Case BriefsSupreme Court

Supreme Court: In a landmark case the Division Bench of Dhananjaya Y Chandrachud* and A S Bopanna, JJ., clarified the residuary powers of NCLT under Insolvency and Bankruptcy Code (IBC). The Bench stated,

“In terms of Section 238 and the law laid down by this Court, the existence of a clause for referring the dispute between parties to arbitration does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor.”

Factual Background

The appellant and the Corporate Debtor had entered into a Build Phase Agreement followed by a Facilities Agreement whereby the Corporate Debtor was obligated to provide premises with certain specifications and facilities to the appellant for conducting examinations for educational institutions. Clause 11(b) of the Facilities Agreement states that either party is entitled to terminate the agreement immediately by written notice to the other party provided that a material breach committed by the latter is not cured within thirty days of the receipt of the notice.

Invoking the termination clause, a termination notice was issued by the appellant owing to multiple lapses in fulfilling its contractual obligations; i.e. insufficiency of housekeeping staff and their malpractices in respect of entering attendance etc. by the Corporate Debtor when the malpractices were not rectified by the Corporate Debtor despite being highlighted from time to time. The said notice came into effect immediately.

Proceedings before the NCLT and NCLAT

The Corporate Debtor instituted a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of the termination notice. The NCLT passed an order granting an ad-interim stay opining that the contract was terminated without serving the requisite notice of thirty days. In appeal, the NCLAT upheld the interim order NCLT.

Question of Law

Based on the appeal, two issues had arisen for consideration:

(i) Whether the NCLT can exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to adjudicate upon the contractual dispute between the parties; and

(ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement.

Is NCLT empowered to intervene where the agreement expressly provides for Arbitration?

Although, Clause 12 (d) of the Facilities Agreement provides that the disputes between the parties shall be a subject matter of arbitration, Section 238 of IBC provides that the IBC overrides other laws, including any instrument having effect by virtue of law.

While considering whether a reference to arbitration made under Section 8 of the Arbitration and Conciliation Act 1996 in terms of the agreement between the parties would affect the jurisdiction of the NCLT, the Supreme Court in Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436, had held that “even if an application under Section 8 of the 1996 Act is filed, the adjudicating authority has a duty to advert to contentions put forth on the application filed under Section 7 of IB Code, examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not. If the irresistible conclusion by the adjudicating authority is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties indisputably contains an arbitration clause.”

Further, Section 60(5) (c) grants residuary jurisdiction to the NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of the Corporate Debtor. Therefore, despite Clause 12 (d) providing that any dispute between the parties relating to the agreement could be the subject matter of arbitration, the Facilities Agreement being an ‘instrument’ under Section 238 of the IBC can be overridden by the provisions of the IBC.

NCLT’s Residuary Powers under IBC    

In Gujarat Urja Vikas v. Amit Gupta, (2021) 7 SCC 209, it was held that the NCLT’s jurisdiction is not limited by Section 14 of IBC in terms of the grounds of judicial intervention envisaged under the IBC. It can exercise its residuary jurisdiction under Section 60(5)(c) to adjudicate on questions of law and fact that relate to or arise during an insolvency resolution process.

Therefore, rejecting the argument of the appellant that the NCLT and NCLAT had re-written the agreement changing its nature from a determinable contract to a non-terminable contract overlooking the mandate of Section 14 of the Specific Relief Act 1963, the Bench opined that IBC is a complete code and Section 238 overrides all other laws. Therefore, the NCLT in its residuary jurisdiction is empowered to stay the termination of the agreement if it satisfies the criteria laid down in the Gujarat Urja’s case. Hence, the Bench stated,

“In any event, the intervention by the NCLT and NCLAT cannot be characterized as the re-writing of the contract between the parties. The NCLT and NCLAT are vested with the responsibility of preserving the Corporate Debtor’s survival and can intervene if an action by a third party can cut the legs out from under the CIRP.”

Factual Analysis

Noticeably, the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor and electricity supply was disconnected for the Corporate Debtor by the Electricity Board. The Corporate Debtor in its email alleged that the appellant had failed to make the requisite payments and the electricity was disconnected as a result.

Before the initiation of the CIRP, the appellant had on multiple instances communicated to the Corporate Debtor that there were deficiencies in its services. The Corporate Debtor was put on notice that the penalty and termination clauses of the Facilities Agreement may be invoked. The termination notice dated 10 June 2019 also clearly laid down the deficiencies in the services of the Corporate Debtor.

Therefore, the Bench opined that there was nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor. The Bench observed,

The trajectory of events makes it clear that the alleged breaches noted in the termination notice dated 10 June 2019 were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor.”

Thus, the Bench held that the NCLT did not have any residuary jurisdiction to entertain the instant contractual dispute which had arisen dehors the insolvency of the Corporate Debtor and in the absence of jurisdiction over the dispute; the NCLT could not have imposed an ad-interim stay on the termination notice.

A Cautionary Note to NCLT and NCLAT

Additionally, the Bench issued a note of caution to the NCLT and NCLAT regarding interference with a party’s contractual right to terminate a contract; i.e. even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor. The Bench added,

“The narrow exception crafted by this Court in Gujarat Urja (supra) must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief.”

Verdict

The Bench held that the NCLT had merely relied upon the procedural infirmity on part of the appellant in the issuance of the termination notice, i.e., it did not give thirty days’ notice period to the Corporate Debtor to cure the deficiency in service but there was no factual analysis on how the termination of the Facilities Agreement would put the survival of the Corporate Debtor in jeopardy to invoke residuary powers of NCLT. Accordingly, the judgment of NCLT and NCLAT was set aside with a direction to dismiss proceedings initiated against the appellant. [TATA Consultancy Services Ltd. v. SK Wheels Pvt. Ltd., 2021 SCC OnLine SC 1113, decided on 23-11-2021]


Kamini Sharma, Editorial Assistant has put this report together


Appearance by:

For the Appellant: Advocate Fereshte D Sethna

For the Respondent: Advocate Sowmya Saikumar


*Judgment by: Justice Dhananjaya Y Chandrachud

Op EdsOP. ED.

Introduction

Even though with the introduction of the Insolvency and Bankruptcy Code, 20161 (hereinafter referred to as “the Code”), a composite way to put through in charge those who default in payments of debt has been exclusively followed, multiple amendments have been already introduced with an aim to eliminate loopholes that do not follow the objective of the Code. One such amendment is the inclusion of Section 29-A2 with retrospective effect from 23-11-2017 by the Insolvency and Bankruptcy Code (Amendment) Act, 20183. The reason for including this was to list down persons who are ineligible to present resolution plans because they are initial contributors to the default of the corporate debtors. The undesirability of such persons through this amendment ensures protection to the creditors of the company from the misconduct and fraudulent motives of such individuals who try to take undue advantage of the provisions of the Code. The restrictive nature of Section 29-A has evolved since its inception and has recently been extensively discussed in Martin S.K. Golla v. Wig Associates (P) Ltd.4 dated 4-6-2021. This judgment arose out of the original order dated 4-6-2018 by the National Company Law Tribunal (NCLT), Mumbai Bench in Wig Associates (P) Ltd., In re5 and held that ineligibility under Section 29-A IBC would get attached at the time when the resolution plan is submitted by the resolution applicant.

The present article aims to (1) analyse the evolution of the famous Wig Associates judgment6 since 2017; (2) identify the issues from the findings of the NCLT and National Company Law Appellate Tribunal (NCLAT), Delhi; (3) discuss the retrospective nature of Section 29-A through various judgments; and (4) discuss the concept of connected persons and related party in the view of the present judgment.

Factual background

The present judgment arose from the order dated 4-6-2018 wherein, Wig Associates (P) Ltd.7 (corporate debtor) filed an application under Section 108 of the Code to initiate corporate insolvency resolution proceedings (CIRP) against itself on 24-8-2017. His application was admitted and Mr S.K. Golla was appointed as the interim resolution professional (RP) vide order dated 24-8-20179. Bank of Baroda was the sole financial creditor and had informed the RP that it had approved a “one time settlement” offer issued by Mr Mahendra Wig. Meanwhile, Section 29-A IBC came into existence with retrospective effect from 23-11-201710 and prescribed that “connected persons” shall not be eligible to submit a resolution plan. The fact being unprecedented, Mr Mahendra Wig fell within the meaning of such “connected persons” and despite that the said resolution plan was accepted by the Committee of Creditors by 100% votes on 20-4-2018. Vide order dated 4-6-201811, the NCLT, Mumbai recorded satisfaction in accepting the resolution plan and held that once CIRP has commenced, the provisions of the Code as existing on the date of admission of petition would continue to apply even though an amendment such as Section 29-A has been introduced. Pursuant to such order, an appeal was preferred by the Insolvency and Bankruptcy Board of India (IBBI) against order dated 4-6-201812 which resulted in the selection of an ineligible resolution applicant, and further resulted in approval of an ineligible resolution plan. The NCLAT, Delhi passed an order on 1-8-2018 that IBBI does not have locus standi to file such an appeal and requested the RP to file an appeal and hence, this present appeal is filed by the resolution professional to seek clarity on the substantive question of law involved in the controversy.

The NCLAT, Delhi made the following observations:

  • Once CIRP is commenced, provisions existing on the day of admission of the petition would continue to apply even on the face of the amendment, cannot be maintained.” The ineligibility under Section 29-A IBC would get attached at the time when the resolution plan is submitted by the resolution applicant.
  • “Mr Wig could not have been acted upon and the appellant erred in presenting the same before the Committee of Creditors.” The resolution applicant is a connected party to the corporate debtor, therefore, the ineligibility under Section 29-A IBC attaches to the resolution applicant.

Issues considered by the NCLAT, Delhi 

(a) Whether Section 29-A will be applicable with retrospective effect in Section 1013 proceedings which were initiated prior to Section 29-A coming into force?

Since, Mr Mahendra Wig was related to the director promoters of the corporate debtor company, the NCLT, Mumbai also discussed the concept of “connected persons” which made him ineligible under Section 29-A of the Code.

Section 29-A explains the connected persons as:

Explanation.— For the purposes of this clause, the expression “connected person” means— (i) any person who is the promoter or in the management or control of the resolution applicant; or

(ii) any person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan; or

(iii) the holding company, subsidiary company, associate company or related party of a person referred to in clauses (i) and (ii): 

The NCLAT, Delhi in the recent case of Navneet Jain v. Manoj Sehgal, RP of Sarbat Cotfab (P) Ltd.14 also observed that,

“Respondents were connected parties as per Section 29-A IBC at the time the resolution plan was submitted by Respondent 2. This leads to the obvious and inevitable conclusion that Tejinder Singh Kocher was not eligible to submit the resolution plan and hence the resolution plan so submitted and approved by the adjudicating authority was bad in law.”

Mr Wig clearly fell within the meaning of “connected persons” and despite that the adjudicating authority went on to examine the resolution plan which was only a one-time settlement and the resolution plan was accepted. The impugned order dated 4-6-2021 eventually ruled out that the approved resolution plan shall be quashed and set aside.

With respect to the main question of law involved here, the Supreme Court of India, in Arcelormittal India (P) Ltd. v. Satish Kumar Gupta15 and Swiss Ribbons (P) Ltd. v. Union of India16 ruled that the date of commencement of the insolvency proceedings is only to classify a person as a non-performing asset (NPA). Ineligibility criteria attaches when the resolution plan is submitted by the resolution applicant. With this, the retrospective effect of Section 29-A was upheld by the Supreme Court.

It was observed by the NCLAT in the present case that the financial creditor i.e. Bank of Baroda asked the appellant to explore the possibility of treating the one time settlement as a resolution plan subsequent to the passing of the amendment which inserted Section 29-A on 18-1-2018. Extending more transparency to the retrospective nature of Section 2917, heavy reliance was placed on the Insolvency Law Committee Report of March 2018. That report clearly stated:

“In relation to applicability of Section 29-A(c), the Committee also discussed that it must be clarified that the disqualification pursuant to Section 29-A(c) shall be applicable if such NPA accounts are held by the resolution applicant or its connected persons at the time of submission of the resolution plan to the RP.”

Thus, in the light of the above judgments, the rulings of the NCLT, Mumbai were dismissed and the true nature of Section 29-A was accepted.

Has the ambiguity around the retrospective nature of Section 29-A resolved?

While the NCLT, Mumbai digressed not only from the amendment that inserted Section 25-A18, but also from the very object of the Code, it also clarified certain fundamental concepts through its order. Firstly, a condition precedent to approval of the resolution plan by the adjudicating authority is that it has to record “satisfaction” by carefully examining the terms of the plan under Section 3119 of the Code. Secondly, the approval of a resolution plan is ought to be accepted after a proper due diligence and this duty primarily lies with the RP and the Committee of Creditors as well to carry out proper assessment. With these two findings the adjudicating authority failed to ignore the continuity of the proceedings in IBC and that such acceptance of an erroneous plan would defeat the purpose of the establishment of this Code and promote misconduct. Surprisingly, the provisions of Section 30(4)20 also inserted by the Amendment Act which clearly states that: Provided that the Committee of Creditors shall not approve a resolution plan, submitted before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (7 of 2017), where the resolution applicant is ineligible under Section 29-A and may require the resolution professional to invite a fresh resolution plan where no other resolution plan is available with it: were also ignored by the ruling. Time and again, the constitutional validity of the insertion of section has been challenged and it has been contended that it promotes a blanket ban on all the promoters and other related parties who may actually have a resolution plan worthy of approval and resulting in maximisation of value of assets. But the Supreme Court has stood by the purpose of such an amendment through its various rulings and has effectively held that whoever contributes to the defaults of the corporate debtor are capable misusing the Code to participate in the resolution process, and gain or regain control of the corporate debtor. In the present ruling as well, the NCLAT stood up to two of the most prominent rulings to observe the rectifying nature of the said amendment. Hence, it can be concluded that even though the famous Wig Associates judgment21 might have created a passage of ambiguity for the new amendment, but the present ruling and its fair interpretation by the Tribunal extends valuable clarity to the new provisions and prevents the misuse of the existing ones.


