractual disputes

“NCLT owes its existence to statute. The powers and functions which it exercises are those which are conferred upon it by law, in this case, the IBC.”

The NCLT has been constituted under Section 408 of the Companies Act, 2013 ―to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.

Sub-section (1) of Section 60 provides the NCLT with territorial jurisdiction over the place where the registered office of the corporate person is located. NCLT shall be the adjudicating authority ―in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors.

The institutional framework under the IBC contemplated the establishment of a single forum to deal with matters of insolvency, which were distributed earlier across multiple fora. In the absence of a court exercising exclusive jurisdiction over matters relating to insolvency, the corporate debtor would have to file and/or defend multiple proceedings in different fora. These proceedings may cause undue delay in the insolvency resolution process due to multiple proceedings in trial courts and courts of appeal.

“A delay in completion of the insolvency proceedings would diminish the value of the debtor‘s assets and hamper the prospects of a successful reorganization or liquidation. For the success of an insolvency regime, it is necessary that insolvency proceedings are dealt with in a timely, effective and efficient manner.”

Residuary jurisdiction of the NCLT under section 60(5)(c)

The residuary jurisdiction conferred by statute may extend to matters which are not specifically enumerated under a legislation. While a residuary jurisdiction of a court confers it wide powers, its jurisdiction cannot be in contravention of the provisions of the concerned statute.

The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings.

“If the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a ‘going concern’. “

Ruling on facts 

In the present case, NCLT stayed the termination by the Gujarat Urja Vikas Nigam Limited of its Power Purchase Agreement (PPA) with Astonfield Solar (Gujarat) Private Limited on the ground of insolvency. The order of the NCLT was passed in applications moved by the Resolution Professional of the Corporate Debtor and Exim Bank under Section 60(5) of the Insolvency and Bankruptcy Code, 2016. On 15 October 2019, the NCLAT dismissed the appeal by Gujarat Urja Vikas Nigam Limited under Section 61 of the IBC.

The PPA was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the Corporate Debtor. Hence, the NCLT was empowered to restrain the appellant from terminating the PPA. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the Corporate Debtor.

“The PPA has been terminated solely on the ground of insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) to adjudicate this matter and invalidate the termination of the PPA as it is the forum vested with the responsibility of ensuring the continuation of the insolvency resolution process, which requires preservation of the Corporate Debtor as a going concern. In view of the centrality of the PPA to the CIRP in the unique factual matrix of this case, this Court must adopt an interpretation of the NCLT‘s residuary jurisdiction which comports with the broader goals of the IBC.”

The Court further explained that the adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.

The Court took further care to clarify that,

“Judicial intervention should not create a fertile ground for the revival of the regime under section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of the PPA which is the sole contract of the Corporate Debtor, governing the supply of electricity which it generates, it will pull the rug out from under the CIRP, making the corporate death of the Corporate Debtor a foregone conclusion.”

Conclusion

“NCLT‘s jurisdiction shall always be circumscribed by the supervisory role envisaged for it under the IBC, which sought to make the process driven by trained resolution professionals.”

The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause, if such termination will not have the effect of making certain the death of the corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor‘s sole contract.

Section 60(5)(c) of the IBC vests the NCLT with wide powers since it can entertain and dispose of any question of fact or law arising out or in relation to the insolvency resolution process. However,

“NCLT‘s residuary jurisdiction, though wide, is nonetheless defined by the text of the IBC. Specifically, the NCLT cannot do what the IBC consciously did not provide it the power to do.”

The Court, however, made it clear that it’s finding on the validity of the exercise of residuary power by the NCLT is premised on the facts of the case at hand and that it was not laying down a general principle on the contours of the exercise of residuary power by the NCLT. However, it is pertinent to mention that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC.

[Gujarat Urja Vikas Nigam Limited v. Amit Gupta,  2021 SCC OnLine SC 194, decided on 08.03.2021]


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by”

For appellant: Senior Advocate Shyam Diwan and Advocate Ranjitha Ramachandran

For Respondent: Senior Advocate C U Singh and Nakul Dewan

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman*, Navin Sinha and KM Joseph, JJ has, analysing various provisions under the Negotiable Instruments Act, the Court concluded that the proceedings under Section 138 are “quasi-criminal” in nature.

The Court held that

“a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.”

In a 120-pages long verdict, the Supreme Court tackled the following issues to reach at the aforementioned conclusion:

OBJECT AND INTERPRETATION OF SECTION 14 OF THE IBC

The expression “institution of suits or continuation of pending suits” is to be read as one category, and the disjunctive “or” before the word “proceedings” would make it clear that proceedings against the corporate debtor would be a separate category.

“What throws light on the width of the expression “proceedings” is the expression “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority”. Since criminal proceedings under the Code of Criminal Procedure, 1973 are conducted before the courts mentioned in Section 6, CrPC, it is clear that a Section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor.”

A quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability.

“Judged from the point of view of this objective, it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned, on its getting the necessary breathing space to get back on its feet during the corporate insolvency resolution process.”

Hence, the width of the expression “proceedings” cannot be cut down so as to make such proceedings analogous to civil suits.

THE INTERPLAY BETWEEN SECTION 14 AND SECTION 32A OF THE IBC

“A section which has been introduced by an amendment into an Act with its focus on cesser of liability for offences committed by the corporate debtor prior to the commencement of the corporate insolvency resolution process cannot be so construed so as to limit, by a sidewind as it were, the moratorium provision contained in Section 14, with which it is not at all concerned.”

If the expression “prosecution” in the first proviso of Section 32A(1) refers to criminal proceedings properly so-called either through the medium of a First Information Report or complaint filed by an investigating authority or complaint and not to quasi-criminal proceedings that are instituted under Sections 138/141 of the Negotiable Instruments Act against the corporate debtor, the object of Section 14(1) of the IBC gets subserved, as does the object of Section 32A, which does away with criminal prosecutions in all cases against the corporate debtor, thus absolving the corporate debtor from the same after a new management comes in.

NATURE OF PROCEEDINGS UNDER CHAPTER XVII OF THE NEGOTIABLE INSTRUMENTS ACT

“Section 138 contains within it the ingredients of the offence made out. The deeming provision is important in that the legislature is cognizant of the fact that what is otherwise a civil liability is now also deemed to be an offence, since this liability is made punishable by law.”

It is important to note that the transaction spoken of is a commercial transaction between two parties which involves payment of money for a debt or liability. The explanation to Section 138 makes it clear that such debt or other liability means a legally enforceable debt or other liability. Thus, a debt or other liability barred by the law of limitation would be outside the scope of Section 138. This, coupled with fine that may extend to twice the amount of the cheque that is payable as compensation to the aggrieved party to cover both the amount of the cheque and the interest and costs thereupon, would show that it is really a hybrid provision to enforce payment under a bounced cheque if it is otherwise enforceable in civil law.

Further, as the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, it becomes clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim.

Under Section 139, a presumption is raised that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. To rebut this presumption, facts must be adduced which, on a preponderance of probability (not beyond reasonable doubt as in the case of criminal offences), must then be proved.

Section 140 states that it shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section, thus making it clear that strict liability will attach, mens rea being no ingredient of the offence.

Section 141 makes Directors and other persons statutorily liable, provided the ingredients of the section are met. Interestingly, for the purposes of this Section, explanation (a) defines “company” as meaning any body corporate and includes a firm or other association of individuals.

A cursory reading of Section 142 makes clear that the procedure under the CrPC has been departed from. First and foremost, no court is to take cognizance of an offence punishable under Section 138 except on a complaint made in writing by the payee or the holder in due course of the cheque – the victim. Further, the language of Section 142(1) (b) would again show the hybrid nature of these provisions inasmuch as a complaint must be made within one month of the date on which the “cause of action” under clause (c) of the proviso to Section 138 arises.

“The expression “cause of action” is a foreigner to criminal jurisprudence, and would apply only in civil cases to recover money. Chapter XIII of the CrPC, consisting of Sections 177 to 189, is a chapter dealing with the jurisdiction of the criminal courts in inquiries and trials. When the jurisdiction of a criminal court is spoken of by these Sections, the expression “cause of action” is conspicuous by its absence.”

Under Section 143, it is lawful for a Magistrate to pass a sentence of imprisonment for a term not exceeding one year and a fine exceeding INR 5,000/- summarily. Hence,

“… the payment of compensation is at the heart of the provision in that a fine exceeding INR 5000/-, the sky being the limit, can be imposed by way of a summary trial which, after application of Section 357 of the CrPC, results in compensating the victim up to twice the amount of the bounced cheque.”

Under Section 144, the mode of service of summons is done as in civil cases, eschewing the mode contained in Sections 62 to 64 of the CrPC. Likewise, under Section 145, evidence is to be given by the complainant on affidavit, as it is given in civil proceedings, notwithstanding anything contained in the CrPC. Most importantly, by Section 147, offences under this Act are compoundable without any intervention of the court, as is required by Section 320(2) of the CrPC.

CONCLUSION

“The gravamen of a proceeding under Section 138, though couched in language making the act complained of an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonoured cheque together with interest and costs, expeditiously and cheaply.”

The Court, hence, concluded that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a “proceeding” within the meaning of Section 14(1)(a), the moratorium therefore attaching to such proceeding.

[P. Mohanraj v. Shah Brother Ispat Pvt. Ltd., 2021 SCC OnLine SC 152, decided on 01.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellants: Senior Advocate Jayanth Muth Raj

For Respondent: Advocate Jayant Mehta

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench: The Coram of Janab Mohammed Ajmal (Judicial Member) and V. Nallasenapathy (Technical Member),  decided the issue of whether the Resolution Plan could be shared with the employees of Jet Airways.

Who all are the applicants?

Pilots of Jet Airways (Corporate Debtor) were represented by a Union named National Aviators’ Guild, Maintenance Engineers of the Corporate Debtor under the umbrella of Jet Aircraft Maintenance Engineers’ Welfare Association, Bhartiya Kamgar Sena (BKS) and Jet Airways Cabin Crew Association (JACCA) respectively representing 70% of the ground staff and the majority of the Cabin Crew of the Corporate Debtor and All India Jet Airways Officers’ and Staff Association, they all sought a direction to Respondent (Resolution Professional) to furnish each of the entities/applicants a full copy of the entire Resolution Plan approved by the CoC.

Reasoning | Why do the applicants want to know the details of Resolution plan?

Applicants state that they are unaware of the details of the Resolution Plan and hence they needed to know what was provided under the RP for its members and employees.

Vital concern of the applicants is with regard to the terms and conditions of the Resolution Plan. Further, it has been added that any revival plan, for that matter, both in terms of employment and provision for outstanding wages/dues, is vital for their sustenance and mutual benefit.

Some of the employees have lingered on the rolls of the Corporate Debtor despite the financial hardships and difficulty it entailed.

Adding to the above, it has also been stated that natural justice demands that the applicants remain aware of the Plan and how it is going to take care of their interests or adversely affects them.

Applicants would be the most affected by the orders of this Authority approving or rejecting the Resolution Plan. Thus, it becomes imperative that the Applicants are made privy to the Resolution Plan before it is considered.

Further, the applicants claimed that the Resolution Plan could not be held to be confidential as far as the employees of the Corporate Debtor were concerned.

It is settled law that the interest of the Corporate Debtor is of utmost importance and should be scrupulously protected. 

In view of the above stated, the present application has been filed.

Respondent submitted that the IP Regulations mandate the Resolution Professional to ensure and maintain the confidentiality of the information related to the Insolvency Resolution Process since it contains sensitive information and could only be presented to the CoC.

Analysis, Law and Decision

Bench observed that the applicants interest in the Resolution Plan revolves around the payment/recovery of their dues such as remuneration/wages, other perquisites including terminal benefits if any.

What does Regulations 9 & 22 of the CIRP Regulation lay down?

The stated provision lays down the procedure for the workmen and employees to submit their claims before the IRP/RP.

Regulation 22 of the IP Regulations mandates that an Insolvency Professional must ensure that the confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process is maintained at all time.

Hence, Tribunal held that in view of the above-discussed provisions, the reluctance and refusal of the respondent in sharing the copy of the Resolution Plan with the applicants cannot be faulted.

Natural Justice

Recourse to principles of natural justice and audi alteram partem can be taken when the provisions made in a statute fall short of the requirement and the constitutional validity of the Code has been upheld by the Supreme Court in Swiss Ribbons v. Union of India (2019) 4 SCC 17.

Adjudicating Authority cannot digress from the express provisions of the Statute and act in the manner not provided thereunder or sanctioned by the statute.

Tribunal further explained that in view of express provisions in relation to the Resolution Plan, it is clear that the statutory mandate requires that the Resolution Plan can only be presented to the CoC for its approval and presented before the Adjudicating Authority for its satisfaction in approving the same.

Code or the Regulations thereunder do not contemplate presentation or supply of the Resolution Plan or a copy thereof to any other body or entity. 

Bench agreed with the decision in Anil N. Surwade v. Prashant Jain (IA No. 1033 of 2020 in C.P. (IB) No. 1799 of 2018 decided on 28-09-2020).

“…workmen being at par with the secured creditors are also entitled to privileges of a member of CoC would be fallacious and would go against the grain of the intent and purpose of the Code. “

Bench also added that the applicants are Operational Creditors and the Supreme Court has observed that the role of the Operational Creditors is very limited and confined to the satisfaction of their claims.

Therefore after a wholesome discussion, Tribunal denied any relief to the applicants with a reasoned order.[National Aviators’ Guild v. Ashish Chhawchharia, 2021 SCC OnLine NCLT 50, decided on 22-02-2021]


Image credits of the aircraft: Business Today

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Dr Ashok Kumar Mishra (Technical Member) observed that:

“I&B Code would not permit the Adjudicating Authority to make a roving enquiry into the aspect of solvency or insolvency of the Corporate Debtor except to the extent of the Financial Creditors or the Operational Creditors, who sought triggering of Corporate Insolvency Resolution Process.”

Present appeal has been heard in ex-parte.

Bench notes that the application of appellant filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 has not been admitted or rejected by the Adjudicating Authority (NCLT, Bengaluru Bench).

Adjudicating Authority disposed of the application directing the respondent to make endeavours for resolution in respect of outstanding debt, failing which the appellant would be at liberty to invoke the arbitration clause contained in the Agreement.

The above finding of the Adjudicating Authority was found to be unique and not in conformity with the provisions embodied in Section 9 (5) of the I&B Code, hence cannot be supported.

Section 9(5) of the I&B Code, 2016:

“9(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.

  1. ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.”

The above provision abundantly makes it clear that the Adjudicating Authority has only two options, either to admit Application or to reject the same. No third option or course is postulated by law.

Appellant’s counsel invited Tribunal’s attention to the fact that the Adjudicating Authority took note of the fact that the respondent did not respond to the Demand Notice, demanding the outstanding amount in respect of the four invoices noticed in the impugned order.

Further another point was brought in from the impugned order wherein it was observed that mere acceptance of the debt in question by the Respondent would not automatically entitle the Appellant to invoke the provisions of the Code, unless the debt and default is undisputed and proved to the satisfaction of the Adjudicating Authority.

Bench in view of the above expressed that the Adjudicating Authority should have, in absence of any dispute contemplated under Section 8(2) having been raised by the Respondent as a pre-existing dispute or that the claim of Appellant had been satisfied, proceeded to admit the Application, as no dispute had been raised before it, justifying its disinclination to admit the Application.

We cannot understand as to how the availability of alternate remedy would render the debt and default disputed.

Tribunal further added to its reasoning that

In absence of pre-existing dispute having been raised by the Corporate Debtor or it being demonstrated that a suit or arbitration was pending in respect of the operational debt, in respect whereof Corporate Debtor was alleged to have committed default, the Adjudicating Authority would not be justified in drawing a conclusion in respect of there being dispute as regards debt and default merely on the strength of an Agreement relied upon by the Appellant.

Adjudicating Authority clearly landed in error by observing that the course adopted by it was warranted on the principle of ease of doing business, ignoring the fact that such course was not available to it, ease of doing business only being an objective of the legislation.

Hence, while allowing the appeal and setting aside the impugned order, Tribunal directed the Adjudicating Authority to pass an order of admission. [Sodexo India Service (P) Ltd. v. Chemizol Additives (P) Ltd., 2021 SCC OnLine NCLAT 18, decided on 22-02-2021]

Case BriefsHigh Courts

Calcutta High Court: Sabyasachi Bhattacharya, J., reiterated the decision of Supreme Court in Embassy Property Developments (P) Ltd. v. State of Karnataka, 2019 SCC OnLine SC 1542, regarding whether NCLT and Resolution Professional have jurisdiction to take control and custody of any asset except as subject to the determination of ownership by a court or authority.

“…the power of the resolution professional to take control of any asset, itself, is subject to the determination of ownership by a court or authority.”

Factual Matrix

Kolkata Municipal Corporation filed the present petition challenging an order passed by the National Company Law Tribunal (NCLT) acting as Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 for handing over physical possession of the office premises.

KMC, in exercise of its authority under Sections 217-220 of the Kolkata Municipal Corporation Act, 1980, had distrained the said property in the recovery of municipal tax dues from an assessee.

Debt of the assessee came within the purview of a Corporate Insolvency Resolution Process (CIRP), thus prompting respondent 4, the Resolution Professional, representing the owner of the asset, to approach the NCLT for handing over of such physical possession of the property-in-question from the KMC.

In view of the above, the instant petition was filed.

Questions that arise in the instant matter are:

  • Whether the writ jurisdiction of this court under Article 226 of the Constitution of India can be invoked in the matter, despite the availability of an alternative remedy;
  • Whether the property-in-question, having been seized by the KMC in recovery of its statutory claims against the debtor, can be the subject matter of a Corporate Resolution Process under the Insolvency and Bankruptcy Code, 2016.

While considering the first question, Bench referred to the decision of Embassy Property Developments (P) Ltd. v. State of Karnataka, 2019 SCC OnLine SC 1542, wherein it was held that, in so far as the question of exercise of the power conferred by Article 226, despite the distinction between lack of jurisdiction and the wrongful exercise of the available jurisdiction, should certainly be taken into account by High Courts, when Article 226 is sought to be invoked by passing a statutory alternative remedy provided by a special statute.

Petitioners urged that the NCLT and the Resolution Professional have no jurisdiction to take control and custody of any asset except as subject to the determination of ownership by a court or authority. KMC exercised its powers under Sections 217 to 220 of the 1980 Act to distraint the asset of the debtor and to attach the property, to be followed by sale in future, but the said exercise of power was argued to be beyond the purview of IBC. Resolution Professional and the NCLT acted de hors their statutory powers in seeking to take control and custody of the asset.

Hence, the challenge in the present petition was on the ground of absence of jurisdiction and not ‘wrongful exercise of the available jurisdiction’, thus bringing it within the fold of Article 226 of the Constitution. Therefore, petition is maintainable.

“…although a wrongful exercise of available jurisdiction would not be sufficient to invoke the High Court’s jurisdiction under Article 226 of the Constitution, the ground of absence of jurisdiction could trigger such invocation.”

Considering the second questions posed above, Bench stated that it would be particularly apt to consider the tests laid down by the Supreme Court in Embassy Property Developments (P) Ltd. v. State of Karnataka, 2019 SCC OnLine SC 1542.

In the above-referred decision, while discussing Section 60(5)(c) of IBC, Supreme Court held, “…a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, cannot, by any stretch of imagination, be brought within the fold of the phrase “arising out of or in relation to the insolvency resolution”.

Further, the Court, while moving ahead in the analysis of the matter and reaching a conclusion expressed that there cannot be any doubt about the proposition that the contours of the powers conferred on the Adjudicating Authority, being the NCLT, under Section 60 of the IBC, are defined by the duties of the interim resolution professional under Section 18.

What is to be seen to examine the charter of the interim resolution professional is whether the assets, of which control and custody is sought to be taken by the professional, are sub judice before a court or authority for the purpose of “determination of ownership” thereof.

In the instant matter, petitioner proceeded with acquiring the possession of the property-in-question and putting up the same for attachment under its powers as flowing from Sections 217-220 of the 1980 Act.

The above-said provision envisages a situation where an amount of tax, for which a bill has been presented under Section 216 of the Act, is not paid within 30 days from the presentation thereof.

In view of the event, Municipal Commissioner may cause a demand notice to be served on the person for such liability and on the non-payment of such tax, petitioner shall under Section 219 of the 1980 Act issue a distress warrant, for distraint of the property. Further in the process, person charged with the execution of the warrant in the presence of two witnesses, makes an inventory of the property which he seizes under such warrant. Thereafter, steps are taken for disposal of such property, including attachment and sale.

KMC followed the above-laid procedure and took possession of the disputed property for non-payment of tax. Hence, there was no scope of any ‘determination’ of ownership of the property by the KMC. Thus, in view of the Supreme Court decision in Embassy Property Developments (P) Ltd. v. State of Karnataka, 2019 SCC OnLine SC 1542  a finalised claim would come within the purview of “operational debt” under Section 5(21) of the IBC. Hence, the Resolution Professional has jurisdiction to take custody and control of the same.

Parameters of powers of the NCLT, as an Adjudicating Authority under Section 60 of the IBC, is defined and circumscribed by the scope of Section 18(f)(vi) of the IBC. Such exercise of power would fall within the ambit of the expression “arising out of or in relation to the insolvency resolution”, as envisaged in Section 60(5)(c) of the IBC.