Principal Associate, Hammurabi and Solomon Partners.

[*] 4th year Student, B.B.A. L.L.B,   Bharati Vidyapeeth

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

2 <http://www.scconline.com/DocumentLink/Z90T7GCq>.

3 <http://www.scconline.com/DocumentLink/EZoXB3Oy>.

4 2021 SCC OnLine NCLAT 300

5 2018 SCC OnLine NCLT 19396.

6 2018 SCC OnLine NCLT 19396.

7 2018 SCC OnLine NCLT 19396.

8 <http://www.scconline.com/DocumentLink/Kp5IKPzm>.

9 2018 SCC OnLine NCLT 19396.

10 The Insolvency and Bankruptcy Code (Amendment) Act, 2018.

11 Wig Associates (P) Ltd., In re, 2018 SCC OnLine NCLT 19396.

12 Wig Associates (P) Ltd., In re, 2018 SCC OnLine NCLT 19396.

13 <http://www.scconline.com/DocumentLink/Kp5IKPzm>.

14 2019 SCC OnLine NCLAT 1260

15 (2019) 2 SCC 1.

16 (2019) 4 SCC 17.

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

18 <http://www.scconline.com/DocumentLink/1oA52TQl>.

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

20 <http://www.scconline.com/DocumentLink/zB7sr53j>.

21 2018 SCC OnLine NCLT 19396.

Case BriefsHigh Courts

Karnataka High Court: S. Sunil Dutt Yadav, J., decided in the matter of a petition which was filed praying to transfer a company petition on the file of the High of Karnataka to the National Company Law Tribunal, Bengaluru under the Insolvency and Bankruptcy Code, 2016.

Company petition had been filed seeking an order of winding-up of the respondent-company claiming that it had committed defaults as regards the payment of; rent, interest on rent, service tax and penalty on service tax.

It was contended that the respondent company had demonstrated its inability to pay the debt and accordingly the winding up proceedings had been initiated and in between the proceeding a company application was filed by the respondent seeking transfer of the company petition to NCLT. The petitioner had opposed the application asserting that no reason was assigned in the application invoking exercise of discretion of the Court in terms of power vested under the fifth proviso to Section 434 (1) of the Companies Act, 2013. On this argument it was contended that provision of transfer of proceedings does not require any explanation.

It was further contended that transfer of proceedings to the NCLT would prejudice the interest of the petitioners’ claim insofar as IBC Code imposes rigours and the ambiguity in the orders of the NCLT and NCLAT as to whether rental dues was an operational debt would prejudice petitioners rights to realise its claims which otherwise was admissible in the present winding up proceedings pending before this court. It was contended that exercise of discretion under the fifth proviso to Section 434(1)(c) could be premised on various considerations including existence of parallel proceedings. It was also contended that exercise of judicial discretion cannot have the effect of prejudicing the rights of the petitioner nor can it be exercised in a manner so as to cause injustice.

It is further contended that transfer of proceedings to the NCLT would deny the petitioner the right to a remedy. It was specifically asserted that the court while exercising judicial discretion ought to also keep in mind as to whether provisions of the IBC in terms of which the winding up proceedings would be decided by the NCLT, would make the claim maintainable failing which the question of transferring the proceedings ought not to be considered at all.

The Court after the hearing both the parties reiterated that in the present case, notice having been served and the matter was pending for admission when the application invoking the fifth proviso under Section 434 of the Companies Act, 2013 had been filed, the manner of disposal of such application was to be done in terms of the fifth proviso and plain reading of the fifth proviso as extracted hereinabove would indicate that any party or parties to any proceedings may file an application for transfer and the court may by order transfer such proceedings to the Tribunal. However, what needs to be looked into was the interpretation placed by the Apex Court relating to the exercise of power under the proviso.

The Court analyzed the judgment of Supreme Court in Action Ispat and Power (P) Ltd. v. Shyam Metalics and Energy Ltd., Civil Appeal Nos. 4042-4043 of 2020 decided on 15-12-2020 and explained that where the winding up proceedings have reached a stage where it is irreversible making it impossible to set the clock back and in such an event, the Company Court must proceed with the winding up instead of transferring the proceedings to NCLT is to be noticed. It further reiterated the relevant context relating to the present case,

“27. …..As has been correctly pointed out by Shri Sinha, a discretionary jurisdiction under the fifth proviso to Section 434(1)(c) of the Companies Act, 2013 cannot prevail over the undoubted jurisdiction of the NCLT under the IBC once the parameters of Section 7 and other provisions of the IBC have been met….” (emphasis supplied)

Court further stated that it is clear that provisions of IBC would prevail over the provisions of the Companies Act relating to winding up proceedings.

It was noted that in the present case, there were no parallel proceedings before the NCLT apart from the present proceedings for winding up but the Court held that even in the absence of parallel proceedings exercise to transfer proceedings may involve taking note of other factors which may include the case made out by the Company demonstrating that if the matter is transferred to NCLT to be disposed off under the IBC, there would be a greater possibility of restructuring and revival of the Company. The Court rejected the contention of petitioner that no reasons need be assigned as long as power is available to be invoked as per the statutory provision thus under the fifth proviso to Section 434 of Companies Act, 2013 the party seeking such transfer must make out grounds.

In the present case, no such grounds are forthcoming as regards the need for restructuring of the Company, if proceedings are transferred to NCLT.

The Company applications were rejected by the Court stating, “The legal regime in winding up proceedings does not disentitle the consideration of winding up merely in light of pre-existing dispute and the considerations for declining to exercise jurisdiction under Section 434 of the Companies Act, 2013 is on different grounds and not necessarily attached to the existence of a dispute in parallel forum.”

[Nitesh Residency Hotels (P) Ltd. v. Archdiocese of Bangalore, 2021 SCC OnLine Kar 14704, decided on 28-09-2021]

For the applicant: Sri K.G. Raghavan, Senior Advocate for Sri Nischal Dev B.R., Advocate

For the respondent: Sri Naman Jabakh, Advocate for Sri S. Vivek Holla, Advocate; Sri C.K. Nandakumar, Advocate as Amicus CURIE

Sri Shivabhushan S. Hatti Advocate for Smt Maneesha Kongovi, Advocate


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: Dealing with the question as to ) when will the clock for calculating the limitation period run for proceedings under the Insolvency and Bankruptcy Code (IBC), the bench of Dr. DY Chandrachud*, Vikram Nath and BV Nagarathna, JJ has held that Sections 61(1) and (2) of the IBC consciously omit the requirement of limitation being computed from when the “order is made available to the aggrieved party”, in contradistinction to Section 421(3) of the Companies Act.

“… the omission of the words “from the date on which the order is made available” for the purposes of computation of limitation in Section 61(2) of the IBC, is a consistent signal of the intention of the legislature to nudge the parties to be proactive and facilitate timely resolution.”

When will the clock for calculating the limitation period run for proceedings under the IBC?

“The IBC is a watershed legislation which seeks to overhaul the previous bankruptcy regime which was afflicted by delays and indefinite legal proceedings.”

Keeping this object of the legislation in mind, the Court noticed that the power to condone delay is tightly circumscribed and conditional upon showing sufficient cause, even within the period of delay which is capable of being condoned. The IBC sought to structure and streamline the entire process of insolvency, right from the initiation of insolvency to liquidation, as a one-stop mechanism. Section 12(3) of the IBC prescribes a strict time-line for the completion of the corporate insolvency resolution process of one hundred and eighty days which is extendable by ninety days. The proviso to Section 12(3) imposes an outer-limit of three hundred and thirty days, including time taken in legal proceedings.

The Court explained that Section 12(2) of the Limitation Act allows for an exclusion of the time requisite for obtaining a copy of the decree or order appealed against. It is not open to a person aggrieved by an order under the IBC to await the receipt of a free certified copy under Section 420(3) of the Companies Act 2013 read with Rule 50 of the NCLT and prevent limitation from running. Accepting such a construction will upset the timely framework of the IBC.

“The litigant has to file its appeal within thirty days, which can be extended up to a period of fifteen days, and no more, upon showing sufficient cause. A sleight of interpretation of procedural rules cannot be used to defeat the substantive objective of a legislation that has an impact on the economic health of a nation.”

Section 61 of the IBC, begins with a non-obstante provision – “notwithstanding anything to the contrary contained under the Companies Act, 2013” when prescribing the right of an aggrieved party to file an appeal before the NCLAT along within the stipulated period of limitation. The notable difference between Section 421(3) of the Companies Act and Section 61(2) of the IBC is in the absence of the words “from the date on which a copy of the order of the Tribunal is made available to the person aggrieved” in the latter. However,

“The absence of these words cannot be construed as a mere omission which can be supplemented with a right to a free copy under Section 420(3) of the Companies Act read with Rule 50 of the NCLT Rules for the purposes of reckoning limitation. This would ignore the context of the IBC’s provisions and the purpose of the legislation.”

“When timelines are placed even on legal proceedings, reading in the requirement of an “order being made available” under a general enactment (Companies Act) would do violence to the special provisions enacted under the IBC where timing is critical for the workability of the mechanism, health of the economy, recovery rate of lenders and valuation of the corporate debtor.”

Hence, the omission of the words “from the date on which the order is made available” for the purposes of computation of limitation in Section 61(2) of the IBC, is a consistent signal of the intention of the legislature to nudge the parties to be proactive and facilitate timely resolution.

Is the annexation of a certified copy mandatory for an appeal to the NCLAT against an order passed under the IBC?

Rule 22(2) of the NCLAT Rules mandates the certified copy being annexed to an appeal, which continues to bind litigants under PART D 29 the IBC. While it is true that the tribunals, and even this Court, may choose to exempt parties from compliance with this procedural requirement in the interest of substantial justice, as re-iterated in Rule 14 of the NCLAT Rules, the discretionary waiver does not act as an automatic exception where litigants make no efforts to pursue a timely resolution of their grievance.

[V. Nagarajan v. SKS Ispat and Power Ltd,  2021 SCC OnLine SC 959, decided on 22.10.2021]


Counsels:

For Appellant: Advocate R Subramanian

For Respondents: Senior Advocate Neeraj Kishan Kaul


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Op EdsOP. ED.

Recently, the Supreme Court of India in Orator Mktg. (P) Ltd. v. Samtex Desinz (P) Ltd.[1], held that disbursement of loan without having any assured rate of interest in return, will be covered within the definition of a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 20162 (IBC Code) and the lender would be accredited at par with the status of financial creditor for initiating insolvency proceedings against the borrower the corporate debtor.

By interpreting Section 5(8) of the IBC Code, the view taken by the Supreme Court, is that the definition of financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. That the return of interest is not sine qua non under Section 5(8) of the IBC Code for initiating the insolvency proceedings under Section 73 of the IBC Code, by the financial creditor against the corporate debtor in the event of default. That if any transaction does not contemplate assured rate of interest in return and not explicitly covered under clauses (a) to (e) of Section 5(8) of the IBC Code, the Court may refer to sub-clause (f) of Section 5(8) of the IBC Code, which means that amounts that are “raised” under “transactions” not covered by any of the other clauses of Section 5(8) of the IBC Code, would amount to a financial debt if they had the commercial effect of borrowing.

That certainly the Supreme Court rightly interpreted that the definition of financial debt means a debt along with the interest, if any, disbursed against the consideration of the time value of money. In a situation where no interest is payable on the loan, only the outstanding amount would qualify as a financial debt, by seeking reference under clause (f) of Section 5(8) of the IBC Code, in terms whereof “financial debt” includes any amount raised under any other transaction, having the commercial effect of borrowing.

However, the judgment of the Supreme Court, raises a question to the effect that if any transaction has no rate of return both in form of profit or discount, does that “transaction” still have the effect of “time value of money” or be covered under the “commercial effect of borrowing”?

As an example, where the advancement of a loan, without any assured rate of interest in return of profit or discount in any manner or form, would still qualify as a financial debt, having an effect of time value of money and be covered under the phrase “commercial effect of borrowing” under clause (f) of Section 5(8) of the IBC Code. This is the question that remained unanswered, which the author seeks to address upon in the present article.

Time value of money and commercial effect of borrowing

That there is no statutory definition of the terms “time value of money” or “commercial effect of borrowing” in the Code. The understanding of the above two terms, has been propounded by judicial precedents, that have been relied upon, to decipher the meaning of the said terms. In Nikhil Mehta & Sons (Huf) v. AMR Infrastructures Ltd.4, amounts raised by developers under assured return schemes, for monthly assured returns to the buyer, were held to have the “commercial effect of borrowing”, as it entails the element of profit in the nature of interest, which the buyer received for the value of money paid to the builder.

Though the current definition of “financial debt” under Section 5(8) of the IBC Code uses the word “includes”, the definition of financial debt is not exhaustive in nature. The phrase “disbursed against the consideration for the time value of money” has been the subject of interpretation only in a handful of cases under the Code. The Report of the Insolvency Law Committee dated 26-3-20185 has discussed the interpretation of the phrase “time value of money” which means compensation, or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money or factoring of a discount in the payment.