Crown Debts

Referring to the decision of Supreme Court in Commr. of Income-tax v. Monnet Ispat Energy Ltd., [Special Leave to Appeal (C) No (S) 6438 of 2018], wherein it was held that income tax dues, being in the nature of crown debts do not take precedence even over secured creditors, Bench stated that the said proposition holds true in the present matter as well.

Hence, KMC’s claim being in the nature of crown debts, cannot gain precedence over other secured creditors, as contemplated in the IBC.

Therefore, in view of the Supreme Court decision in Embassy Property Developments (P) Ltd. v. State of Karnataka, 2019 SCC OnLine SC 1542 Finalised claim of the KMC can very well be the subject-matter of a Corporate Resolution Process under the IBC.

Accordingly, the Court decided the above two questions in affirmative.[Kolkata Municipal Corpn. v. Union of India, 2021 SCC OnLine Cal 145, decided on 29-01-2021]


Advocates who appeared:

For Petitioners:

Ashok Kumar Banerjee, Sr. Adv.,

Rajdip Roy,
Anindya Sundar Chatterjee,
Goutam Dinda

For Respondent 3:

Jishnu Chowdhury,

Dilwar Khan,
Sondwip Sutradhar

For Respondent 4:

Rishav Banerjee,

Pronoy Agarwal,

Ankita Baid

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Venugopal M (Judicial Member) and Alok Srivastava (Technical Member) held that a demand notice is a forerunner to the commencement of insolvency proceedings against a corporate debtor. Unpaid demand notice is good enough to exhibit the debtor’s inability to pay its debts for bankruptcy proceedings. If a bonafide dispute is established then an ‘Insolvency’ petition is not the appropriate proceeding to determine the validity of a disputed debt.

On being aggrieved with the decision of National Company Law Tribunal, Mumbai, the present Company Appeal was preferred by the appellant.

Appellant submitted that no ‘Demand Notice’ was ever served on the Corporate Debtor/Second Respondent as per Section 8 of the Insolvency and Bankruptcy Code.

Tribunal’s Assessment

Tribunal noted that the appellant’s plea stated that the alleged Demand Notice of the respondent 1 was sent to an address and the same was not registered address of the ‘Corporate Debtor’ as per the master data of the ‘Corporate Debtor’ on MCA website.

Further, it was submitted by the appellant that the Demand Notice was knowingly addressed to the wrong address of the ‘Corporate Debtor’ by respondent 1.

Tribunal expressed that:

As per Section 8 of the I&B Code an Operational Creditor is required to deliver a demand notice on the occurrence of the default within ten days from the receipt of the demand notice, the Corporate Debtor shall bring to the notice of the Operational Creditor ‘the existence of the dispute’, if any, and the record of the pendency of the suit or arbitration proceedings before the receipt of such notice or invoice in relation to such dispute.

While proceeding with discussion in the above matter, Bench also stated that a change in address of the registered office of the ‘Corporate Debtor’ cannot be a ruse for the failure of the party concerned to send/issue a ‘Demand Notice’ as per Section 8 of the I&B Code. In fact, serving the demand notice to the corporate debtor is mandatory.

“If a demand notice payment under the code is issued, the ‘Corporate Debtor’ will appreciate in right earnest the consequences flowing on account of failure to pay the ‘operational debt’. Also, that . after transfer of the case form High Court to Tribunal (in respect of winding up petition) an Operational Creditor is required to submit all information including the details of the proposed Insolvency Professional.”

Tribunal opined that service of ‘Demand Notice’ to the second respondent is mandatory as per Section 8 of the Code.

Further the Bench while making observations in the present matter also added that it cannot be forgotten that the proceedings under Section 138 NI Act pertain to criminal liability for dishonour of cheques issued and do not bar an application under Section 9 of the Code. Likewise, the pendency of proceedings under Order 37 of the civil Procedure Code will not prohibit an application under Section 9 of the Code.

While concluding, the Tribunal held that:

Since the ‘Service of notice’ at the registered address of the ‘Corporate Debtor’ was not established to the subjective satisfaction of the Tribunal and the admitted fact being that the notice sent to the second respondent at its registered office got returned, the said admission of debt and the reference with regard to NI Act that a holder of cheque received the cheque for the discharge either in whole or in part of any debt or other liability will not in any way heighten or improve the case of appellant.

Since the notice as per Section 8 of I&B Code was not served upon the corporate debtor and the same got returned, NCLT’s decision is to be set aside.

Hence NCLT’s order is to be declared as illegal in appointing the ‘Interim Resolution Professional’ declaring moratorium and all other orders passed.  Corporate Debtor is therefore released from all the rigour of law and is allowed to function independently through its Board of Directors.

Before parting, Tribunal granted liberty to the Operational Creditor to issue a fresh notice under Section 8 of I&B Code and on receipt of such notice of service if there is ‘Debt and Default’ to file a fresh application under Section 9 IBC. [Shailendra Sharma v. Ercon Composites, 2021 SCC OnLine NCLAT 3, decided on 13-01-2021]

Op EdsOP. ED.

When a corporate entity is subject to insolvency proceedings, often as a part of the resolution plan, a competitor seeks to acquire the insolvent entity. This is a typical case witnessing an overlap between insolvency law and competition law, and such acquisitions under the Insolvency and Bankruptcy Code (IBC) are to be reported to the Competition Commission of India[1].

When the IBC first came into being, it provided for the resolution applicant to seek Competition Commission of India (CCI) approval regarding the resolution plan within the prescribed time-limit (which was 270 days); however, it did not mention whether this approval was to be obtained before the approval of the committee of creditors or whether it was to be obtained after their approval or simultaneously. This confusion was alleviated by the Amendment Act of 2018 whereby sub-section (4) was added to Section 31 and its proviso specified that the approval from CCI was to be obtained before seeking the approval of the committee of creditors.

In 2019, the Competition Law Committee suggested in their report that combinations which do not cause any adverse effect on competition may be permitted to obtain “green channel” approval from the CCI; this dispensation also extends to combinations driven by the IBC. The Committee based its report on the fact that there was a very high approval rate of CIRPs that were notified to the CCI.

Green channel approval is based on the concept of “failing firm defence”. It means that the anti-competitive effects of the failing firm (in this case, the insolvent firm) exiting the market are to be evaluated with respect to the anti-competitive effects of the firm being acquired by a competitor. If it is observed that the latter is not more than the former, the acquisition or merger is approved by the competition authorities.

This defence has also got statutory recognition[2], and it essentially consists of a three-stage test[3], viz. firstly, if the firm is about to exit the market due to financial distress, secondly, whether there exists any alternative which is less anti-competitive than the merger or acquisition in question, and thirdly if the firm would be forced to exit the market in absence of this combination.

If the answers to these questions are in the positive, the combination is permitted. The CCI has also recognised the failing firm defence, as was noted when Reliance Industries sought to acquire 37.7% stake in Alok Industries[4]. Keeping these in mind the green channel approval mechanism was proposed by the Competition Law Committee.

Advantages of Green Channel Approval

The Code mandates CIRPs to be completed within 330 days, but it has been observed that the time taken for completion of the process extends this time-limit. Since the time taken for obtaining approval from the CCI adds to the time taken for approval of the resolution plans as a whole, automatic approvals would accelerate the whole process, thereby furthering the very purpose of enactment of the IBC, that is, to provide for resolution of distressed firms in a “time-bound manner[5]”.

Green channeling will do away with the requirements of obtaining prior approval from CCI in case on combinations, and consequently it will reduce the burden of compliances as well on resolution applicants.

It must also be noted that the requirement of obtaining prior approval from CCI may result in multiple applications being filed for the same transaction. This was observed in the Patanjali and Adani Wilmar fiasco where both wanted to acquire Ruchi Soya[6] and when UltraTech and Dalmia Bharat both wanted to acquire Binani Cement[7]. Situations like these lead to unnecessary litigation which may be done away with if green channel approval could be afforded to resolution plans.

Overall, automatic approval of resolution plans will make the whole resolution process simpler, easier and more expedient for all the stakeholders but since the impact of a resolution extends to laws beyond the insolvency regime, the demerits of the proposition should also be taken into consideration.

Disadvantages of Green Channel Approval

If all resolution plans were approved automatically and later it was observed that it had anti-competitive effects, the concerned combination would have to be modified or prohibited, and since it would be modified after the completion of the merger or acquisition as the case may be, the inconvenience caused would be amplified. This is because creditors in a CIRP usually extend additional finances depending on the resolution plan and if such a plan would be prohibited after its completion, the interests of the creditors would be prejudiced. Thus, it is much better that resolution plans go through the scrutiny of the CCI before being approved.

The IBC currently provides for prior approval of resolution plans which involve combinations, thereby encouraging coordination between both the authorities—National Company Law Tribunal and the Competition Commission of India. Green channel approval of resolution plans will discourage resolution applicants from approaching the CCI for approval of their plans or for consultation on whether they may have any anti-competitive effects on the market. This increases the scope of disputes arising later on, as it might have adverse effects on the interests of consumers and businesses (both upstream and downstream).

Conclusion

There are arguments present both in favour of and against the proposition and thus before implementing the recommendations of the Committee, a thorough analysis should be done, keeping in mind the interests of all the stakeholders. If the scales are tilted more towards the implementation of green channel approval, then it may be integrated into the insolvency regime, however it must be noted that the current mechanism of coordination and cooperation between the NCLT and the CCI should be encouraged and sustained nevertheless. A fine balance among interest of diverse stakeholders and an effective implementation are the need of the hour.


Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in. Ishika Chattopadhyay, Student Researcher, Final year student Department of Law, University of Calcutta.

[1] S. 5, Competition Act, 2002.

[2]  S. 20(4)(k) of the Competition Act, 2002.

[3] Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings, (Ch. VIII), Official Journal of the European Union, <https://eurlex.europa.eu/legalcontent/EN/TXT/PDF/?uri=CELEX:52004XC0205(02)&from=EN#page=10>.

[4] “Complete Alok Industries takeover: SBI to RIL”, 3-1-2020, <https://www.ibcguide.com/complete-alok-industries-takeover-sbi-to-ril/>.

[5] Preamble to the IBC.

[6] “Patanjali moves NCLT Against Ruchi Soya Lenders Approving Adani Wilmar Bid”, The Economic Times, 24-8-2018 <https://cfo.economictimes.indiatimes.com/news/patanjali-moves-nclt-against-ruchi-soya-lenders-approving-adani-wilmar-bid/65532351>.

[7] “Nclat Approves UltraTech’s Revised Bid of Rs 7950 Crore for Binani Cement”, The Economic Times, 15-11-2018, <https://economictimes.indiatimes.com/industry/indl-goods/svs/cement/nclat-holds-ultratechs-bid-for-binani-cement-valid/articleshow/66615756.cms?from=mdr>.