That in Pioneer Urban Land and Infrastructure Ltd. v. Union of India,6 Justice Nariman, while interpreting the concept of time value of money in Section 5(8) of the IBC Code, as applicable on the real estate builder stated that,

…the money that is disbursed by the allottee to the real estate developer, are utilised by them and they are legally obligated to give money’s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment.

Further Justice Nariman, referred to Collins English Dictionary & Thesaurus (2nd edn., 2000) for the meaning of the expression “borrow” and the meaning of the expression “commercial”.

  1. … borrow—vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To put the ball uphill of the direct path to the hole: make sure you borrow enough.

* * *

commercial. —adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser: commercial television. 3. having profit as the main aim: commercial music. 4. (of chemicals, etc.) unrefined and produced in bulk for use in industry. 5. a commercially sponsored advertisement on radio or television.

That relying upon the aforesaid definition, the Court further stated that:

“Commercial would generally involve transactions having profit as their main aim.”

That in Shailesh Sangani v. Joel Cardoso7, the shareholder of the company granted an unsecured loan, without any interest in return to the company. On default, the shareholder, initiated insolvency proceedings against the company under Section 7 of IBC Code. The company took a defence, that the transaction does not have an effect of commercial borrowing to qualify as financial debt under clause (f) of Section 5(8) of the IBC Code. The NCLAT held,

  1. … that money advanced by a promoter, director or a shareholder of the corporate debtor as a stakeholder to improve financial health of the company and boost its economic prospects, would have the commercial effect of borrowing on the part of corporate debtor notwithstanding the fact that no provision is made for interest thereon. Enhancement of assets, increase in production and the growth in profits, share value or equity ensures to the benefit of such stakeholders and that is the time value of the money constituting the consideration for disbursement of such amount raised as debt with obligation on the part of company to discharge the same.

Similarly, in Kolla Koteswara Rao v. S.K. Srihari Raju,8 the question arouse was whether parties which had agreed to one-time settlement can claim that there exists no element of profit and the transaction will fall out the contour of clause (f) of Section 5(8) of the Code. The NCLAT held that,

  1. As regarding the argument of the learned appellant counsel that there was no “profit” involved, it is only because of the one-time settlement entered into between the lender bank and the “corporate debtor”, that the “corporate debtor” had benefited in terms of waiver of interest, payment of a lesser amount of Rs 11.70 crores as against the ledger outstanding amount of Rs 16.72 crores and therefore it has to be safely construed that the “corporate debtor” has benefited/profited from the said transaction.

In cases, where the promoters of the company give interest free loans to the company, it certainly exists the element of foreseeable profit to be secured at a later stage, by providing financial stability to the company, means to expand the company business, etc. Though, at the first glance it may look that it is an unsecured loan without any interest, but it certainly carries a motive of making profit in future, which relates to the concept of time value of money and effect of commercial borrowing.

That the disbursement of money by the lender to the borrower, must have an element of profit or factor of discount in return, to have the effect of time value of money and commercial borrowing, to qualify as a financial debt under Section 5(8) of the IBC Code. Certainly, the intent of the legislature is evidently clear when they use the terms like “time value of money and commercial effect of borrowing” which impliedly shows the nexus in between the transaction and the motive behind it for making profit or factoring of discount, by more than one form and manner, through that transaction.

IBC is not intended to be substituted to a recovery forum

That the objective of the Code is to introduce a unified legal regime for effective and timely resolution of the insolvency and bankruptcy of a corporate entity, to attain maximisation of value of assets of the company, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. That the intent of the Code, is to safeguard the interest of the company and its creditors, by providing maximum realisation of assets to the creditors of company, while the company will remain a going concern. That the primary focus of the Code, is to ensure revival and continuation of the corporate debtors, by bringing it back on feet, and not being the mere recovery legislation for creditors.

That the IBC Code is bifurcated into two forms of creditors, firstly financial creditors and secondly operational creditors. In the case of financial creditors, the financial debt is disbursed against the consideration for the time value for money. In the case of operational creditors, where the operational debt would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.

That the difference between the financial creditors and operational creditors is that the former will firstly attempt to preserve the corporate debtor as a going concern, while ensuring maximum recovery for all creditors as being the objective of the Code, while the later concerns are limited to the recovery of their outstanding dues against the supply of goods and services to the corporate debtor.

That the element of return of profit in the transaction, certainly accedes to the interest of the financial creditor, as they are in the business of money lending, banks and financial institutions, whose primary focus is reviving and restructure the liabilities of the corporate debtor, so that it can continue to remain a going concern. On the other hand, operational creditors, who are limitedly concerned for the recovery of their outstanding dues against the supply of goods and services to corporate debtor.

That if an amount is disturbed as a loan, not against the time value of money, having no effect of commercial borrowing, then the financial creditor rather than having any interest in the revival of corporate debtor, will only seek to recover the said loan amount by pushing the otherwise health company in the shackles of insolvency proceedings, which is not the intent of the IBC Code. That the primary focus of the IBC Code is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The IBC Code is a beneficial legislation which puts the corporate debtor back on its feet, not intended to be substituted by a recovery forum.

Conclusion

Under the IBC Code, the unsecured loan without any interest, must have an effect of time value of money and commercial effect of borrowing, to qualify as the financial debt under clause (f) of Section 5(8) of the IBC Code. For transaction to qualify as a financial debt under the IBC Code, it must have the element of profit or factoring discount, to give it an effect of time value of money and commercial effect of borrowing. Though, the profit or discount may not always materialise in monetary benefits, but it should entail benefit of such a nature, that the money advanced against loans, has a potential earning capacity and furthers the intent of the financial creditors seeking profits.


Associate, PSL Advocates and Solicitors.

†† Partner, PSL Advocates and Solicitors.

[1] 2021 SCC OnLine SC 513.

2 <http://www.scconline.com/DocumentLink/w93pA9Ln>.

3 <http://www.scconline.com/DocumentLink/K60PW5A6>.

4 2017 SCC OnLine NCLT 219.

5 <http://www.scconline.com/DocumentLink/sYKPTj8e>.

6 (2019) 8 SCC 416, p. 513-514.

7 2019 SCC OnLine NCLAT 52.

8 2021 SCC OnLine NCLAT 110.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT)- The Coram of Justice Jarat Kumar Jain (Judicial Member), Ashok Kumar Mishra (Technical Member), and Alok Srivastava (Technical Member) while dismissing an appeal summarily without notice to the Respondent was of the opinion, that there was no need to interfere with the impugned order since the adjudicating authority had rightly held that the petition was not maintainable.

In the pertinent matter, it was alleged that the adjudication authority had erroneously dismissed the Petition as not maintainable. Appeal was filed by the Shareholder of the Financial Creditor Company, and it was submitted that the petitioner can initiate action on behalf of the Company if the same is in the interest of the Company and the Board is not pursuing the same, as per the doctrine of derivative action. The adjudicating authority was of the opinion that such person does not come within the definition of aggrieved person under Section 61 of the IBC. Therefore, the Appeal was not maintainable. The adjudicating authority held that no Board Resolution was filed in regard to advance loan to Corporate Debtor Company as required under Section 186 of the Companies Act, 2013.

The Tribunal held that

“we have considered the submissions, undisputedly there is no board resolution authorising the appellant to file the petition under Section 7 of the IBC and filed this Appeal as there is deadlock in the Financial Creditors Company”.

The Court further held that,

“The facts of the cited cases are quite different and in theses citations it is held that a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a shareholder can show that the wrong doers are in control of the defendant company and hence the company would be unable to maintain the action. So far as the Petition under Section 7 of the IBC is concerned, there is a specific notification by the Central Government under sub-section (1) of Section 7 of the IBC that on behalf of the Financial Creditor a guardian, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the board of directors of a company may file Application for initiation of CIRP against the Corporate Debtor. In such situation, doctrine of derivative action cannot be applied in Petition under Section 7 of the IBC.”

[M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd., Company Appeal (AT) (Ins) No. 706 of 2021, decided on 09-09-2021]


Counsel for the Parties:

For Appellant:

Mr. P Nagesh, Sr. Adv. with Mr. Harshal Kumar, Mr. Shivam Wadhwa

For Respondent:

Mr. Arvind Nayar, Sr. Adv. with Mr. Shivam Singh, Mr. Abhinav Singh, Advocates


Agatha Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): Coram of Judicial Member Ashok Kumar Borah and Technical Member Shyam Babu Gautam has admitted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 by Bank of India (Financial Creditor) seeking to initiate Corporate Insolvency Resolution Process against VVVF (India) Limited (Corporate Debtor).

Factual Background

Applicant had sanctioned/revised/reviewed/continued various fund based and non-fund based working capital facilities to VVF (India) Limited for a sum of 283.65 Crore (Loan Amount).

In the petition, it was mentioned that the amount in default along with interest was INR 293, 42, 50, 526.79 (Financial Debt), which was due and payable by the Corporate Debtor in favour of the applicant.

Due to various defaults by Corporate Debtor, its account was classified as a Non-Performing Asset by the applicant.

As per the RBI guidelines, if a company failed to repay the loan liability sanctioned to the borrower under the corrective action plan, then the asset classification of the borrower will be considered from the cut-off date considered for the implementation of the corrective action plan (CAP).

In this account, under CAP, long term working capital loan was sanctioned in 2016 and due to payment default the Statutory Central Auditors of the Applicant classified the Corporate Debtor as an NPA from the implementation date of the CAP.

Further, corporate debtor issued a revival letter addressed to the applicant, confirming and admitting the existence of the various facilities and security documents availed by and executed by the Corporate Debtor and its Promoters.

Even the liability to the Financial Creditor was expressly admitted.

Financial Creditor and the Corporate Debtor had executed 14 agreements/contracts reflecting all amendments and waivers, which were forming part of the Financial Creditor’s pleadings.

Since the financial debt amount remained unpaid, the applicant filed the present petition.

Analysis, Law and Decision

The Tribunal opined that the petition was maintainable by law and the defenses raised by the Corporate Debtor were nothing but an attempt to delay the commencement of the Corporate Insolvency Resolution Process of the Corporate Debtor.

Bench while analyzing the facts of the case, referred to the Supreme Court decision in Swiss Ribbons (P) Ltd. v. Union of India, WP (C) 99 of 2018, wherein the Constitutional validity of IBC was upheld, the position was very clear that unlike Section 9, there was no scope of raising a ‘dispute’ as far as Section 7 petition was concerned. As soon as a ‘debt’ and ‘default’ is proved, the adjudicating authority is bound to admit the petition.

Contention with respect to not attaching the documents as raised by the Corporate Debtor was dealt by the Supreme Court in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy, Civil Appeal No. 1650 of 2020, where the same issue was raised and covered.

In Tribunal’s opinion, no dispute with respect to Corporate Debtor owing money to the Financial Creditor existed.

Further, the Coram added that, the Financial Creditor’s application was complete in all respects as required by law. It clearly showed that the Corporate Debtor was in default of a debt due and payable and the default was in excess of the minimum amount stipulated under Section 4(1) of IBC.

Hence, debt and default stood established.

Therefore, Tribunal ordered as follows:

(a)        Petition filed by the Bank of India, Financial Creditor, under Section 7 of the IBC read with Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating Corporate Insolvency Resolution Process (CIRP) against VVF (India) Limited the Corporate Debtor, is admitted.

(b)       There shall be a moratorium under Section 14 of the IBC, in regard to the following:

(i)  The institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(ii)  Transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein;

(iii)  Any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002;

(iv)  The recovery of any property by an owner or lessor where such property is occupied by or in possession of the Corporate Debtor.

(c) Notwithstanding the above, during the period of moratorium:

(i)  The supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the moratorium period;

(ii)  That the provisions of sub-section(1) of section 14 of the IBC  shall not apply to such transactions as may be notified by the Centre in consultation with any sectoral regulator;

(d) Moratorium shall have effect from the date of this order till the completion of the CIRP or until this Adjudicating Authority approves the resolution plan under Section 31 (1) of the IBC or passes an order for liquidation of Corporate Debtor under Section 33 of the IBC, as the case may be.

(e) Public announcement of the CIRP shall be made immediately as specified under section 13 of the IBC read with regulation 6 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(f) Mr Avil Menezes appointed as Interim Resolution Professional of the Corporate Debtor to carry out the functions as per the IBC.

(g) During the CIRP Period, the management of the Corporate Debtor shall vest in the IRP or, as the case may be, the RP in terms of section 17 of the IBC. The officers and managers of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP within a period of one week from the date of receipt of this Order, in default of which coercive steps will follow.

(h) Financial Creditor shall deposit a sum of Rs 2,00,000 with the IRP to meet the expenses arising out of issuing public notice and inviting claims. These expenses are subject to approval by the Committee of Creditors (CoC).

[Bank of India v. VVVF (India) Ltd., CP (IB) 331/MB/C-II/2020, decided on 23-9-2021]


Appearances:

For the Financial Creditor: Nausher Kohli, Nirav Shah and Viraj Gami i/b DSK Legal

For the Corporate Debtor: Mustsafa Doctor, Counsel i/b M/S Dhruve Liladhar & Co.

Case BriefsSupreme Court

Supreme Court of India: The Bench of M.R. Shah and Aniruddha Bose, JJ., observed that,

“Appellate Tribunal has jurisdiction or power to condone the delay not exceeding 15 days from the completion of 30 days, the statutory period of limitation.”