Op EdsOP. ED.

The preamble of the Insolvency and Bankruptcy Code, 2016 (IBC) states that, the purpose of IBC is to provide a mechanism for the insolvency resolution of debtors in a time-bound manner in order to enable maximisation of the value of their assets, thereby promoting availability of credit and balance the interests of all the stakeholders. In order to achieve this, Section 14 of IBC has been incorporated, which provides for moratorium, which is a period where no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or carried on against the corporate debtor. But since the enactment of IBC, moratorium under Section 14(1) (a) of IBC has come under scrutiny and the courts have laid down multiple interpretations and exceptions to the same.

It is in light of the objectives of IBC and the interpretations to Section 14(1) (a) of IBC, that the notice issued by the Supreme Court of India in Malayan Banking Berhad v. Ushdev International Ltd[1]. is of vital importance. In the present case, the counsel of Malayan Banking Berhad submitted that, the point of contention before the Supreme Court of India was that the moratorium imposed under Section 14(1) (a) of IBC would only be applicable in civil suits filed “against the Corporate Debtor” and as the suit before the Bombay High Court was filed “by the Corporate Debtor i.e. Ushdev International Ltd.”, therefore, the Moratorium under Section 14(1) (a) of IBC would not be applicable.

Brief Facts Leading up to the SLP

Malayan Banking Berhad had filed a review petition before the Bombay High Court titled, Malayan Banking BHD v. Ushdev International Ltd.[2] seeking review of the order dated 07th July, 2019 passed by the Bombay High Court in Notice of Motion filed by Malayan Banking Berhadin, a suit initiated by Ushdev International Ltd. During the pendency of the Notice of Motion, a petition against Ushdev International Ltd. under IBC was admitted by the NCLT, Mumbai, thereby initiating CIRP against Ushdev International Ltd. and imposing Moratorium. In lieu of the same, the Bombay High Court vide order dated 07th July, 2019, adjourned the proceedings under the Notice of Motion, sine die.

Malayan Banking Berhad, challenged the order dated 07th July, 2019 vide the aforesaid review petition, wherein the Bombay High Court vide order dated 16th September, 2019 held that, the Notice of Motion would fall within the term “proceeding” as contemplated under Section 14(1) (a) of IBC, as it is a proceeding seeking rejection of the Suit filed by the corporate debtor, which is under CIRP and Moratorium. It was also observed that, the submission of Malayan Banking Berhad that, moratorium does not stay all the proceedings is erroneous. Hence, the Bombay High Court upheld the order dated 07th July, 2019. The order dated 16th September, 2019 passed in the review petition was challenged before the Supreme Court of India and the Supreme Court of India was pleased to issue notice.

Ambiguity in the Legal Position

The contentions of Malayan Banking Berhad as noted in the notice issued by the Supreme Court of India, sheds light on the fact that there exists an ambiguity in the legal position relating to the applicability of Moratorium upon the adjudication of proceedings filed by the Corporate Debtor, as the judicial trend reflects a conflicting and divergent view.

When majority of the petition(s) filed under Section(s) 7, 9 or 10 of IBC before the NCLT, are admitted, moratorium under Section 14(1) (a) of IBC is always imposed, against the proceedings filed or to be instituted by or against the corporate debtor. It is to be noted that, Section 14(1)(a) of IBC specifically states that proceedings “against the Corporate Debtor” are to be stayed, despite the same proceedings filed “by the Corporate Debtor” are also stayed. It was with regards to this ambiguous legal position that Malayan Banking Berhad had filed the SLP before the Supreme Court of India.

This question had come up for interpretation before the Delhi High Court in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[3] , wherein the Single Judge laid down the factors needed to determine the applicability of moratorium to proceedings filed by the Corporate Debtor. The factors were:

  1. “The nature of the proceedings has to be considered; and
  2. it has to be observed whether such proceedings are in the favor of the Corporate Debtor or against the Corporate Debtor.[4]

If the answers to the factors are in favor of the Corporate Debtor then staying such proceedings during moratorium would cause harm to the Corporate Debtor and would also be against the objectives of IBC. The Single Judge was of the considered view that the application of moratorium should not be used to impose a blanket stay on all proceedings, rather in proceedings initiated by the Corporate Debtor, it should be considered if the continuation of the proceeding would benefit the Corporate Debtor. It was also observed that, a proceeding would not be prohibited under Section 14(1) (a) of IBC, unless it has the effect of endangering, diminishing, dissipating or adversely impacting the assets of Corporate Debtor.

The Single Judge was of the opinion that, the legislative intent was to restrict the meaning and applicability of moratorium under Section 14(1)(a) of IBC to proceedings filed against the Corporate Debtor and not to proceedings filed by the Corporate Debtor, which is evident from the narrow construction of the phrase “against the Corporate Debtor” in Section 14(1)(a) of IBC as compared to the wider phrase “by or against the Corporate Debtor” as under Section 33(5) of IBC.

Recently, the Delhi High Court in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd.[5] was called upon to decide on whether the adjudication of a suit filed by the Corporate Debtor and counter-claim filed in the same could be carried on during moratorium imposed under Section 14(1) (a) of IBC. The Single Judge relied upon the reasoning of the  Delhi High Court in Power Grid Corporation of India (Supra) and did not stay the adjudication of the suit and counter-claim, holding that the assets of the Corporate Debtor were not under any threat till the adjudication of the counter-claim and Section 14 of IBC can only be triggered at the stage when the counter-claim is adjudicated upon and the amount to be paid/recovered has been determined or when the execution proceedings are filed against the Corporate Debtor and these were subject to the prevalent situation. The Single Judge was also of the considered opinion that, with regards to the applicability of moratorium on proceedings filed by the corporate debtor, it has to be observed, whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated and a blinkered approach cannot be followed, whereby the Court stays the proceedings and refers the defendant to the NCLT/RP for filing its claims.

A similar reasoning is also found in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd. (Corporate Debtor)[6] , wherein the NCLAT was called upon to adjudicate on the issue, whether a claim filed by the Corporate Debtor and a counter-claim filed in the same arbitral proceedings could be heard, during the Moratorium period. The NCLAT allowed the claim of the Corporate Debtor along with the counter claim to be heard by the arbitral, as there is no bar regarding the same under IBC and held that, if it is found that the Corporate Debtor is liable to pay a certain amount, then in such case, no recovery can be made during the period of moratorium.

From the aforesaid cases, it can be observed that, there is an ambiguity with regards to the proceedings filed by the corporate debtor and their adjudication during moratorium, where one school of thought is of the opinion that the moratorium covers all proceedings filed by or against the corporate debtor, but on the other hand the other school of thought is of the view that due to the restrictive wordings of Section 14(1) (a) of IBC and due to the objectives of moratorium, it is only applicable upon proceedings filed against the corporate debtor and when it comes to proceedings filed by the corporate debtor, moratorium should be applicable only after considering the benefit to the corporate debtor.

The Balancing Act

The interpretation put forward by the Delhi High Court and the NCLAT in the aforesaid cases, does raise a pertinent issue with regards to the interpretation and applicability of the phrase “against the corporate debtor” as under Section 14(1)(a) of IBC. Upon prima facie reading it would appear that the legislative intent was to restrict the applicability and meaning of moratorium as under Section14(1) (a) of IBC and this interpretation would also benefit the Corporate Debtor, its corpus and the creditors. Despite the clear advantages to this interpretation, there are a few drawbacks too, which are:

  1. If the proceedings filed by the corporate debtor are allowed to continue, it might delay the entire process and the statutorily mandated time lines;
  2. if the proceedings are allowed to continue, it could cause financial stress in the form of additional litigation expenses; and
  3. if the Courts are called upon to observe whether a proceeding is in favour or against the Corporate Debtor, it is as good as pronouncing an assessment based on a preliminary understating of the proceeding, which could be detrimental to the parties involved and might lead to situations of overlapping of judicial powers and functions.

If the interpretation is to be carried out and applied, certain stringent checks/factors would be needed to be put in place, such as the factors delineated by the Delhi High Court and in addition to those some other factors such as, the status/stage of the proceeding should also be considered and a stringent timeline should be imposed for completion of adjudication of the pending proceedings, etc. Thereby balancing the positives and the drawbacks.

Conclusion

The interpretation would definitely help the corporate debtor and would also be in line with the objectives of IBC, but without stringent judicial guidelines to determine which proceedings should be stayed and which shouldn’t, it could be detrimental to everyone involved. A balanced approach with stringent guidelines to be followed to determine whether the proceedings filed by the corporate debtor can be adjudicated upon during the moratorium period is needed, as the same would have a positive impact on the corporate debtor, its creditors and related parties. It remains to be seen how the Supreme Court of India deals with the issue and settles the position. But, for now, the interpretation of staying all the proceedings filed by or against the corporate debtor, seems to be the way.


Advocate at Bombay High Court and National Company Law Tribunal, Mumbai.

[1] 2020 SCC OnLine SC 1068

[2] 2016 SCC OnLine Bom 6962 

[3] 2017 SCC Online Del 12729

[4] ibid

[5] 2019 SCC Online Del 9339

[6] 2018 SCC Online NCLAT 296.

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.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Dr. DY Chandrachud*, Indu Malhotra and Indira Banerjee, JJ has held that collusive transactions with the Corporate Debtor would not constitute a ‘financial debt’ under Insolvency and Bankruptcy Code.

Financial Creditor and Financial Debt

Under Section 5(7) of the IBC, a person can be categorised as a financial creditor if a financial debt is owed to it. Section 5(8) of the IBC stipulates that the essential ingredient of a financial debt is disbursal against consideration for the time value of money.

As per the decision in Pioneer Urban Land and Infrastructure Ltd v. Union of India, (2019) 8 SCC 416,

“The expression “disbursed” refers to money which has been paid against consideration for the “time value of money”. In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money….”

Collusive Transactions

Money advanced as debt should be in the receipt of the borrower. The borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of time for which the money is lent. A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive. In other words, the real agreement between the parties is something other than advancing a financial debt.

The IBC has made provisions for identifying, annulling or disregarding “avoidable transactions” which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoidable transactions include:

(i) preferential transactions under Section 43 of the IBC;

(ii) undervalued transactions under Section 45(2) of the IBC;

(iii) transactions defrauding creditors under Section 49 of the IBC; and

(iv) extortionate transactions under Section 50 of the IBC.

The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors.

Hence, collusive transactions with the Corporate Debtor would not constitute a ‘financial debt’.

Related Parties – Interpretation In Praesenti

Where a financial creditor seeks a position on the CoC on the basis of a debt which was created when it was a related party of the corporate debtor, the exclusion which is created by the first proviso to Section 21(2) must apply. For, it is on the strength of the financial debt as defined in Section 5(8) that an entity claiming as a financial creditor under Section 5(7) seeks a position on the CoC under Section 21(2). If the definition of the expression ‘related party’ under section 5(24) applies at the time when the debt was created, the exclusion in the first proviso to Section 21(2) would stand attracted.

“However, if such an interpretation is given to the first proviso of Section 21(2), all financial creditors would stand excluded if they were a ‘related party’ of the corporate debtor at the time when the financial debt was created. This may arguably lead to absurd conclusions for entities which have legitimately taken over the debt of related parties, or where the related party entity had stopped being a ‘related party’ long ago.”

The exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso.

Hence,

“while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder.”

If this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a ‘related party’ before the Corporate Debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors.

[Phoenix Arc Pvt. Ltd. v. Spade Financial Services Ltd., 2021 SCC OnLine SC 51, decided on 01.02.2021]


*Justice Dr. DY Chandrachud has penned this judgment 

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by

Senior Advocate K.V. Viswanathan for AAA and Spade;

Senior Advocate Neeraj Kishan Kaul for Phoenix; and

Senior Advocate Sanjiv Sen for the Resolution Professional

Akaant MittalExperts Corner

The issue was also discussed at one of the sessions at the International Symposium on Insolvency and Bankruptcy Code, 2016 organised by the Centre for Transnational Commercial Law at National Law University, Delhi on 7-1-2021, where I had moderated the panel discussion on the session on “Corporate Liquidation and Key Issues”. I must express my appreciation towards Sh. Ravi Sharma, Advocate Pricewaterhouse Coopers for his succinct presentation on this issue at the session.

 

In the present post, I shall briefly discuss the conflict between Insolvency and Bankruptcy Code, 2016 (IB Code) vis-à-vis the tax statutes during the stage of liquidation of a corporate debtor. In examining the interplay of IB Code vis-à-vis the tax statutes and its impact on the latter, it is relevant to refer to the non-obstante clause in the IB Code under Section 238 which stipulates:

  1. Provisions of this Code to override other laws.— The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

This particular provision purports to address numerous conflicts arising between the IB Code and other statutes. In the subsequent discussion, we shall see how the provisions of the IB Code have circumvented other statutory laws and the same has been given effect to by virtue of Section 238 of the IB Code.

Introduction

Several issues have arisen when during the liquidation proceedings under the IB Code, the tax authorities have invoked their right to recover dues. Section 53 of the IB Code is relevant provision which has been a bone of contention for the tax authorities with the IB Code. The provision provides for a waterfall mechanism ranking the relevant stakeholders and designating the priority of their claim in the following manner:

  1. Distribution of assets.— (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely—

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following—

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

 

Explaining the rationale behind keeping the right of the Central and State Governments in the distribution waterfall in liquidation at a priority below the unsecured financial creditors, the Bankruptcy Law Reforms Committee stated that the same will be helpful in:

… promoting the availability of credit and developing a market for unsecured financing (including the development of bond markets). In the long run, this would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth. The Government also will be the beneficiary of this process as economic growth will increase revenues. Further, efficiency enhancement and consequent greater value capture through the proposed insolvency regime will bring in additional gains to both the economy and the exchequer.[1]

Keeping this objective in mind, we will discuss the issues that have arisen during the liquidation proceedings under the IB Code vis-à-vis the tax authorities.

 

Issue 1 – Sections 178, 179 of the Income Tax Act, 1961 versus Section 53 of the IB Code

In LML Ltd., In re,[2]  issue arose as to under which “head” will the payment of capital gain tax on the sale of assets of the corporate debtor during liquidation fall into.

Option (a) was to include such capital gain tax as part of the “liquidation expense”.

Option (b) was to rule it as creditor’s due and the same will come under the “operational debt”.

The distinction was crucial since option (a) would have meant that the tax dues would be ranked higher up in the priority list under the IB Code. The same would have to be paid in priority of the other claims such as of workers’ dues or the dues of the secured creditors in terms of the waterfall mechanism specified under Section 53 of the IB Code.

The National Company Law Tribunal (NCLT) in this case ruled that such a capital gain tax has to fall under option (b) and has to be recovered in accordance with the waterfall mechanism provided under Section 53 of the IB Code. The reasoning of the NCLT was also premised on the reading of Section 178[3]  of the Income Tax Act, 1961 which in the marginal note states “company in liquidation” and sub-clause (6) of which was amended by the legislature to read as:

  1. (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

     

Based on this, it was concluded that the legislature intended to give the provisions of the IB Code (Section 53, in the present case) to override the provisions of Section 178 of the Income Tax Act, 1961.

It is crucial to understand that while Section 178 of the Income Tax Act, 1961 was amended, the legislature did not amend Section 179 of the Income Tax Act, 1961 which provides for the personal liability of the directors of a private company in liquidation.

Section 179 provides that where any tax is due from a private company and if the same could not be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Similar issue arose in Pooja Bahry, In re,[4] where the liquidator sold certain properties relinquished by the secured creditors. Issue before the adjudicating authority was whether the liquidator is required to deposit “capital gains” on the sale of secured assets which was relinquished by the secured creditors and include it in the “liquidation cost”. Reiterating Section 178(6) of the Income Tax Act, 1961, the Tribunal held that the tax on capital gains must be distributed in accordance with the waterfall mechanism under Section 53 of the IB Code.

The Tribunal also noted that under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, a secured creditor can effect a sale of the secured asset and appropriate the entire amount towards its dues, without any liability to first pay capital gain. However, if the capital gain is to be first provided for under the IB Code by including the same under “liquidation cost”, the Tribunal opined that an anomalous situation will be created where the secured creditor shall get a lesser remittance under the IB Code than what it could have realised under the SARFAESI Act, had it not released the security into the common corpus.

An issue was brought before the Telangana High Court in Leo Edibles & Fats Ltd.,[5] where the petitioner purchased an immovable property in the liquidation proceeding of a corporate debtor. When the Income Tax Department claimed a charge over the property on account of an attachment order, and refused to allow the transfer of the immovable property in the name of the successful bidder, the issue arose with respect to Sections 52 and 53 of the IB Code vis-à-vis the Income Tax Act, 1961.

The High Court held that the Income Tax Department cannot claim any priority on the ground that:

(a) Tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of Section 53(1)(e) of the IB Code.

(b) The order of attachment of assets is issued by the Income Tax Department is prior to the initiation of liquidation proceedings under the IB Code.

(c) Under Section 36(3)(b) of the IB Code, a “liquidation estate” includes “assets that may or may not be in possession of the corporate debtor, including but not limited to encumbered assets”. Resultantly, the court opined that even if the order of attachment constitutes an encumbrance on the property, the same will not take out the property outside the purview of the liquidation estate.

(d) Section 178 of the Income Tax Act, 1961 stands excluded by virtue of the amendment of Section 178(6) of the Income Tax Act, 1961.

Similarly, in Om Prakash Agarwal v. Tax Recovery Officers,[6] an order attaching the bank accounts of the corporate debtor under liquidation was set aside by considering the tax dues as operational debt and a reference to the provision of Section 178(6). Thus, held that it is entitled to be claim distribution as envisaged under Section 53 of the IB Code.

 

Issue 2 – Sections 88 and 89 of Central Goods and Services Tax Act, 2017 (CGST Act, 2017) versus Section 53 of the IB Code

The provisions of Sections 88[7] and 89[8] of the CGST Act, 2017 are to an extent pari materia to the provisions of Sections 178 and 179 of the Income Tax Act, 1961.

Under Section 88(1) of the CGST Act, just like Section 178(1) when any company is being wound up or liquidated, the “liquidator” appointed shall give intimation of his appointment to the Commissioner.

Sections 88(3) and 89 of the CGST Act, similar to Section 179(2) of the Income Tax Act, 1961 incorporated the principle of vicarious liability of the directors of the debtor company. It provides that when any private company is liquidated and any tax, interest or penalty determined under this Act remains unrecovered, then the directors of such debtor company shall be jointly and severally liable for the payment of such tax, interest or penalty.

The issue herein shall be with respect to Section 88(1). While it is similar to Section 178(1), it does not contain the provision of Section 178(6) of the Income Tax Act, 1961, which explicitly provides for the overriding effect of the IB Code over the provisions of Section 178 of the Income Tax Act, 1961.

 

Issue 3 – TDS versus Section 53 of the IB Code

Section 194-IA(1) of the Income Tax Act, 1961 stipulates:

194-IA Payment on transfer of certain immovable property other than agricultural land.—.(1) Any person, being a transferee, responsible for paying (other than the person referred to in Section 194-LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax thereon.

(2)-(3) ***

In Pooja Bahry, In re,[9] the adjudicating authority held that the applicability of Section 194-IA of the Income Tax Act will not have an overriding effect on the waterfall mechanism provided under Section 53 of the IB Code.

However in Om Prakash Agarwal v. CIT (TDS),[10] issue arose on deduction of TDS by the successful bidder on the purchase of a liquidation asset. The liquidator sought a direction from the adjudicating authority to prevent the bidder from deducting TDS on the payment to be made for successfully purchasing the asset.

The NCLT rejecting the submission observed that the overriding effect under Section 238 is applicable to the issues between the creditor and the debtor but not to TDS deductions. The reasoning was predicated on the fact that deduction of TDS does not tantamount to payment of government dues in priority to other creditors, because it is not a tax demand for realisation of tax dues and the Government is not making any claim against the corporate debtor, rather it is incumbent on the purchaser to credit the TDS to the Income Tax Department. Hence the provision of Sections 53 and 238 of the IB Code was held to be inapplicable.

 

Miscellaneous issues

Apart from the above issues, there are several other inconsistencies that may arise during the corporate insolvency resolution process as well as the liquidation process.

For instance, Section 5(13) of the IB Code defines the term “insolvency resolution process costs” on account of the costs incurred by a resolution professional during the resolution process. The same includes costs such as the fees payable to any person acting as a resolution professional; any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. The issue arises on the tax treatment of such expenses. Which part of these expenses will fall under the head of “capital expenditure” and which may fall under the head of “revenue expenditure” is a question that remains to be seen. It is also argued that costs on restructuring can be classified as a “revenue expenditure”.[11]

Then there is also the issue of Section 56(2)(x) of the Income Tax Act, 1961, which imposes taxes on “gifts”. The provision stipulates that if any person receives any property, other than an immovable property, for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, will be charged income tax under the head “income from other sources”.

In cases of restructuring such instances do arise where lenders convert their outstanding loans into equity of the borrower company at a price which is less than the prescribed fair market value of such shares. The same is argued to be open to invocation of Section 56(2)(x) of the Income Tax Act, 1961.[12]

Conclusion

In conclusion, the issues discussed above show that the nitty-gritties of the taxation system vis-à-vis the objective of the IB Code are the next line of challenges that may require a conclusive position of law. One thing is certain that the breadth of the tax laws and the traditional priority of the claims under it have certainly in a lot of issues taken a subordinate position post the enactment of the IB Code.