Aggrieved and dissatisfied with impugned order passed by the National Company Law Appellate Tribunal by which NCLAT refused to condone delay of 44 days in preferring the appeal against the order passed by the National Company Law Tribunal rejecting the claim of the appellant. Appellant has preferred the present appeal.

Factual Background

State Bank of India (SBI) had initiated the insolvency proceedings before the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Dunar Foods Limited (Corporate Debtor) on the ground that Corporate Debtor had taken credit limits by hypothecating the commodities kept in the warehouses of the appellant.

It was stated that there was a delay of 44 days in preferring the appeal before NCLAT as the said appeal was required to be filed within a maximum period of 45 days (30 days + 15 days). However, there was a further delay of 44 days beyond a total period of 45 days.

Therefore, considering Section 61(2) of IBC which provides for powers to the Appellate Tribunal to condone delay of only 15 days which it can condone over the period of 30 days, if there is a sufficient cause, by impugned order, the Appellate Tribunal dismissed the appeal on the ground that the tribunal had no jurisdiction to condone the delay beyond 15 days and thereby the appeal was barred by limitation.

Analysis, Law and Decision

Bench noted that the appellant had applied for the certified copy of the order passed by the adjudicating authority after a delay of 34 days. Hence the said copy of the order was applied beyond the prescribed period of limitation i.e. beyond 30 days.

As the Appellate Tribunal can condone the delay up to a period of 15 days only, the Appellate Tribunal refused to condone the delay which was beyond 15 days from completion of 30 days, i.e., in the present case delay of 44 days and consequently dismissed the appeal.

 Hence, the appellate tribunal did not commit any error.

Further, the Court stated that in a case there may arise a situation where the applicant may not be in a position to file the appeal within a statutory period of limitation and even within the extended maximum period of appeal which could be condoned owing to genuineness, viz., illness, accident, etc. However, Parliament has not carved any exception of such a situation.

“…courts have no jurisdiction and/or authority to carve out any exception. If the courts carve out an exception, it would amount to legislate which would in turn might be inserting the provision to the statute, which is not permissible.”

In the decision of Popat Bahiru Govardhane v.  Special Land Acquisition Officer, (2013) 10 SCC 765, this Court has observed and held that it is a settled legal position that the law of limitation may harshly affect a particular party but it has to be applied with all its rigour when the Statute so prescribes.

Further, in the decision of this Court in Oil & Natural Gas Corporation Limited v. Gujarat Energy Transmission Corporation Limited, (2017) 5 SCC 42, the question was with respect to delay beyond 120 days in preferring the appeal under Section 125 of the Electricity Act and the question arose whether the delay beyond 120 days in preferring the appeal is condonable or not. After considering various earlier decisions of this Court on the point and considering the language used in Section 125 [2] of the Electricity Act which provided that delay beyond 120 days is not condonable, this Court has observed and held that it is not condonable and it cannot be condoned, even taking recourse to Article 142 of the Constitution.

Hence, Supreme Court held that delay beyond 15 days in preferring the appeal is uncondonable, the same cannot be condoned even in exercise of powers under Article 142 of the Constitution.

Conclusion 

“…considering the fact that even the certified copy of the order passed by the adjudicating authority was applied beyond the period of 30 days and as observed hereinabove there was a delay of 44 days in preferring the appeal which was beyond the period of 15 days which maximum could have been condoned and in view of specific statutory provision contained in Section 61(2) of the IB Code, it cannot be said that the NCLAT has committed any error in dismissing the appeal on the ground of limitation by observing that it has no jurisdiction and/or power to condone the delay exceeding 15 days.”

In view of the above discussion, the appeal failed and was dismissed. [National Spot Exchange Ltd. v. Anil Kohli, 2021 SCC OnLine SC 716, decided on 14-09-2021]

Case BriefsSupreme Court

Supreme Court: A Division Bench of Dr D.Y. Chandrachud and M.R. Shah, JJ. has held that under Insolvency and Bankruptcy Code, 2016, a Resolution Applicant is not entitled to withdraw or modify its Resolution Plan, once it has been submitted to the National Company Law Tribunal (Adjudicating Authority). The Supreme Court held:

“The existing insolvency framework in India provides no scope for effecting further modifications or withdrawals of CoC-approved Resolution Plans, at the behest of the successful Resolution Applicant, once the plan has been submitted to the Adjudicating Authority.”

The Court observed that a Resolution Applicant, after obtaining the financial information of the Corporate Debtor through the informational utilities and perusing the Information Memorandum, is assumed to have analysed the risks in the business of the Corporate Debtor and submitted a considered proposal. A submitted Resolution Plan is binding and irrevocable as between the Committee of Creditors (“CoC”) and the successful Resolution Applicant in terms of provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).

At the same time, the Court recognised that long delays in approving the Resolution Plan by NCLT affect subsequent implementation of the plan. It was observed:

“These delays, if systemic and frequent, will have an undeniable impact on the commercial assessment that the parties undertake during the course of the negotiation. … Such inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive.”

The Supreme Court urged NCLT and NCLAT to be sensitive to the effect of such delays on the insolvency resolution process and be cognizant that adjournments hamper the efficacy of the judicial process. The Court said:

“The NCLT and the NCLAT should endeavor, on a best effort basis, to strictly adhere to the timelines stipulated under the IBC and clear pending resolution plans forthwith. Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the IBC. We cannot let the present insolvency regime meet the same fate.”

The Court was deciding appeals filed against the judgments of NCLAT whereby it had upheld the orders passed by NCLT rejecting withdrawal applications filed by Resolution Applicants (appellants before the Supreme Court).

Following is a comprehensive report of Supreme Court’s legal and factual analysis.

Question of Law

In the instant case, the task before the Supreme Court was to answer the question of law: Whether a Resolution Applicant is entitled to withdraw or modify its Resolution Plan, once it has been submitted by the Resolution Professional to NCLT and before it is approved by the latter under Section 31(1) of the Insolvency and Bankruptcy Code, 2016?

Legal Analysis and Observations

Purpose of a law on insolvency

Discussing the dynamic and comprehensive nature of IBC, the Supreme Court noted that the procedure designed for the insolvency process is critical for allocating economic coordination between the parties who partake in, or are bound by the process. This procedure produces substantive rights and obligations. The Court said:

“Upholding the procedural design and sanctity of the process is critical to its functioning. The interpretative task of the Adjudicating Authority, Appellate Authority, and even this Court, must be cognizant of, and allied with that objective.”

The Court opined that any judicial creation of a procedural or substantive remedy that is not envisaged by the statute would not only violate the principle of separation of powers, but also run the risk of altering the delicate coordination that is designed by IBC framework and have grave implications on the outcome of the Corporate Insolvency Resolution Process (“CIRP”), the economy of the country and the lives of the workers and other allied parties who are statutorily bound by the impact of a resolution or liquidation of a Corporate Debtor. It was observed:

“The adjudicating mechanisms which have been specifically created by the statute, have a narrowly defined role in the process and must be circumspect in granting reliefs that may run counter to the timeliness and predictability that is central to the IBC.”

Nature of a Resolution Plan

The Supreme Court sought to determined the nature of a Resolution Plan after its approval by CoC but prior to its approval by NCLT. This would help establish the source of legal force of a Resolution Plan ─ whether it is IBC or the law of contract. It was noted that the insolvency process, as governed by IBC, does not merely structure the conduct of participants in the process after finalisation and approval of a Resolution Plan by CoC, but also the conduct stemming from the very first steps of inviting prospective Resolution Applicants. Discussing the statutory framework, the Court observed:

“[F]eatures of a Resolution Plan, where a statute extensively governs the form, mode, manner and effect of approval distinguishes it from a traditional contract, specifically in its ability to bind those who have not consented to it.”

The Court opined that a Resolution Plan cannot be construed purely as a ‘contract’ governed by the Contract Act, in the period intervening its acceptance by CoC and the approval of NCLT.

Further, the Court opined that a Resolution Plan cannot be classified even as a ‘statutory contract’. There is no provision under IBC referring to a Resolution Plan as a contract. The legal force of a Resolution Plan arises due to the framework provided under IBC. Reiterating that IBC is a self-contained Code, the Court concluded:

“Principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan. However, remedies that are specific to the Contract Act cannot be applied, de hors the overriding principles of the IBC.”

Statutory framework governing CIRP

IBC and regulations framed thereunder provide a detailed procedure for completion of CIRP. The Supreme Court noted that CIRP is a time bound process with a specific aim of maximising the value of assets. IBC and the regulations made under it lay down strict timelines which need to be adhered to by all the parties, at all stages of CIRP. The second proviso to Section 12(3) of IBC read with the judicial dictum in Essar Steel (India) Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 prescribes that CIRP in its entirety must be completed within 330 days from the insolvency commencement date, including the time taken in legal proceedings, with a short extension to be granted only in exceptional cases. This is indicative of the strong emphasis of IBC on its timelines and its attempt to thwart the prospect of stakeholders engaging in multiple litigations solely with the intent of causing undue delay. The Court observed:

“Delays are also a cause of concern because the liquidation value depletes rapidly, irrespective of the imposition of a moratorium, and a delayed liquidation is harmful to the value of the Corporate Debtor, the recovery rate of the CoC and consequentially, the economy at large.”

The evolution of IBC framework, through an interplay of legislative amendments, regulations and judicial interpretation, consistently emphasises the predictability and timeliness of IBC. If CIRP is not completed within the prescribed timeline, the Corporate Debtor is sent into liquidation. Relying on Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, 2021 SCC OnLine SC 194, the Court said:

“The stipulation of timelines and a detailed procedure under the IBC ensures a timely completion of CIRP and introduces transparency, certainty and predictability in the insolvency resolution process. … This Court should proceed with caution in introducing any element in the insolvency process that may lead to unpredictability, delay and complexity not contemplated by the legislature.”

Withdrawal of Resolution Plan by a successful Resolution Applicant under IBC

Absence of legislative hook or regulatory tether to enable withdrawal

Analysing the statutory framework governing CIRP and periodic reports of the Insolvency Law Committee, the Supreme Court observed that it is a creditor-driven process. It was noted that IBC is silent on whether a successful Resolution Applicant can withdraw its Resolution Plan. However, the statutory framework laid down under IBC and the CIRP Regulations provide a step-by-step procedure which is to be followed from the initiation of CIRP to the approval by NCLT. It was observed:

“The absence of any exit routes being stipulated under the statute for a successful Resolution Applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest.”

The Court took note of the fact that Section 12-A was inserted in IBC by an amendment whereby the Corporate Debtor and CoC have been empowered to withdraw from CIRP, but the Parliament chose not to introduce any explicit provision for allowing any amendment of the Resolution Plan after approval of creditors, let alone a power to withdraw the Resolution Plan at that stage. Keeping in mind the principles for interpretation of economic statutes, the Court opined:

“In the absence of any provision under the IBC allowing for withdrawal of the Resolution Plan by a successful Resolution Applicant, vesting the Resolution Applicant with such a relief through a process of judicial interpretation would be impermissible. Such a judicial exercise would bring in the evils which the IBC sought to obviate through the back-door.”

Terms of Resolution Plan not sufficient to effect withdrawals or modifications after submission to NCLT

The appellant−Resolution Applicants submitted that a Resolution Plan only becomes binding when it is approved by NCLT under Section 31(1) of IBC. Examining the contention that the terms of a Resolution Plan can reserve the right to modify or withdraw its contents after submission to NCLT, the Supreme Court observed:

“The language of Section 31(1) cannot be construed to mean that a Resolution Plan is indeterminate or open to withdrawal or modification until it is approved by the Adjudicating Authority or that it is not binding between the CoC and the successful Resolution Applicant.”

The Court noted that the procedure envisages a 15-day window between submission of Resolution Plan and its approval or rejection by NCLT which clearly indicates that the statute envisages a certain level of finality before the Resolution Plan is submitted for approval to NCLT.  It was observed:

“Even the CoC is not permitted to approve multiple Resolution Plans or solicit [Expressions of Interest] after submission of a Resolution Plan to the Adjudicating Authority, which would possibly be in contemplation if the Resolution Applicant was permitted to withdraw from, or modify, the Plan after acceptance by the CoC.”

Following the decision in AMTEK Auto Ltd. v. Dinkar T. Venkatasubramanian, (2021) 4 SCC 457 which thwarted similar attempt of successful Resolution Applicant relying on certain open-ended clauses in its Resolution Plan to seek a direction compelling CoC to negotiate a modification to its Resolution Plan, the Court opined:

“A Resolution Plan whose implementation can be withdrawn at the behest of the successful Resolution Applicant, is inherently unviable, since open-ended clauses on modifications/withdrawal would mean that the Plan could fail at an undefined stage, be uncertain, including after approval by the Adjudicating Authority”

The Court further explained that the negotiations between the Resolution Applicant and CoC are brought to an end after CoC’s approval. The only conditionality that remains is the approval of NCLT, which has a limited jurisdiction to confirm or deny the legal validity of the Resolution Plan in terms of Section 30(2) of IBC.

Noting that various mandatory timelines have been imposed for undertaking specific actions under CIRP and if the legislature intended to allow withdrawals or subsequent negotiations by successful Resolution Applicants, it would have prescribed specific timelines for the exercise of such an option, the Court said:

“The recognition of a power of withdrawal or modification after submission of a CoC-approved Resolution Plan, by judicial interpretation, will have the effect of disturbing the statutory timelines and delaying the CIRP, leading to a depletion in the value of the assets of a Corporate Debtor in the event of a potential liquidation.”