Notwithstanding the above, Section 179 of the Income Tax Act, 1961 as well as Sections 88(3) and 89 of the CGST Act, 2017, still show that the personal liability of the directors of the company, vicariously, may subsist for the non-recovery of taxes due.


†Akaant K M, Advocate, National Company Law Tribunals and Constitutional Courts and author of the commentary “Insolvency and Bankruptcy Code – Law and Practice” foreworded by Justice Suryakant and available HERE 

[1] Report of the Bankruptcy Law Reforms Committee, Executive Summary – Chapter 2, “Liquidation”, accessible at  <https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf>.

[2] 2017 SCC OnLine NCLT 1685.

[3] Income Tax Act, 1961, S. 178 stipulates:

178. Company in liquidation.— (1) Every person—

   (a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or

  (b) who has been appointed the receiver of any assets of a company,(Mark as RI2)

(hereinafter referred to as “the liquidator”) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the assessing officer who is entitled to assess the income of the company.(Mark as RI1)

(2)  The assessing officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the assessing officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.

(3)  The liquidator—

(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the assessing officer under sub-section (2); and

(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands: 

Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.

(4)-(5) ***

(6)  The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

[4] Pooja Bahry, Liquidator v. Gee Ispat Pvt. Ltd. [CA 666/2019 in (IB)/250(ND)/2017, Order dt. 22.10.2019].

[5] Leo Edibles & Fats Ltd. v. Tax Recovery Officer, 2018 SCC OnLine Hyd 193.

[6] Item No. 301, IA-992/2020 in CP/294/2018 Principal Bench, Order dt. 15.06.2020.

[7] Central Goods and Services Tax Act, 2017, S. 88 states:

“88. Liability in case of company in liquidation.— (1) When any company is being wound up whether under the orders of a court or tribunal or otherwise, every person appointed as receiver of any assets of a company (hereafter in this section referred to as “the liquidator”), shall, within thirty days after his appointment, give intimation of his appointment to the Commissioner.

(2) The Commissioner shall, after making such inquiry or calling for such information as he may deem fit, notify the liquidator within three months from the date on which he receives intimation of the appointment of the liquidator, the amount which in the opinion of the Commissioner would be sufficient to provide for any tax, interest or penalty which is then, or is likely thereafter to become, payable by the company.

(3) When any private company is wound up and any tax, interest or penalty determined under this Act on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then every person who was a director of such company at any time during the period for which the tax was due shall, jointly and severally, be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”

[8] Central Goods and Services Tax Act, 2017, S. 89 stipulates

“89. Liability of directors of private company.— (1) Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013) where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

(2) Where a private company is converted into a public company and the tax, interest or penalty in respect of any supply of goods or services or both for any period during which such company was a private company cannot be recovered before such conversion, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax, interest or penalty in respect of such supply of goods or services or both of such private company:

Provided that nothing contained in this sub-section shall apply to any personal penalty imposed on such director.”

[9] Pooja Bahry, Liquidator v. Gee Ispat Pvt. Ltd. [CA 666/2019 in (IB)/250(ND)/2017, Order dt. 22.10.2019].

[10] [Item No. 203 CP/294/2018]

[11] Insolvency and Bankruptcy Code beyond the Tip of the Iceberg, a Deloitte Research Study referring to the decision in CIT v. Akzo Nobel India Ltd., 2018 SCC OnLine ITAT 14623, accessible at <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-ibc1-noexp.pdf>.

[12] Insolvency and Bankruptcy Code beyond the Tip of the Iceberg, a Deloitte Research Study, accessible at <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-ibc1-noexp.pdf>.

Case BriefsSupreme Court

Supreme Court: The 3-Judge Bench of Rohinton Fali Nariman, Navin Sinha and K.M. Joseph, JJ., in a 465-pages long judgment, upheld the validity of several provisions of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, albeit with directions given in exercise of powers under Article 142 of the Constitution of India. While so upholding the impugned amendments, the Bench expressed an observation that:

“There is nothing like a perfect law and as with all human institutions, there are bound to be imperfections. What is significant is however for the court ruling on constitutionality, the law must present a clear departure from constitutional limits.”

The Challenge

In the instant matter, the petitioners approached the Court calling in question the following Sections of the Insolvency and Bankruptcy Code (Amendment) Act, 2020: Sections 3, 4 and 10.

Section 3 of the impugned amendment, amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It incorporates 3 provisos to Section 7(1).

Section 4 of the impugned amendment, incorporates an additional Explanation in Section 11 (Explanation II) IBC.

Section 10 of the impugned amendment inserts Section 32-A in IBC.

The Petitioners

Majority of the petitioners were the allottees under the real estate projects and they have trained the constitutional gun at the impugned provisos.

Under the second proviso, a new threshold was declared for an allottee to move an application under Section 7 for triggering the insolvency resolution process under IBC. The threshold is the requirement that there should be at least 100 allottees to support the application or 10% of the total allottees whichever is less. Moreover, they should belong to the same project.

Some other petitioners were money lenders, who stepped in to provide finance for the real estate projects. They were also visited with the requirement which is imposed upon them under the first impugned proviso which is on similar lines as those comprised in the second proviso.

Point-wise Discussion & Observations

A. Challenging a Plenary Law

The Court noted the following two contentions urged by some of the petitioners:

A.1. The law was created by way of pandering to the real estate lobby and succumbing to their pressure or by way of placating their vested interests.

In regard with this contention, Court stated that such an argument is nothing but a thinly disguised attempt at questioning the law of the Legislature based on malice. It was observed:

“While malice may furnish a ground in an appropriate case to veto administrative action it is trite that malice does not furnish a ground to attack a plenary law.”

 Reliance was placed on the earlier Supreme Court decisions in K. Nagaraj v. State of A.P., (1985) 1 SCC 523 and State of H.P. v. Narain Singh, (2009) 13 SCC 165.

A.2. Another contention was that, due to its stand before the Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, the supreme legislature was estopped by the principle of promissory estoppel from enacting the impugned enactment.

To this, the Court answered that: “A supreme legislature cannot be cribbed, cabined or confined by the doctrine of promissory estoppel or estoppel. It acts as a sovereign body.

The theory of promissory estoppel, on the one hand, has witnessed an incredible trajectory of growth but it is incontestable that it serves as an effective deterrent to prevent injustice from a Government or its agencies which seek to resile from a representation made by them, without just cause. Reliance was placed on Union of India v. Godfrey Philips( India) Ltd, (1985) 4 SCC 369.

B. Challenge to newly inserted Provisos in S. 7(1)

Under the impugned provisos inserted in Section 7(1) of the Code, an application by an allottee, can be made only if there are hundred allottees or a number representing one-tenth of the total number of allottees, whichever is less, with a further rider that the allottees must be part of the same real estate project.

B.1. Allottee and Real Estate Project

The Court was of the opinion that the definition of the word “allottee” appears to be split up into three categories broadly, they are- plot, apartment and buildings. In the context of the impugned proviso, in calculating the total number of allottees, the question must be decided with reference to real nature of the real estate project in which the applicant is an allottee. If it is in the case of an apartment, then necessarily all persons to whom allotment had been made would be treated as allottees for calculating the figure mentioned in the impugned proviso. As to what would constitute the “real estate project”, it must depend on the terms and conditions and scope of a particular real estate project in which allottees are a part of. These are factual matters to be considered in the facts of each case.

B.2. Workability of Default

 Since, default can be qua any of the applicants, and even a person, who is not an applicant, and the action is, one which is understood to be in rem, in that, the procedures, under IBC, would bind the entire set of stakeholders, including the whole of the allottees, the Court saw no merit in the contention of the petitioner based on the theory of default, rendering the provisions unworkable and arbitrary.

It was explained that if a law contemplates that the default in a sum of R 1 crore can be towards any financial creditor, even if he is not an applicant, the fact that the debt is barred as against some of the financial creditors, who are applicants, whereas, the application by some others, or even one who have moved jointly, fulfill the requirement of default, both in terms of the sum and it not being barred, the application would still lie.

B.3. Allottees to be from same real estate project: Constitutionality 

The rationale behind confining allottees to the same real estate project is to promote the object of IBC. Once the threshold requirement can pass muster when tested in the anvil of a challenge based on Articles 14, 19 and 21, then, there is both logic and reason behind the legislative value judgment that the allottees who must join the application under the impugned provisos must be related to the same real estate project. If it is to embrace the total number of allottees of all projects, which a Promoter of a real estate project, may be having, it will make the task of the applicant himself more cumbersome.

B.4. Point of time to comply with the Threshold Requirements

There can be no doubt that the requirement of a threshold under the impugned proviso in Section 7(1) must be fulfilled as on the date of the filing of the application. In the matter of presentation of an application under Section 7, if the threshold requirement under the impugned provisos stands fulfilled, the requirement of the law must be treated as fulfilled.

B.5. Holding by family members and joint holdings: Whether Single Allottee

 In the case of a joint allotment of an apartment, plot or a building to more than one person, the allotment can only be treated as a single allotment. This for the reason that the object of the Statute, admittedly, is to ensure that there is a critical mass of persons (allottees), who agree that the time is ripe to invoke IBC and to submit to the inexorable processes under IBC, with all its attendant perils.

B.6. No power of waiver to Central Government unlike in Companies Act

 Section 399(4) of the Companies Act, 1956, empowers the Central Government to waive certain requirements allowing applicants to approach the Tribunal, if found just and equitable.

However, the scheme of IBC is unique and its objects are vividly different from that of the Companies Act. Consequently, if the Legislature felt that threshold requirement representing a critical mass of allottees alone would satisfy the requirement of a valid institution of an application under Section 7, it cannot be dubbed as either discriminatory or arbitrary.

B.7. Or. 1 R. 8 CPC and S. 12, Consumer Protection Act

Under Order 1 Rule 8 CPC, where there are numerous persons having the same interest in one suit, one or more such persons can, with the permission of the court, sue or be sued or may defend such suit on behalf of or for the benefit of all persons so interested, at the instance of a single person with whom numerous persons share the same interest. Similar is the provision of Section 12 of the Consumer Protection Act, 1986.

However, it is important to not be oblivious to the scheme of IBC and to distinguish it from a civil suit laid invoking Order 1 Rule 8 or the consumer complaint presented by one consumer, sharing the same interest with numerous others. As to whether the procedure contemplated in Order I Rule 8 is suitable, more appropriate and even more fair, is a matter, entirely in the realm of legislative choice and policy.

“Invalidating a law made by a competent Legislature, on the basis of what the Court may be induced to conclude, as a better arrangement or a more wise and even fairer system, is constitutionally impermissible. If, the impugned provisions are otherwise not infirm, they must pass muster.”