Based on plain terms of the statute, the Court concluded that NCLT lacks authority to allow withdrawal or modification of Resolution Plan by a successful Resolution Applicant or to give effect to any such clauses in the Resolution Plan. Further, no such power can be vested with NCLT even under its residuary jurisdiction in terms of Section 60(5)(c) as it cannot do what IBC consciously did not provide it the power to do.

Factual Analysis and Observation

Without affecting the legal position formulated, the Supreme Court undertook an analysis on whether the individual Resolution Applicants in the instant appeal had specifically negotiated with the respective CoCs for a right of modification or withdrawal and were contractually entitled to the same.

Ebix Singapore (P) Ltd.

CIRP of Educomp Solutions Ltd. commenced in 2017, in which Ebix Singapore (P) Ltd. emerged as successful Resolution Applicant. Ebix submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. However, subsequently, owing to investigations into accounts of Educomp, Ebix filed withdrawal application on account of delay in approval. It relied on inter alia the terms of the Resolution Plan that it was valid for six months only.

The Supreme Court rejected the submission since the terms related to the validity of the Resolution Plan for the period of negotiation with CoC and not for a period after the Resolution Plan was submitted for approval of NCLT. It was observed:

“The time which may be taken before the Adjudicating Authority is an imponderable which none of the parties can predict. … Parties cannot indirectly impose a condition on a judicial authority to accept or reject its Plan within a specified time period, failing which the CIRP process will inevitably come to an end.”

Next, Ebix argued that its position changed manifestly because of new allegations which came up in relation to the financial conduct of Educomp. However, in this regard, the Court noted that the Request For Resolution Plan (“RFRP”) directed prospective Resolution Applicants to conduct their own due diligence and independent investigations. Further noting the provisions of Section 32-A of IBC (liability for prior offences, etc.), the Court observed:

“Thus, in any case even if it is found that there was any misconduct in the affairs of Educomp prior the commencement of the CIRP, Ebix will be immune from any prosecution or punishment in relation to the same. The submission that Ebix has been placed in a prejudicial position due to the initiation of investigation into the affairs of Educomp by the CBI and SFIO is nothing but a red herring since such investigations have no bearing on Ebix.”

Lastly, the Court noted that no clause of Ebix’s own Resolution Plans provided them with a right to revise/withdraw their Resolution Plan after its approval by CoC, but before its confirmation by the Adjudication Authority. Also, Ebix did not stop pursuing their Resolution Plan after the expiry of six months, if the true import of the commercial bargain was a withdrawal of the Resolution Plan after six months of its submission.

Kundan Care Products Ltd.

CIRP of Astonfield Renewables (P) Ltd. commenced in 2018. Kundan Care Products Ltd. submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. Subsequently, Kundan Care moved an application for withdrawal of its Resolution Plan because of uncertainty over the sole Power Purchase Agreement with Gujarat Urja Vikas Nigam Ltd. which formed the entirety of Astonfield’s business. However, the withdrawal application was dismissed by NCLT.

Kundan Care initially relied on terms of their Resolution Plan to argue that it had reserved the right to modify or withdraw the Plan in event of a ‘material adverse change’ which affects Astonfield. However, the Resolution Professional pointed out that the Letter of Intent awarded to Kundan Care clearly stipulated that the submitted Resolution Plan was irrevocable. This was reaffirmed by the terms of RFRP, which indicated that the condition of a ‘material adverse event’ could be exercised only until CoC was considering the Resolution Plan, and not after it had been submitted to NCLT.

Notably, in July 2021, Kundan Care addressed a communication to EXIM Bank and PFCL (lenders) seeking a revision/renegotiation of the resolution amount/financial proposal of Kundan Care for the resolution of Astonfield. Responding to Kundan Care’s request lenders were prima facie agreeable to deliberate the financial proposal seeking revision on resolution plan amount. Pursuant to this, a joint application was filed by the parties for liberty to submit a revised plan before NCLT.

Noting that EXIM Bank and PFCL represent 98% of financial creditors of Astonfield, the Supreme Court allowed the request with directions, deeming it appropriate to exercise its jurisdiction under Article 142 of the Constitution for a one-time relief.

Seroco Lighting Industries (P) Ltd.

CIRP of Arya Filaments (P) Ltd. commenced in 2018. Seroco Lighting Industries (P) Ltd. submitted a Resolution Plan which was ultimately approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. In June 2020, Seroco sought modification of Resolution Plan and the amount on account of economic slowdown caused by COVID-19 pandemic, and subsequently filed applications before NCLT seeking modification of the Resolution Plan on account of the original being filed over eighteen months ago. However, NCLT rejected the application. Seroco relied on terms of their Resolution Plan, but the Supreme Court found there were no such terms in the Plan that could provide such a benefit to Seroco. Concluding, the Court observed:

“This Court is cognizant that the extraordinary circumstance of the COVID-19 pandemic would have had a significant impact on the businesses of Corporate Debtors and upon successful Resolution Applicants whose Plans may not have been sanctioned by the Adjudicating Authority in time, for myriad reasons. But the legislative intent of the statute cannot be overridden by the Court to render outcomes that can have grave economic implications which will impact the viability of the IBC.”

Decision

In such view of the matter, the appeals filed by Ebix and Seroco were dismissed, and parties to the appeal preferred by Kundan Care were directed to abide by the directions issued by the Court in exercise of powers under Article 142 as a one-time relief. [Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (Committee of Creditors), 2021 SCC OnLine SC 707, decided on 13-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of Abni Ranjan Kumar Sinha, (Judicial Member) and L.N. Gupta (Technical Member) dismissed an application considering the pre-existing dispute and on failure to prove that the operational debt was undisputed.

The instant matter was pertaining to an Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy Rules, 2016 by KK Continental Trade Ltd., to initiate Corporate Insolvency Resolution Process against Diamond Traexim Pvt. Ltd. (Corporate Debtor). The dispute was to release an outstanding balance amount of Rs. 6,29,45,000/- pursuant to the High Seas Sale Agreement for the purchase of 2000 metric tons of Crude Palm Oil in bulk  The Corporate Debtor denied the debt amount so due and further disputed the amount claimed, stating the deteriorated quality of the supplied goods. The counsel for the corporate debtor further submitted that there has been a dispute prior to the service of demand notice, for which the application is not maintainable. And also that the Corporate Debt

What was noted by the Tribunal was that the sole Arbitrator in the Arbitral Award concluded that,

“the claim of the Claimant is premature and can be filed only after the complaint/claim of Rs. 9,06,00,00/- of the Respondent is addressed to by the supplier of the Oil to the Claimant. Accordingly, the Claim is dismissed. The counter Claim of the Respondent also deserves to be dismissed”.

The Tribunal considered the fact that the applicant itself had initiated the Arbitration Proceeding to resolve the dispute relating to its claim, which resulted in dismissal of the claim being pre-mature. It, therefore, concluded that,

“the material on record sufficiently indicates that there has been a pre-existing dispute between the parties prior to issuance of demand notice. Therefore, there being a pre-existing dispute and a situation in which the Applicant itself has referred the dispute to the Arbitration proceeding, which resulted in dismissal of the claim of the Applicant being pre-mature, the applicant has failed to prove that its operational debt is undisputed. In terms of Section 9(5) (ii) (d) of the IBC, the moment it is established that there is a pre-existing dispute, the Corporate Debtor gets out of the clutches of the IBC”.

[KK Continental v. Diamond Traexim Pvt. Ltd., 2021 SCC OnLine NCLT 350, decided on 16-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For the Operational Creditor: CS Chauhan, Advocate

For the Corporate Debtor: Mr Abhishek Kumar Dwivedi, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Judicial A.I.S. Cheema (The officiating Chairperson) and Dr Alok Srivastava (Technical Member) while disposing of an appeal, directed NCLT to decide the matter ‘one way or the other’, hoping that it would take up the application with ‘all sincerity’.

In the instant matter, an appeal was filed against an impugned order of NCLT, Kolkata Bench, Kolkata, that an Application under Section 7 of Insolvency and Bankruptcy Code, 2016 has been pending before it since 30-12-2019 and the Admission Order is not yet passed one way or the other. The counsel submitted that the matter was getting protracted before the Adjudicating Authority which defeats the purpose of the provisions of IBC requiring the Application to be admitted within 14 days.

The Tribunal considering the facts and circumstances noted,

“…we appreciate the pain of the Appellant due to pendency of such Application under Section 7 of IBC which has been pending since 30th December, 2019. We have already said what we could on 29th January, 2021. We hope that the Adjudicating Authority would in all sincerity take up the Application and decide the same one way or the other”.

[South Indian Bank Ltd. v. Gold View Vyapaar (P) Ltd., 2021 SCC OnLine NCLAT 297, decided on 19-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant:

 Ms. Malvika Trivedi, Sr. Advocate with

Mr. Parag Maini, Mr. Abhimanyu Chopra,

Mr. Raghav Chadha and Bhargavi Kannan, Advocates.

For Respondent:

 Mr. Joy Saha, Sr. Advocate with

Mr. Ishaan Saha, Mr. Santosh Kumar Ray

and Rituparna Sanyal, Advocates.

Op EdsOP. ED.

Introduction

Since the inception of the Insolvency and Bankruptcy Code, 2016[1] (IBC/the Code), the corporate insolvency resolution process (CIRP) has been shaped by the amendments to the Code and its regulations, and judicial developments alike. One of the core principles that govern the CIRP and implementation of the resolution plan is the clean slate theory. The clean slate theory found its footing in Essar Steel (India) Ltd. v. Satish Kumar Gupta[2] pronounced by the Supreme Court in 2019. This was informed by provisions of the Code and was delivered in response to the issue of validity of undecided claims, particularly those of personal guarantors. Since the conceptualisation of the clean slate theory, the same has been widely relied on as a non-negotiable factor to be fulfilled on approval of the resolution plan. However, not much has been said on the interplay of the clean slate theory and the initiation of CIRP against guarantors for the same debt and default as the principal borrower against whom CIRP has already been initiated. In this context, it is apposite to evaluate the ambit of the clean slate theory and its limitations.

What is the “clean slate theory”

The clean slate theory is founded on the basis of Section 31 of IBC[3] which provides that the resolution plan, once approved by the adjudicating authority is binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under the law such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.

The rationale for this legislative provision is to ensure that all valid claims are addressed in the approved resolution plan itself thereby leaving little to no room for such claims to be brought forth after the resolution plan has been approved. This ensures that on implementation of the resolution plan, the resolution applicant is not bombarded by a sudden influx of past claims of the entity prior to CIRP. By maintaining a clear framework that prevents perpetuity of claims against the corporate debtor, resolution applicants are encouraged to step forward and takeover the stressed entity.

In this regard, the High Court of Rajasthan on 7-4-2020 in Ultra-Tech Nathdwara Cement Ltd. v. Union of India[4] struck down and quashed the demands of Central Goods and Service Tax Department pending as on date of finalisation of the resolution plan. It was reaffirmed that once the resolution plan submitted by the resolution applicant has been accepted and approved by the adjudicating authority, the resolution plan is binding on all parties concerned including the statutory authorities. It was further explained that as per the newly amended (at the time) Section 31, the Central Government, State Government or any other local authority to whom, a debt in respect of payment of dues arising under any law for the time being in force are owed, have been brought under the umbrella of the resolution plan approved by the adjudicating authority which has been made binding on such governments and local authorities.

Therefore, it is explicitly clear that the government agencies and statutory authorities are bound by the resolution plan once approved and ought to raise any valid claims during the period of CIRP when the resolution professional calls for submission of claims against the corporate debtor. Thus, it is not open for creditors including the Government to disregard the established process as envisaged by the Code.

The clean slate theory in its essence is that the resolution applicant cannot suddenly be faced with undecided claims after the approval of the resolution plan as the resolution applicant is to run the business of the corporate debtor on a fresh slate. The Supreme Court in Essar Steel[5] fleshed out the theory by stating,

  1. A successful resolution applicant cannot suddenly be faced with ‘undecided’ claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate….

Similarly, in conformity with the clean slate theory, Section 32-A[6] as inserted subsequent to the pronouncement of the Essar Steel[7] judgment, provides that the liability of a corporate debtor for an offence committed prior to the commencement of the CIRP ceases, and the corporate debtor cannot be prosecuted for such an offence from the date of approval of the resolution plan by the adjudicating authority, if the resolution plan results in the change in the management or control of the corporate debtor to someone who is not a related party or other specified persons. Furthermore, no action can be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP of the corporate debtor, where such property is covered under the approved resolution plan which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of the Code to someone who is not a related party or other specified persons.

The validity of Section 32-A was challenged before the Supreme Court in the matter of Manish Kumar v. Union of India[8] as decided on 19-1-2021. The Supreme Court in the matter noted that while Section 32-A intends to give a clean break to the successful resolution applicant, it is hedged with ample safeguards to avoid any exploitation. Such immunity is contingent on the fulfilment of several conditions such as approval of resolution plan, change in control of the corporate debtor such that the new management cannot be the disguised avatar of the old management or be a related party of the corporate debtor. Additionally, the new management cannot be the subject-matter of an investigation which has resulted in material showing abetment or conspiracy for the commission of the offence and the report or complaint filed thereto. More importantly, every person who was associated with the corporate debtor in any manner and who was directly or indirectly involved in the commission of the offence in terms of the report submitted continues to be liable to be prosecuted and punished for the offence committed by the corporate debtor. It was also noted that the corporate debtor and its property in the context of the scheme of the Code constitute a distinct subject-matter thereby justifying the special treatment accorded to them. It was elaborated that the extinguishment of criminal liability of the corporate debtor is important for the new management to make a clean break with the past and start on a clean slate. Such a provision is part of economic measure and deals with offences committed prior to the commencement of the CIRP.

In this respect, the National Company Law Tribunal (NCLT), Mumbai Bench vide order dated 19-5-2021, in Kamla Industrial Park Ltd. v. Monitoring Committee of Corporate Debtor [9], held that the new management of the corporate debtor could not be held liable and responsible for the malfeasance and misfeasance committed by the former promoters and directors of the corporate debtor and that it could not be saddled with the repercussions of reprehensible actions of the erstwhile management.

In the notable case of Ghanashyam Mishra and Sons Private Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[10], the Supreme Court on 13-4-2021 reiterated the clean slate theory and held that once a resolution plan is duly approved by the adjudicating authority, the claims as provided in the resolution plan stands frozen and is 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. On the date of approval of resolution plan by the adjudicating authority, all such claims, which are not a part of resolution plan, stands extinguished and no person is entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.

Conflicts with the clean slate theory

I. Contingent waiver of liabilities owed to statutory authorities

Diverging from the established clean slate theory as seen above, several orders approving the resolution plan as seen in Vikram Sanghvi v. Bank of Baroda[11] and Edelweiss Asset Reconstruction Company Limited v. Lanco Hoskote Highway Limited[12] (delivered by the NCLT Ahmedabad Bench and Hyderabad Bench respectively) carry the caveat that waivers of obligations or any such reliefs are subject to the permission of the authority concerned.

The NCLT, Ahmedabad Bench in Vikram Sanghvi[13] on 26-4-2021 held that resolution applicant is required to approach the competent government authorities for any extinguishment, waiver or concession of claims as approval of the resolution plan does not imply an automatic waiver or abetment of legal proceedings pending against the corporate debtor as such legal proceedings are the subject-matter of the competent authorities concerned that have their own jurisdiction to pass appropriate orders.

When raised with the issue that such caveats leave the door open for additional undecided claims outside those addressed in the resolution plan, the  National Company Law Appellate Tribunal (NCLAT), at Chennai in Antanium Holdings Pte. Ltd. v. Sujana Universal Industries Ltd.[14] on 17-5-2021 upheld such stipulations by stating that same are merely observations that the adjudicating authority is permitted to express and are not in the form of “imposition of an additional condition” which opens up the plan to the undecided claims.

Granting the government authorities, the discretion to refuse waiver of the corporate debtor’s liabilities outside those addressed in the resolution plan is a significant indicator that the clean slate theory is not absolute.

II. Insolvency proceedings against guarantors

Insolvency proceedings of corporate guarantors

The NCLAT in SBI v. Athena Energy[15], on 24-11-2020 notably held that in the matter of guarantee, CIRP can be initiated against both the principal borrower and the guarantor. It was further elaborated that simultaneous remedy is central to a contract of guarantee and where the principal borrower and the surety are undergoing CIRP, the creditor can file claims in the CIRP of both parties. To avoid any unjust enrichment of the creditor, it was clarified that it would be a matter of adjustment when the creditor receives debt due from the principal borrower/guarantor in the respective CIRP that the same should be adjusted in the other CIRP.

Carrying this forward, the NCLAT in SBI v. Animesh Mukhopadhyay[16] on 8-3-2021 elaborated that till payment is received in one CIRP, claim can be maintained in both CIRPs for same amount and representation in Committee of creditors (CoC) in both CIRPs to the extent of amount due will be justified. Similarly, the NCLAT in Kanwar Raj Bhagat v. Gujarat Hydrocarbons and Power SEZ Ltd.[17] on 11-5-2021, held that an application under Section 7 is maintainable against the corporate debtor for the same debt and default even though the CIRP has already been initiated against the corporate guarantor and the financial creditor can recover the remaining dues from the corporate debtor.

Insolvency proceedings of personal guarantors

For the insolvency proceedings against personal guarantors, the validity of the Notification dated 15-11-2019 that brought into force provisions related to personal guarantors to corporate debtors under Part III of the Code in addition to the relevant Rules and Regulations thereunder was adjudicated by the Supreme Court in Lalit Kumar Jain v. Union of India[18] on 21-5-2021. The Supreme Court therein held that approval of a resolution plan does not ipso facto discharge the personal guarantor of a corporate debtor of their liabilities under the contract of guarantee. It was explicated that the discharge of the principal borrower from the debt owed by it to its creditor due to liquidation or insolvency resolution process does not absolve the guarantor of their liability which arises out of an independent contract. Such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of Section 128 of the Contract Act, 1872[19] (Contract Act) as there is no discharge under Section 134 of the Contract Act[20]. While it was argued by the petitioner that by virtue of the holding of Essar Steel[21] and Section 31(1) of IBC, an approved resolution plan in respect of a corporate debtor amounts to extinction of all outstanding claims against that debtor; consequently, the liability of the guarantor, which is coextensive with that of the corporate debtor, would also be extinguished; it was definitively held that Section 31 of IBC does not operate to discharge the guarantor’s liability.

Subrogation rights of a guarantor

It is worth noting that guarantors are vested with the right of subrogation as under Section 140[22] and 141 of the Contract Act[23] which provides that the guarantor after paying the debt of the principal debtor against the creditor, is invested with all the rights of the creditor against the principal debtor. Essentially, the guarantor steps into the shoes of the creditor upon performance of their obligations. Owing to the clean slate theory, since no prior commitments or rights can be enforced once the resolution plan is approved and made binding on all parties including the guarantor, the natural implication is that subrogation rights can no longer be enforced after approval of the resolution plan to uphold the interest of the resolution applicant. As a result, guarantors will be left remediless which will greatly discourage guarantors from extending guarantees.

Conclusion

While there has been extensive reliance on the clean slate theory, it ought to be recognised that it is not absolute and that guarantors are the key exception to the clean slate theory. For the resolution applicant to effectively run the entity it is paramount that it receives the corporate debtor with a clean slate without the burden of pending liabilities and claims after CIRP and the implementation of the resolution plan.

In instances where the corporate entity undergoes CIRP due to external forces such as economic distress as opposed to internal factors such as fraud and mismanagement, the entity is granted reprieve as the resolution applicant takes control of the entity on a clean slate. However, it is recognised that insolvency and bankruptcy proceedings of an entity does not absolve the guarantor of their liabilities. This begs the question that if the distressed entity is granted the aid and relief of starting afresh on a clean slate in the hands of the successful resolution applicant, why are the rights of the guarantor ignored?

Due consideration ought to be made for the guarantors involved as creditors are given free rein to initiate insolvency resolution process against corporate and personal guarantors apart from corporate debtor i.e.  principal borrower. Moreover, in accordance with the clean slate theory, the guarantor’s right of subrogation extinguishes on the approval of the resolution plan. This marginalisation of guarantors serves as a significant hindrance to guarantors from extending guarantees. With this mounting stack of disadvantages with no remedy or benefit in sight, guarantors are left bereft and discouraged. Thus, one can hope that this crucial concern is adequately addressed and adjudicated upon to the benefit of all the stakeholders especially, guarantors.


* Principal Associate, Dhir & Dhir Associates.

** Associate, Dhir & Dhir Associates.

[1] http://www.scconline.com/DocumentLink/86F742km.

[2] (2020) 8 SCC 531

[3] http://www.scconline.com/DocumentLink/gvPKCciX.

[4]2020 SCC OnLine Raj 1097.

[5] (2020) 8 SCC 531, p. 616.

[6] http://www.scconline.com/DocumentLink/PEnh3D4C.

[7] (2020) 8 SCC 531.

[8] 2021 SCC OnLine SC 30.

[9] 2021 SCC OnLine NCLT 249.

[10] 2021 SCC OnLine SC 313

[11] 2021 SCC OnLine NCLT 298

[12] 2021 SCC OnLine NCLT 299

[13] 2021 SCC OnLine NCLT 298.

[14] 2021 SCC OnLine NCLAT 167.

[15] 2020 SCC OnLine NCLAT 774.

[16] 2021 SCC OnLine NCLAT 30.

[17] 2021 SCC OnLine NCLAT 157.

[18] 2021 SCC OnLine SC 396.

[19] http://www.scconline.com/DocumentLink/6D21Pq4g.

[20] http://www.scconline.com/DocumentLink/LHI883Dw.

[21] (2020) 8 SCC 531.

[22] http://www.scconline.com/DocumentLink/2vRS7GCk.

[23] http://www.scconline.com/DocumentLink/U4s5QmXr.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dr Dhananjaya Y Chandrachud and M R Shah, JJ., observed that,

Jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom.

Under the Indian Insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity-based jurisdiction on the Adjudicating Authority other than the statutory requirements laid down under Section 30 (2) of the IBC.

The Appeal

 Present appeal arose under Section 62 of the Insolvency and Bankruptcy Code against the decision of the National Company Law Appellate Tribunal. Reliance Infratel Limited (RIL) was the corporate debtor and appellants the operational creditors.

NCLAT had upheld the decision of NCLT wherein it had approved the resolution plan formulated in the course of the insolvency resolution process of the Corporate Debtor.

Analysis, Law and Decision

Valuation of Preference Shares

The first aspect was in relation to the inclusion of realisable value from sale of preference shares held by Reliance Bhutan Limited, in Reliance Realty Limited, in determining the liquidation value of the Corporate Debtor. Earlier, it was clarified that under IBC and its regulations, the RP appointed two registered valuers to carry out the valuation of the Corporate Debtor and to determine the liquidation value and fair value.

Appellants submission that the realizable value from the preference shares was excluded from the liquidation value of the Corporate Debtor had been rebutted by a specific clarification contained in the Monitoring Committee’s affidavit.

Further, it was added that the realisable value for the Corporate Debtor on account of any proceeds realised from the preference shares held by its subsidiary (Reliance Bhutan Limited), is included in the determination of the liquidation value of the Corporate Debtor.

Hence, value of preference shares not being included in calculating the liquidation value of Corporate Debtor was factually incorrect.

Liquidation Value – To remain nil?

On this aspect, it had been clarified that the liquidation value due to the unsecured operational creditors would remain nil in all scenarios, including if the corpus of Rs 800 crores was separately considered.

Further, it was added that even if the liquidation value of the realizable value of preference shares were to be considered in isolation for distribution amongst all the operational creditors, in terms of the priority contained in Section 53 (1) of the Code, the liquidation value due to the appellants would still remain at nil.

Impact of Exclusion 

Order of NCLT in Doha Bank proceedings

It was stated that, the exclusion of certain financial debts and hence, the exclusion of certain financial creditors from the CoC, pursuant to the order of the NCLT in the Doha Bank proceedings, has no practical implication since the resolution plan continues to be approved with a 100 per cent majority even after their exclusion.

Jurisdiction to approve a Resolution Plan 

NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC, there is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.

Adding to the above, it was expressed that the jurisdiction which had been conferred upon the Adjudicating Authority in regard to the approval of a resolution plan was statutorily structured by Section 31 (1).

The jurisdiction is limited to determining whether the requirements which are specified in Section 30 (2) have been fulfilled. This is a jurisdiction which is statutorily defined, recognised and conferred, and hence cannot be equated with jurisdiction in equity, that operates independently of the provisions of the statute.

Ambit of the Adjudicating Authority is to determine whether the amount that is payable to the operational creditors under the resolution plan is consistent with the norms provided stipulated in clause (b) of sub-clause (2) of Section 30.

Hence, the statute indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.

Appellants challenged the treatments of operational creditors on the ground that it had not been fair and equitable.

It was added that as long as the payment under the resolution plan is fair and equitable amongst the operational creditors as a class, it satisfies the requirements of Section 30(2)(b).

Nature of the jurisdiction exercised by the Adjudicating Authority, while approving a resolution plan under Section 31, had been interpreted in the decision of a 2-Judge Bench in K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150.

Elaborating the above discussion, Supreme Court stated that the submission that there had been a failure to maximise the value of the assets was not substantiated by any concrete material before the Court, apart from the reference to the preference shares which had already been clarified earlier in this judgment.

It must be borne in mind that the jurisdiction of the Adjudicating Authority is circumscribed by the terms of the provisions conferring the jurisdiction.

 “…jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon the merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity-based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.”

 In Court’s opinion, IBC is a complete code in itself.

IBC defines what is fair and equitable treatment by constituting a comprehensive framework within which the actors partake in the insolvency process. The process envisaged by the IBC is a direct representation of certain economic goals of the Indian economy. 

Therefore, once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions.

“…neither the Adjudicating Authority nor the Appellate Authority have an unchartered jurisdiction in equity.”

Conclusion

 In the present matter, the resolution plan had been duly approved by a requisite majority of the CoC in conformity with Section 30(4).

  • Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100 per cent voting share of the CoC.
  • Jurisdiction of the Adjudicating Authority was confined by the provisions of Section 31(1) to determining whether the requirements of Section 30(2) have been fulfilled in the plan as approved by the CoC. once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.

In view of the above discussion, appeal was dismissed. [Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd.,  2021 SCC OnLine SC 569, decided on 10-08-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, NCLT Mumbai: Coram of Suchitra Kanuparthi, Judicial Member and Chandra Bhan Singh, Technical Member, observed that,

“…a Judicial authority ought not to pass Orders which would lead to further multiplicity of proceedings.”

The instant application was filed by the Operational Creditor who had earlier initiated the corporate insolvency resolution process against the Corporate Debtor−Rolta India Ltd. The applicant−Operation Creditor now sought withdrawal of his company petition admitted under Section 9 of the Insolvency and Bankruptcy Code, 2016.