 B.8. The Pioneer judgment: Are amendments violative of it

In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, certain amendments to IBC were challenged. The challenged provisions included the Explanation added to Section 5(8)(f).

After culling out the findings of the Court in the Pioneer judgment, the Court opined that the impugned provisos do not set at naught the ruling in Pioneer judgment. In a challenge by real estate developers upholding the provisions in the manner done including the Explanation in Section 5(8)(f) and allaying the apprehension about abuse by individual allottees cannot detract from the law giver amending the very law on its understanding of the working of IBC at the instance of certain groups of applicants and impact it produces on the economy and the frustration of the sublime goals of the law.

B.9. Information Asymmetry

 It was contended that the information relating to allottees in respect of real estate projects and the debenture holders and security holders in regard to the first proviso is not available, which makes it arbitrary and unworkable.

On this, the Court noted that as far as allottees are concerned in regard to apartments and plots, Section 11(1)(b) of the RERA makes it mandatory for the promoter to make available information regarding the bookings. The Court conflated bookings with allotments. Further, the Association of allottees has to be formed under the mandate of the law it is expected to play an important role. It was stated:

“The law giver has therefore created a mechanism, namely, the association of allottees through which the allottees are expected to gather information about the status of the allotments including the names and addresses of the allottees.”

Similarly, contention regarding non-availability of information regarding debenture holders and security holders was turned down in view of statutory mechanism comprised in the provisions of the Companies Act 2013, namely Section 88.

B.10. The first and second provisos classification

The petitioners emphasised the principle that the object itself cannot be discriminate. It was pointed out that the object in the case of impugned provisos between different sections of financial creditors is such discrimination. Further, the corporate debtors are discriminated again in that builders are accorded special treatment qua other corporate debtors.

Following a plethora of judicial precedents, the Court concluded that:

“It is clear that the law does not interdict the creation of a class within a class absolutely. Should there be a rational basis for creating a sub-class within a class, then, it is not impermissible.”

It was noted that allottees are indeed financial creditors. They do possess certain characteristics, however, which appear to have appealed to the Legislature as setting them apart from the generality of financial creditors. These features are: (i) Numerosity; (ii) Heterogeneity; (iii) Individuality in decision making.

“In the case of the allottees of a real estate project, it is the approach of the Legislature that in a real estate project there would be large number of allottees. There can be hundreds or even thousands of allottees in a project. If a single allottee, as a financial creditor, is allowed to move an application under Section 7, the interests of all the other allottees may be put in peril. This is for the reason that as stakeholders in the real estate project, having invested money and time and looking forward to obtaining possession of the flat or apartment and faced with the same state of affairs as the allottee, who moves the application under Section 7 IBC, the other allottees may have a different take of the whole scenario.”

It was added that some of them may approach the Authority under the RERA. Others may, instead, resort to the fora under the Consumer Protection Act, though, the remedy of a civil suit is, no doubt, not ruled out. In such circumstances, if the Legislature, taking into consideration, the sheer numbers of a group of creditors, viz., the allottees of real estate projects, finds this to be an intelligible differentia, which distinguishes the allottees from the other financial creditors, who are not found to possess the characteristics of numerosity, then, it is not for the Court to sit in judgment over the wisdom of such a measure.

“This is not a case where there is no intelligible differentia. The law under scrutiny is an economic measure. As laid down by this Court, in dealing with the challenge on the anvil of Article 14, the Court will not adopt a doctrinaire approach.”

 B.11. Allottees v. Operational Creditors

One of the contentions raised by petitioners was as regards the hostile discrimination between petitioner (allottees) and operational creditors. The advantages which financial creditor have over operational creditors was referred to.

The Court was of the view that as far as the argument relating to violation of Article 14 qua operational creditor was concerned, there is no merit in the same. Quite apart from the fact that under IBC they are dealt with under different provisions and a different procedure is entailed thereunder, even the earlier decisions have treated the financial creditor differently from the operational creditor. Reliance was placed on Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416. It was observed:

“While it may be true that the allottee is not a secured creditor and he is not in the position of a bank or the financial institution, the contentions of the petitioners that there is hostile discrimination forbidden (under) Article 14 is untenable. There cannot be any doubt that intrinsically a financial creditor and an operational creditor are distinct.”

It was noted that it is not a case where the right of the allottee is completely taken away. All that has happened is a half-way house is built between extreme positions, viz., denying the right altogether to the allottee to move the application under Section 7 IBC and giving an unbridled license to a single person to hold the real estate project and all the stakeholders thereunder hostage to a proceeding under IBC which must certainly pass inexorably within a stipulated period of time should circumstances exists under Section 33 into corporate death with the unavoidable consequence of all allottees and not merely the applicant under Section 7 being visited with payment out of the liquidation value, the amounts which are only due to the unsecured creditor.

C. Challenge to newly inserted Explanation II to S. 11

It was contended that an Explanation cannot modify the main provision to which it is an Explanation. Section 11(a) and Section 11(b) unequivocally bar a Corporate Debtor from filing a Corporate Insolvency Resolution Process application qua another Corporate Debtor under Section 7 and Section 9 IBC. It was complained that the label of an Explanation has been used to substantially amend, which is an arbitrary and irrational exercise of power.

It was pointed out that the word “includes” in Explanation I to Section 11 would indicate that an Application for CIRP is barred not only against itself but also against any other Corporate Debtor when the applicant-Corporate Debtor is found placed in circumstances expressed in Section 11. If the purport of  Explanation II, which was impugned, is that the intention of the law was to only bar an Application for CIRP by a Corporate Debtor against itself, then, it will be unworkable and practically impossible. Explanation II, it was contended, is manifestly arbitrary. It was further contended that the amendment cannot be used retrospectively and take away the vested right.

Dealing with this challenge, the Court analysed the limbs of Section 11 and  Explanation I. Then finally coming to Explanation II, it was opined that The intention of the Legislature was always to target the corporate debtor only insofar as it purported to prohibit application by the corporate debtor against itself, to prevent abuse of the provisions of IBC. It could never had been the intention of the Legislature to create an obstacle in the path of the corporate debtor, in any of the circumstances contained in Section 11, from maximizing its assets by trying to recover the liabilities due to it from others. It was further held:

“The provisions of the impugned Explanation II, thus, clearly amount to a clarificatory amendment. A clarificatory amendment, it is not even in dispute, is retrospective in nature.”

D. Challenge to newly inserted S. 32-A

It was contended that the immunity granted to the corporate debtors and its assets acquired from the proceeds of crimes and any criminal liability arising from the offences of the erstwhile management for the offences committed prior to initiation of CIRP and approval of the resolution plan by the adjudicating authority further jeopardizes the interest of the allottees/creditors. It will cause huge losses which is sought to be prevented under the provisions of the Prevention of Money Laundering Act, 2002. Section 32-A, it was argued, is therefore arbitrary, ultra vires and violative of Article 300-A and Articles 14, 19 and 21.

Answering this, the Court was of the clear view that no case whatsoever is made out to seek invalidation of Section 32-A. The boundaries of the Court’s jurisdiction are clear. The wisdom of the legislation is not open to judicial review. It was observed:

“The provision is carefully thought out. It is not as if the wrongdoers are allowed to get away. They remain liable. The extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate.”

Further, it was stated that it must be remembered that the immunity is premised on various conditions being fulfilled. In Court’s opinion, there was no basis at all to impugn the Section on the ground that it violates Articles 19, 21 or 300A.

E. Restrospectivity in third proviso to S. 7 and effect on vested rights

The third proviso is a one-time affair. It is intended only to deal with those applications, under Section 7, which were filed prior to 28.12.2019. In other words, the legislative intention was to ensure that no application under Section 7 could be filed after 28.12.2019, except upon complying with the requirements in the first and second provisos. The Legislature did not stop there. It has clearly intended that the threshold requirement it imposed, will apply to all those applications, which were filed, prior to 28.12.2019 as well, subject to the exception that the applications, so filed, had not been admitted, under Section 7(5).

The Court considered, whether the right under the unamended Section 7 was a vested right of the financial creditors or allottees covered by the provisos 1 and 2, respectively.

It was the Court’s view that there is a right which is vested in the cases where, the petitioners have filed application, fulfilling the requirements under unamended Section 7 of IBC. The very act of filing the application, even satisfies the apparent test propounded by the Additional Solicitor General, that the right under Section 7 is only one to take advantage of the statute and unless advantage is actually availed it does not create an accrued right. When applications were filed under the unamended provisions of Section 7, at any rate it would transform into a vested right. The vested right is to proceed with the action till its logical and legal conclusion.

It was noted, every sovereign Legislature is clothed with competence to make retrospective laws. It is open to the Legislature, while making retrospective law, to take away vested rights. If a vested right can be taken away by a retrospective law, there can be no reason why the Legislature cannot modify the vested rights.

During the course of discussion, it was also noted that imposing the threshold requirement under the third proviso, is not a mere matter of procedure. It impairs vested rights. It has conditioned the right instead, in the manner provided in the first and the second proviso. The Court already upheld the first and second proviso, which, in fact, operates only in the future. In that sense, the Legislature has purported to equate persons who had not filed applications with persons like the petitioners who had filed the applications under the unamended law.

Lastly, the Court discussed certain factors including clarity regarding “withdrawal” under the third proviso, as also the question of court fees. Analysing such points, the Court finally passed certain directions.

Conclusion & Relief

The Court upheld the impugned amendments, albeit subject to certain directions issued under Article 32 of the Constitution:

(i) If any of the petitioners move applications in respect of the same default, as alleged in their applications, within a period of two months from today, also compliant with either the first or the second proviso under Section 7(1), as the case may be, then, they will be exempted from the requirement of payment of court fees, in the manner, which we have detailed in the paragraph just herein before.

(ii) If applications are moved under Section 7 by the petitioners, within a period of two months from today, in compliance with either of the provisos, as the case may be, and the application would be barred under Article 137 of the Limitation Act, on the default alleged in the applications, which were already filed, if the petitioner file applications under Section 5 of the Limitation Act, the period of time spent before the Adjudicating Authority, the Adjudicating Authority shall allow the applications and the period of delay shall be condoned in regard to the period, during which, the earlier applications filed by them, which is the subject matter of the third proviso, was pending before the Adjudicating Authority.

(iii) The time limit of two months is fixed only for conferring the benefits of exemption from court fees and for condonation of the delay caused by the applications pending before the Adjudicating Authority. In other words, it is always open to the petitioners to file applications, even after the period of two months and seek the benefit of condonation of delay under Section 5 of the Limitation Act, in regard to the period, during which, the applications were pending before the Adjudicating Authority, which were filed under the unamended Section 7, as also thereafter. [Manish Kumar v. Union of India, 2021 SCC OnLine SC 30, dated 19-01-2021]

Op EdsOP. ED.