The applicant worked as an employee of the Corporate Debtor from March 2013 to June 2019, when he was relieved from services without settlement of arrears of salary and other dues. Consequently, he filed a petition under Section 9 which was admitted by the National Company Law Tribunal, Mumbai (“NCLT”), in May 2021 and an Insolvency Resolution Professional was appointed for the Corporate Debtor.

Thereafter, further negotiations took place between the parties and they reached a settlement agreement. Consequently, the application requested the Insolvency Resolution Professional to file an application under Section 12-A (Withdrawal of application admitted under Section 7, 9 or 10). As the Insolvency Resolution Professional did not file the application immediately, the applicant preferred the Section 12-A application before the NCLT.

The withdrawal application was vehemently opposed by the Financial Creditors (a consortium of several Public Sector Banks) and some of the other ex-employees. Notably, over 75 other petitions under Sections 7 and 9 of  IBC were pending against the Corporate Debtor.

Analysis, Law and Decision

Instant application had been filed under Section 12-A of the IBC read with Rule 11 of the NCLT Rules, 2016 by an employee of the Corporate Debtor company in the capacity of Operational Creditor seeking withdrawal of the company petition in terms of Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Applicant mentioned that he had approached the Insolvency Resolution Professional for filing the Application in Form FA under Regulation 30-A(1)(a) to seek withdrawal of the admitted company petition. However, he stated that the Insolvency Resolution Professional did not cooperate and, therefore, the applicant was compelled to file the present application on their own motion under Rule 11 of the NCLT Rules seeking withdrawal of the admitted company petition.

The Insolvency Resolution Professional mentioned that she had received claims/intimation of claims of about Rs 5523.81 crores from financial creditors, operational creditors and workmen employees of Rolta India Limited.

Further, the Bench noted that even under Workmen and Employees’ claim there were 567 employees whose claims had been collated by the Insolvency Resolution Professional. However, the settlement entered into by the Corporate Debtor was only with 32 employees. It was also noted that even the settlement which was proposed by the promoter on behalf of the Corporate Debtor company kept aside majority of the workmen employees’ claim which had been brought out by the Insolvency Resolution Professional. Moreover, the proposed settlement with the employees under the Joint Settlement Agreement will be done only after they withdraw the petition. The Bench observed:

“…Corporate Debtor is willing to pay the major part of the dues to the employees only subsequent to withdrawal of petition through the settlement jointly and/or severally with the employees. The Bench feels that this provides an escape route to both the promoter as well as to the Corporate Debtor Company to conveniently wriggle out of the partial mini settlement at any point of time.”

Major Issue 

The Tribunal noted the major issue:

Whether it would be proper for the Bench to allow withdrawal of corporate insolvency resolution process (“CIRP”) under Section 12-A or to exercise, its discretion to reject the present application under Section 12-A?

The Bench was fully aware that after passing the “Admission Order” dated 13-05-2021 and after the commencement of CIRP, the proceeding are in rem and therefore, any decision regarding the continuation or otherwise of CIRP has to be decided in the interest of all stakeholders and not just a handful of employees. It was reiterated:

“…under Section 53 of IBC the debts of the workmen rank equally with the financial debt owed to the secure/ unsecured creditors.”

In view of the above, it was stated that it cannot be ignored that Tribunal has to take into account the interest of all stakeholders. Before taking the discussion further, the Bench relied upon some of the prominent judgments in respect of the scope and ambit of Section 12-A of IBC. Supreme Court in the decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, clearly directed that interest of all stakeholders have to be considered while accepting or disallowing an application for withdrawal.

Supreme Court recently in the matter of Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 SCC OnLine SC 268 has clearly observed that when a petition under Section 7 of IBC is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as corporate insolvency resolution process is required to be considered through the mechanism provided under IBC.

Further, the Tribunal noted that in the present matter, there were several Financial Creditors and total financial claim collated by the Insolvency Resolution Professional in the matter of Rolta India Ltd. was upward of Rs 5000 crore. Thus, this itself would be an enough ground to disallow the present application for withdrawal under Section 12-A. The Tribunal said:

“…even in the event of the original creditor [and] the Corporate Debtor settling their disputes prior to the constitution of the CoC, the Tribunal has sufficient jurisdiction to reject an application under Section 12-A of the IBC if the facts and circumstances of the case warrants such rejection.”

Tribunal in view of the above, expressed that, even if withdrawal was permitted, it is a fact that all the dues of all the employees of the Corporate Debtor company were not being settled. About more than 100 employees had lodged their claims against the Corporate Debtor. However, only some employees’ claims were being settled by the ex-management/promoter of the company. Therefore, the purported settlement lacked bona fide.

Moreover, the interest of the employees would be taken care of during the CIRP of the Corporate Debtor and they being operational creditors will be entitled to their rights as provided for under the IBC. Concluding, the Bench said that it had no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

In view of the above, the Bench dismissed the application filed under Section 12-A of the IBC and the CIRP against the Corporate Debtor company would continue. [Dinesh Gupta v. Rolta India Ltd., MA No. 1196 of 2021, decided on 6-08-2021]


Advocates before the Tribunal:

For the Promoter: Mr. Prateek Seksaria, Advocate.

For the IRP: Ms. Ranjana Roy Gawai, Mr. Pervinder, Mr. Vineet Kumar, Advocates a/w Ms. Vandana Garg, IRP.

For the Financial Creditor: Mr. Rohit Gupta, Mr. Nausher Kohli, Advocates.

For the Operational Creditor: Mr. Nausher Kohli and Mr. Rohit Gupta, Advocates

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): The Coram of Justice Abni Ranjan Kumar Sinha,(Judicial Member), and L.N. Gupta, (Technical Member) while exercising their jurisdiction, terminated the CIR process of the Corporate Debtor with immediate effect.

In the instant case, Om Logistics Ltd., Operational Creditor, had filed an application for initiation of CIR Process against the Ryder India Pvt. Ltd., Corporate Debtor and the Adjudicating Authority had initiated the CIR Process against the Corporate Debtor and had appointed Mr. Bikram Singh Gusain IP, as the Interim Resolution Professional (IRP). It was alleged that the CIR Process so initiated, was not for the resolution of Insolvency. Instead, the Operational Creditor had used for recovery and got the CIR process started with malicious intent for a purpose other than the resolution of insolvency of the Corporate Debtor, not permissible under the IBC 2016.

The Tribunal was of the view that the IRP for dissolution of the Corporate Debtor ‘cannot be accepted since the Liquidation is a pre-requisite to the Dissolution’ and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC.

The Tribunal was thus of the opinion that,

“After hearing submissions of the Applicant/IRP, perusing his averments and documents placed on record, this Bench is of the view that the prayer made by the IRP for dissolution of the Corporate Debtor cannot be accepted since the Liquidation is a pre-requisite to the Dissolution and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC”.

The Coram further held that

“by exercising our jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, we hereby terminate the CIR process of the Corporate Debtor with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium”.[Om Logistics Limited v Ryder India Pvt. Ltd. IA. 2038/ND/2020, decided on 29-07-2021]


Advocates before the Tribunal:

For the Applicant: Mr. Vinod Chaurasiya, Advocate for IRP

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai: Coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member dismissed an interlocutory application filed against a personal guarantor under Section 95 (“application by creditor to initiate insolvency resolution process”) of the Insolvency and Bankruptcy Code, 2016, finding that the Corporate Debtor concerned was not under Corporate Insolvency Resolution Process.

The instant Interlocutory Application was filed by the Financial Creditor under Section 95 of the Insolvency and Bankruptcy Code against the personal guarantor.

Further, on an enquiry from the Bench, it came out that the Corporate Debtor for which the personal guarantee had been given was not under Corporate Insolvency Resolution Process.

Hence, the present Interlocutory Application cannot be prosecuted and therefore the IA was disposed of. [Altico Capital India Ltd. v. Rajesh Patel, IA 1062 of 2021, decided on 9-07-2021]


Advocates before the Tribunal:

For the Personal Guarantor: Nausher Kohli

Samit Shukla, Associate Partner and Yash Dhruva, Associate i/b DSK Legal

For the Creditor: Faizan Mithaiwala

Op EdsOP. ED.

The Insolvency and Bankruptcy Code, 2016 (IBC)1 is still in the nascent stage, wherein day-to-day the legislature try to strengthen the Code with clarificatory amendments; and/or as well as the Tribunals and the courts of this country try to strengthen the Code by setting new judicial precedents, explaining the scope and ambit of the Code which came into force in 2016.

Insolvency and bankruptcy jurisprudence has undoubtedly witnessed many controversies with regard to the various facets of the Code. Notable controversies include the applicability of Section 92 application for repayment of advances lends out by the operational creditor to the corporate debtor for procuring goods which began from a decision rendered by the NCLT, Kolkata Bench in SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.3. However, NCLT, Mumbai in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.4; has taken a contrary view while dealing with the issue. Other notable controversies include the subject-matter of advance does not fall under the definition of debt i.e which has also been dealt with by the National Company Law Appellate Tribunal in Daya Engg. Works (P) Ltd. v. UIC Udyog Ltd.5,  Kavita Anil Taneja v. ISMT Ltd.6, Roma Infrastructures India (P) Ltd. v. A.S. Iron & Steel (I) (P) Ltd.7, and Andal Bonumalla v. Tomato Trading LLP8.

The latest controversy that has gained considerable importance in insolvency and bankruptcy jurisprudence is the determination of advance lend out for the procurement of goods or services. Although the National Company Law Appellate Tribunal (NCLAT) has on many occasions delivered seminal judgments on this issue there still appears to be room for uncertainty, this article will study the latest position of law propounded by the Appellate Tribunal with regards to the determination of Section 9 application filed by operational creditor.

The significance of the term operational debt and operational creditor

Under IBC, for an amount to be claimed by any person as due to a person representing an “operational creditor”9 such person should demonstrate that; first, such an amount should fall within the definition of “claim” as defined under Section 3(6)10 of the Insolvency and Bankruptcy Code, 2016, and secondly, such a claim should be able as debt as defined under Section 3(11)11 of the Insolvency and Bankruptcy Code, 2016, and thirdly, the “debt” should fall within the purview of Section 5(21)12 of the Insolvency and Bankruptcy Code, 2016.

At this juncture, it is important to understand and note that the Code, does not define and/or explicitly say that the debt due by the corporate debtor should be from an actual transfer of goods or services for a claim to be recognised as an operational debt. However, any amount to be claimed as a debt need to have a direct.

To begin understanding the principle adopted by the Tribunal and the Appellate Tribunal to deal whether the amount advanced by the operational creditor for procuring goods or services would fall under the definition of debt under IBC. It would be pertinent to note here, that the National Company Law Tribunal (NCLT), Kolkata in SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.13, the Tribunal had to interpret, whether the debt of the operational creditor as claimed falls under the definition of the debt as defined under Section 3(11) of the Insolvency and Bankruptcy Code, 2016, and whether the operational creditor would fall under the definition as defined under Section 5(20) of the  Insolvency and Bankruptcy Code, 2016. The Tribunal held that:

“14. A reading of Section 5(21) of the Code, it is clear that the debt includes a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, State Government or any local authority. Nor fall within the definition of sub-section (21) of Section 5 of the Code, so the question is whether refund claim of the advance paid for rending service by the corporate debtor would fall within the meaning of a claim in respect of the provision of goods; or services including employment.”

While deciding the above,  NCLT, Kolkata also considered the judgment of NCLT, New Delhi in Sajive Kanwar v. AMR Infrastructure15, wherein the Tribunal discussed in detail the definition of the operational creditor.

The same issues have been adjudicated by  NCLT, Mumbai Bench in TATA  Chemicals Ltd. v. Raj Process Equipments and Systems (P) Ltd.16, wherein the Tribunal also rendered that the debt does not come within the definition of “debt” as defined under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

However, the said position was again dealt with by NCLT, Mumbai in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.17, wherein the Tribunal had taken a contrary view from the other Benches of the National Company Law Tribunal. In the instant case, the issue before the Tribunal was whether the advance token amount claimed could be considered an operational debt under IBC. The Tribunal while rendering its decision, applied the test of the intention of the parties. The test was to exchange goods or services for which the operational creditor has paid in advance. While dealing with the same, the Tribunal held that the refund of advance is in connection with the goods or services for repayment of dues by the corporate debtor who had accepted the payment, even though the agreement was not fructified. Therefore, the application filed by the operational creditor is admitted as the debt due is debt as defined under the Code.

Thereafter in 2019, the National Company Law Appellate Tribunal had to revisit this topic in Kavita Anil Taneja v. ISMT Ltd.18. The respondent in this case, filed an application under Section 9 of Insolvency and Bankruptcy Code, 2016 for alleging default amounting to Rs 2,10,00,000. The Adjudicating Authority (National Company Law Tribunal), Mumbai Bench taking into consideration admitted the application by the impugned order. The appellant challenged the said order and the main issue before the Tribunal was that the respondent does not come within the definition of “operational creditor”. The 2-Member Bench of the Tribunal held:

  1. 4. Section 5(20) defines “operational creditor” which is read with Section 5(21) which defines “operational debt”. Hence in this present case, it is clear from the work order that the amount of Rs 2,60,000,00 was advanced by the respondent to the appellant for the supply of 10,000 metric tons of Indonesian Thermal Coal. Form the aforesaid fact, we find that the respondent had not supplied any goods nor provided any services and therefore, it does not come within the meaning of “operational creditor” and set aside the impugned order by the adjudicating authority.