In the backdrop of the pandemic, much discussion on the Insolvency and Bankruptcy Code, 2016[1] (the Code) has revolved around whether creditors should continue to have a right to commence insolvency proceedings. However, the pandemic induced lockdowns and the recession that has followed have also raised important questions pertaining to the rights of resolution applicants (RA). The scheme of the Code is such that when insolvency resolution proceedings are initiated against a corporate debtor (CD), a committee of its creditors (CoC) calls for bids from parties who may be interested in taking over or purchasing the assets or business of that company. The party whose bid is accepted is the successful RA under the Code.

Expectedly, after the pandemic, financial pressures have mounted not only on companies who have debts due to banks and other lenders, but also on such RAs. To successfully buy the assets and businesses of CDs, an RA would have to infuse sizable sums of money. Generally, this money is arranged for in two to three different ways. One source of funds is the cash in hand that the RA may have. A second is the revenues that can be generated from the business and assets of the CD. A third is fresh debt raised from the market to pay off the institutional lenders of the CD. In the present recession-hit economy, it is only natural that all these sources of funds would be under some stress. Therefore, it is likely that RAs may no longer want to purchase companies that they were interested in before the lockdown. To cut the long story short, RAs may want to withdraw from the corporate insolvency resolution process (CIRP). Pertinently though, the question of withdrawal from the CIRP is not relevant only in the context of a recession-hit economy. It is an independent question of law that needs to be answered sooner rather than later.

It is in this context that a recent decision of the National Company Law Appellate Tribunal (NCLAT) in Kundan Care Products v. Amit Gupta[2] assumes significance. The NCLAT held that a successful RA is not entitled to withdraw a resolution plan (the plan). The appellant, Kundan Care, had emerged as the successful RA in the CIRP of Astonfield Solar (Gujarat) Pvt. Ltd. (Astonfield). Although Kundan Care’s plan had been accepted by the CoC on, it was yet to be approved by the NCLT. In the meantime, Kundan Care approached the NCLT to withdraw its plan, on the grounds that the plan had been rendered commercially unviable due to delay in concluding the CIRP. The NCLT rejected this application, prompting Kundan Care to prefer an appeal.

Before the NCLAT, Kundan Care argued that the Code does not contain any provision to compel specific performance of the plan. As a corollary, an application to withdraw a plan found to be unviable had to be permitted.

The NCLAT not only declined to grant permission to withdraw, but also held that “the argument advanced on behalf of the appellant that there is no provision in the  Insolvency and Bankruptcy Code compelling specific performance of resolution plan by the successful resolution applicant has to be repelled”. The NCLAT provided four distinct reasons for the same:

 (a) First, that the Code had no specific provision permitting withdrawal of accepted plans.

(b) Second, once the plan was approved, it became a binding contract between the parties, which “is not a contract of personal service which may be legally unenforceable”.

(c) Third, the RA would be estopped from “wiggling out” of the liabilities flowing from the resolution plan.

(d) Fourth, the assets of the CD were bound to deplete during the time consumed by the CIRP process, and if this were accepted as a ground for withdrawal, every RA would “walk out with impunity”.

The overarching rationale behind the decision was that any withdrawal by the RA could bring about “disastrous consequences” for the CD, and push the CD into liquidation. The NCLAT also observed that by permitting withdrawal, it would be interfering with the commercial wisdom of the CoC. This decision was then carried in appeal before the Supreme Court, which was pleased to grant an ad interim stay on the judgment.

Necessarily, this question will now be resolved by the Supreme Court. However, there are several legal issues that subliminally undercut the decision of the NCLAT, and which we believe merit a widespread discussion..

No specific provision permitting withdrawal

 The absence of a specific provision in the Code permitting withdrawal only means that the NCLT lacks the jurisdiction to entertain an application for withdrawal. This is borne out by the decision in Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd.[3], where the NCLAT held that the adjudicating authority had no jurisdiction to entertain an application for the withdrawal of a plan after it had been approved.

However, this does not mean the withdrawal of a resolution plan is always prohibited by the Code. Let us consider a scenario, as in the present case, where the plan is yet to be approved by the NCLT. Section 31 of the Code needs the adjudicating authority to assess whether a plan may be implemented efficiently, before approving the plan. An RA who at the outset suggests that it may no longer be in a position to abide by the plan on account of a downturn in the economy or otherwise, would be a prime indicator of the fact that the plan may not be successfully implemented. In such cases, the plan ought to be rejected by the NCLT. In effect, even without considering a separate application for withdrawal, the NCLT can indirectly permit the RA to withdraw.

A separate application for withdrawal is not needed because the Code envisages liquidation as the solution in such situations. Sections 33(3) and (4) clearly stipulate that where a plan has been contravened, the adjudicating authority “shall pass a liquidation order”, upon application by an aggrieved party. Thus, instead of compelling an unwilling RA to perform a plan, the Code rightly considers liquidation as an efficacious alternative to the CIRP. Liquidation also follows when CIRP fails.

The NCLAT’s suggestion that liquidation would necessarily be a worse outcome, that has to be avoided at all costs, is not borne out by the Code. In fact, sale of assets in liquidation in a time-bound fashion may be more effective than protracted litigation to compel an RA to abide by the plan.

Resolution Plan is a binding contract capable of specific performance

 By holding that withdrawal cannot be permitted, the NCLAT in Kundan Care[4] effectively holds that the NCLT has the power to compel an RA to specifically perform a plan. This is directly contrary to the NCLAT’s own decision in Metalyst Forging Ltd. v. Deccan Value Investors LP[5], where the NCLAT observed as follows:

“In the aforesaid background, the adjudicating authority (National Company Law Tribunal), Mumbai Bench rightly observed that the Insolvency and Bankruptcy Code do(es) not confer any power and jurisdiction on the adjudicating authority to compel specific performance of a plan by an unwilling resolution applicant ”.

It is now a well-settled position in law that specific performance may only be awarded of a contract[6]. Whether a plan is a contract is itself ambiguous. The scheme of the Code is such that various RAs who may be interested in the assets of a CD submit their plans to the resolution professional of the CD, who in turn places them before the CoC. By an internally decided mechanism, this Committee then selects one of the plans as the successful plan.

Following this logic, the two parties to the contract would have to be the CoC and the RA.  Were the plan a “contract”, it would only bind the parties thereto. However, Section 31 makes it clear that the plan is a document in rem – it binds every stakeholder of the CD, including those who may not have consented to the plan. Moreover, for there to be a concluded contract there must be an offer and an acceptance. In a CIRP though, the mere acceptance of one of a plan, does not amount to an acceptance of the offer. This is simply because a plan comes into force and becomes legally binding only if it is approved by the NCLT. No concluded contract comes to be only on the CoC selecting a plan.

Further, the transaction covered under the plan indicates that it is not truly a “contract” at all. Under a plan, the consideration that flows to the RA is control over the CD.  However, the CD does not belong to the CoC – under company law, the CD is owned by its shareholders. It is a settled position in law that a party cannot pass a better title than what she possesses. Therefore, conventionally the CoC would have no authority to transfer the CD. Ownership and control would have to be passed by shareholders themselves, either as parties to the contract or at the behest of the CoC. However, this is evidently not the case in a plan. Therefore, the power given to the CoC to “transfer” the Company is only statutory and not contractual in nature.

In any case, even if a plan is assumed to be a concluded contract, it is not one of which specific performance can be awarded. Under Section 14(b) of the Specific Relief Act, a resolution plan would be a contract which needs constant supervision by the court and is thus, not capable of specific performance. Suppose, for a moment, that the CD operated a restaurant chain and was taken over by an RA in the CIRP. The plan submitted by the RA envisioned that 30% of the revenues earned through the restaurant business every year would be used to pay off the debts of the CD. In the current climate, the RA no longer wants to proceed with adding a restaurant chain to its line of businesses. To compel the RA to specifically perform this contract would mean that he would necessarily have to operate a chain of restaurants, do business and garner revenues. These are obligations that no court can constantly supervise. Similarly, when a plan envisages that an RA will raise fresh debt to finance the older debts of the CD, a court cannot compel him to take a loan. Therefore, we say that even if a plan were assumed to be a contract, it is not one of which specific performance can be readily awarded by a civil court.

 Estoppel

 The other prominent reason provided by the NCLAT to repel Kundan Care’s submissions was that it was barred by estoppel from withdrawing the plan. At the outset, it is seen that the decision is internally inconsistent on this point. As we have seen above, the NCLAT considers the plan to be a concluded contract. Once that is so, it is doubtful whether a question of estoppel can arise –– estoppel is a doctrine which enforces promises when there is no contract, on the basis that the other party has relied upon the promise and acted to his detriment. When there is a contractual relationship, remedies would presumably exist under the contract and estoppel would not coexist.

In any case, there are other reasons why estoppel cannot apply here. First, the courts have previously had the occasion to observe that the highest bidder in an auction is not estopped from retracting his bid.[7] Rightly so, because this is not a scenario where an equitable intervention is warranted. When an auction fails, property may be reauctioned or the bidder may be sued for damages or, as in the present case, the company may be liquidated. This, as stated, is also the scheme of the Code, which provides for liquidation of companies where plans cannot be successfully implemented. Second, injuncting an RA from withdrawing on the grounds of estoppel, would be tantamount to indirectly awarding specific performance of a contract that is not capable of specific performance.

 Conclusion

 Based on our opinion on the issues that arise in this context, we contend that the decision of the NCLAT in Kundan Care[8] is incorrect and deserves to be revisited. Otherwise, we might find ourselves in a situation where struggling businesses are handed over to unwilling RAs, who are looking for every opportunity to exit. These outcomes may well be counterproductive. Moreover, there is also the associated question of refund of performance guarantees and/or earnest money deposits usually provided by RAs along with the plan. This is an independent question, which too will have to be considered by the SC when it revisits Kundan Care[9]. For the paucity of space though, we have not examined it in this piece.


Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore, BCL from University of Oxford. Works in the chambers of Mr Shyam Kapadia.

‡ Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore. Works in the chambers of Sr. Advocate Mr Venkatesh Dhond.

[1] Insolvency and Bankruptcy Code, 2016

[2] 2020 SCC OnLine NCLAT 670

[3] 2020 SCC OnLine NCLAT 592

[4] 2020 SCC OnLine NCLAT 670.

[5] 2020 SCC OnLine NCLAT 837.

[6] Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 and Amrit Lal Suri v. C.P. Gupta, 1990 SCC OnLine Del 87

[7] Vishal Builders (P) Ltd. v. Delhi Development Authority, 1977 SCC OnLine Del 29  and Shakharamseth Employees Union v. ICICI Bank Limited, 2009 SCC OnLine Bom 1707

[8] 2020 SCC OnLine NCLAT 670.

[9] Ibid.