In August 2020, a 3-Member Bench of the National Company Law Appellate Tribunal had another occasion to revisit this topic in Andal Bonumalla v. Tomato Trading LLP19.  The Tribunal while deciding on this issue whether the advance amount paid by Respondent 1 to Respondent 2 for supply is an operational debt, considered the views of the Tribunal as rendered in Kavita Anil Taneja case20 and Roma Infrastructures India (P) Ltd. case21, and concluded that the advance amount paid by the respondent is not an operational debt, hence the impugned order dated 3-6-2019 was set aside.

Thereafter in 2021, another conundrum had arisen before the 2-Member Bench of the National Company Law Appellate Tribunal in Joseph Jayananda v. Navalmar (UK) Ltd.[22]. While interpreting the position, inter alia took a contrary view in respect of the same position which was decided and/or settled by the three-Member Bench of the Appellate Tribunal. In this instant case, the monies were advanced by Respondent 1 to the corporate debtor as  advance payment for work to be done in the future. Admittedly, the work was to be done in terms of the General Agency Agreement between the parties. The advance payment was made for the purpose of Turnkey projects and capital goods, but the said amount was adjusted towards cost and expense by the corporate debtor.

The Tribunal instead of applying the ratio as laid down by the three-Member Bench  Appellate Tribunal employed a different method of inquiry altogether. Although the Tribunal took into consideration a decision adjudicated by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[23], that an operational debt there is no consideration for the time value of money. Rather, the Tribunal in this present case has held:

As per the General Agency Agreement between the operational creditor and the corporate debtor, the corporate debtor acted as an agent of the former in India and collected various payments due in operational credito’s customers name. Since the corporate debtor is an agent and service provider of the operational creditor, the amounts due under the transaction would fall within the ambit of operational debt as defined under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

Conclusion

It flows from SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.[24], that as per the NCLT’s Kolkata Bench, the advance amount given in a situation where the underlying basis of the advance amount is a contract to transfer goods or services, in these situations the advance amount given will not be treated as operational debt, because the intention of parties was to engage in an exchange of goods or services. As such, other Benches of the NCLT have a contrary view the one dealt by NCLT, Mumbai Bench in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.[25]

However, the same ratio has been settled by a three-Member Bench of NCLAT in Andal Bonumalla v. Tomato Trading LLP[26], but recently the issue again cropped up before a 2-Member Bench of NCLAT in Joseph Jayananda v. Navalamar (UK) Ltd.[27], which had a contrary view as regards to the advance amount given in a situation where the underlying basis of the advance amount is a contract to transfer goods or services, in this situation the advance amount given will not be treated as operational debt because the intention of parties was to engage in an exchange of goods or services.

What is interesting, however, is that one of the Members of the 2-Member Bench was also a member of the 3-Member Bench of NCLAT which has categorically held that the basis amount advanced, no Section 9 application lies where the applicant had neither supplied goods or services. There also exists another 3-Member Bench decision of NCLAT reiterating the aforesaid provision.

Going forward would be interesting to see whether NCLT/NCLAT decides to follow the 2-Member Bench decision (which appears to correct interpretation) or the contrary view taken by the 3-Member Bench.


*Advocate. Author can be reached at  rahul.poddar94@gmail.com

1 Insolvency and Bankruptcy, Code, 2016.

2 Section 9 IBC.

3 2018 SCC OnLine NCLT 28558.

4 CP (IB) 3990/MB/2019, decided on 7-1-2021 (Mumbai Bench).

5 2018 SCC OnLine NCLAT 349.

6 2019 SCC OnLine NCLAT 512.

7 2019 SCC OnLine NCLAT 822.

8 2020 SCC OnLine NCLAT 624

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

10 “claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; and (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

11 “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

12 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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.

13 See supra Note 3.

15 2017 SCC OnLine NCLT 16279 

16 2018 SCC OnLine NCLT 29791

17 See supra Note  4.

18 See supra Note  6.

19 See supra Note  8.

20 See supra Note  6.

21 See supra Note  7.

[22] 2021 SCC OnLine NCLAT 116.

[23] (2019) 8 SCC 416 : 2019 SCC OnLine SC 1005.

[24] See supra Note  3.

[25] See supra Note  4.

[26] See supra Note  8.

[27] See supra Note  23.

Op EdsOP. ED.

In the March of 2020, the Insolvency and Bankruptcy Code, 2016[1] (Code), notified two new thresholds which significantly impacted the real estate industry. Firstly, by a notification[2], the minimum threshold of default under Section 4(1)[3] of the Code was increased from Rs 1 lakh to Rs 1 crore, keeping in mind the financial repercussions of the global pandemic. Secondly, an amendment[4] was introduced, which mandated a numerical threshold requirement for allottees of a real estate project to trigger the corporate insolvency resolution process (CIRP).

Rationale behind the introduction of a numerical threshold for allottees

The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[5] had clarified that the sale agreement between the developer and homebuyer has a “commercial effect” of borrowing, as the money is paid in advance for temporary use, so that a flat/apartment could be given back to the homebuyer.

This essentially gave every individual allottee the status of a financial creditor, allowing them to trigger the CIRP against the promoter/developer of the real estate project in case of a default. This led to a large number of applications, frivolous or otherwise being filed in the National Company Law Tribunal (NCLT), thereby augmenting the misuse of the provisions of the Code, in turn leading to the disruption of the real estate sector.

Thus, an amendment was introduced in Section 7[6] of the Code, requiring the application for initiating CIRP to be filed jointly by at least a hundred allottees or one-tenth of the total number of allottees in the same real estate project, whichever is less.

Furthermore, the Supreme Court, in Manish Kumar v. Union of India[7] (Manish Kumar) while upholding the constitutionality of the amendment also threw light on the rationality and the need for the introduction of such a threshold. The Court observed that the consequence of empowering a lone allottee to initiate the CIRP at his discretion could thwart the entire real estate project, thereby endangering the interests of other allottees who were not in favour of the same and might have faith in the developer.

This post seeks to analyse the ground realities and the ambiguities that may arise in light of the amendment and the Manish Kumar[8] judgment.

Prerequisites for initiating CIRP

In light of the notification and the amendment, an allottee has to now fulfil the following two prerequisites to initiate the insolvency proceedings under Section 7 of the Code:

  1. The total amount of default by the corporate debtor shall be more than Rs 1 crore; and
  2. the application has to be filed jointly by hundred allottees or one-tenth of the total number of allottees in the same real estate project, whichever is less.

Calculation of total default

The threshold of Rs 1 crore means the total default of the corporate debtor to any financial creditor and not necessarily only to the applicant allottees. Thus, the allottees can move against the promoter even without any amount being due to them, provided that they meet the numerical threshold requirement under Section 7.

What constitutes a real estate project

As per the Code, the term “real estate project” (project) shall have the meaning assigned to it in clause (zn) of Section 2[9] of the Real Estate (Regulation and Development) Act, 2016 (RERA) which provides only a general overview of the scope of inclusion of the constituents of a project, leaving a grey area for interpretation.

Phases/towers/blocks in a project – separate individual projects

Section 3[10] of RERA deals with the mandatory requirements of registration and exemption from such registration to projects where the area of land proposed to be developed does not exceed five hundred square meters or the number of apartments proposed to be developed does not exceed eight, inclusive of all phases. However, the explanation to this section reads as follows:

For the purpose of this section, where the real estate project is to be developed in phases, every such phase shall be considered a stand-alone real estate project, and the promoter shall obtain registration under this Act for each phase separately.

The above explanation fails to confer a clear interpretation of how the phases should be included in the calculation of the numerical threshold of allottees.

The literal interpretation of the phrase “every phase shall be considered a stand-alone real estate project shall mean to apply only for the purpose of “this section, so as to analyse whether the registration of a project can be totally exempted from the purview of the Act.

Thus, it can be inferred from the literal interpretation and purpose of the section that each phase would not be considered as a stand-alone real estate project in calculation of the required numerical threshold of allottees. Hence, all the phases in a project shall be considered together for the purpose of calculating such threshold under Section 7 of the Code.

Further, to substantiate this interpretation, the observations deduced from some clauses under Section 4(2)[11] of the RERA which pertains to the details and documents required for filing an application for registration of a project can be referred. The relevant clauses are extracted below:

(d) the sanctioned plan, layout plan and specifications of the proposed project or the phase thereof, and the whole project as sanctioned by the competent authority;

Here, the clause refers to “the phase thereof, and the whole project which indicates that all the phases that are sanctioned by the competent authority to constitute a particular project may be considered as one project.

(f) the location details of the project, with clear demarcation of land dedicated for the project along with its boundaries including the latitude and longitude of the endpoints of the project;

Here, providing information relating to proper demarcation of land and boundaries to indicate the endpoints of a project would be helpful in ascertaining whether a certain building is a phase of a particular project or a different project in itself.

Example: Confusion may occur with regard to the demarcation between two projects by the same promoter, if the projects are adjacent to each other. How would one distinguish whether the said projects are two separate real estate projects or just phases of the same real estate project?

Thus, in the above scenario the location details provided by the promoter to the competent authority while registering the project as per Section 4(2)(f) would be considered.

Calculation of allottees for the numerical threshold

As per the Code, the term “allottee” shall have the meaning assigned to it under Section 2(d) of the RERA which states that an allottee is a person to whom a plot, apartment or building is allotted by sale, transfer or otherwise by the promoter of the project or any subsequent owner.

For calculating the total number of allottees, only the number of allotted units in a project shall be considered, irrespective of the number of units constructed.

In cases of joint allotments, wherein a single unit is allotted to more than one person, the joint allottees of that unit shall be considered to mean a single allottee.

Example: In a project constituting a total of twenty units, three individuals — A, B, and C book four units each. Here, the number of individual allottees is only three i.e. A, B, and C but the number of apartments allotted is twelve. Hence, for the purpose of calculation for threshold requirement, the total number of allottees shall be twelve.

Access to the information of allottees in a project

The Supreme Court, in Manish Kumar[12], reiterated the following provisions to address the concerns of homebuyers with regard to the asymmetry in availability of information.

Section 11(1)(b)[13] of the RERA, requires the promoter to upload quarterly updates of the number of apartments allotted on the RERA web page which can be referred to ascertain the total number of allottees till date. However, the Court failed to observe the fact that there is no obligation on the promoter to provide names and details of such allottees.

Section 11(4)(e) mandates the promoter to enable the formation of the association of allottees (association) within three months of the majority of units being allotted, in the absence of local laws, allowing the allottee to be privy to the details of fellow the allottees in the project. However, the Court overlooked the fact that there is no obligation on the promoter to form an association, in case the majority of units are not booked. Additionally, local laws of States like U.P. and Haryana require the formation of such association only after obtaining the completion certificate, thus slyly providing a loophole in favour of the promoters.

As a result, in the absence of such an association and where the promoter refuses to furnish the said information, the only redressal available to an allottee is to approach the real estate regulatory authority (authority). The authority using its discretionary powers under Section 37[14] may direct the promoter to furnish the required information.

Conclusion

The introduction of a numerical threshold for triggering the CIRP is a step in the right direction to curb the use of the Code as a debt recovery mechanism, thereby contradicting its primary objective of revival of an entity. This step ensures that the project does not collapse on the whims and fancies of a few disgruntled allottees.

However, the Court failed to address the major issue of unavailability of the necessary information faced by an allottee while meeting the newly imposed numerical threshold under the Code. This will pose a major hurdle in initiating the CIRP where the promoter is unable to meet his debt obligations and there is a dire need for an overhaul of the management.

The builders and the homebuyers are on the opposite sides of a weighing scale representing the real estate sector and the recently imposed thresholds have tilted the scales in favour of the builders. Thus, in order to create and maintain balance, it is necessary to implement regulations mandating the builders to publish the required information of allottees in the public domain.


Final year LLB student at ILS Law College, Pune.

†† Final year LLB student at ILS Law College, Pune.

[1] <http://www.scconline.com/DocumentLink/i9ibga9l>.

[2] <http://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf>.

[3] <http://www.scconline.com/DocumentLink/7uaUmcO6>.

[4] <https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf>.

[5] (2019) 8 SCC 416

[6] <http://www.scconline.com/DocumentLink/K60PW5A6>.

[7] 2021 SCC OnLine SC 30

[8] 2021 SCC OnLine SC 30

[9] <http://www.scconline.com/DocumentLink/jXVqv4Tm>.

[10] <http://www.scconline.com/DocumentLink/1x31154O>.

[11] <http://www.scconline.com/DocumentLink/9l3Q426Y>.

[12] 2021 SCC OnLine SC 30

[13] <http://www.scconline.com/DocumentLink/OzOYWrYB>.

[14] <http://www.scconline.com/DocumentLink/om9ga1Y0>.

Op EdsOP. ED.

Introduction

Insolvency and Bankruptcy Code, 2016[1] (hereinafter “IBC”) has introduced a much more stable structure with strict time frames into the resolution process, providing the system with much-needed clarity and reliability. It has totally removed the governing powers of the companies under the resolution process and transferred them to a resolution professional to ensure a smooth transition and revival. Unlike the previous regime’s never-ending moratorium, the IBC established a far more practical structure with a set deadline. As per Section 14 of the IBC, while the moratorium is in effect, creditors of a company in the corporate insolvency resolution process (CIRP) are prohibited from taking any action to recover a security interest generated by the corporate debtor. However, the scope of this section has remained under debate for the longest time and has finally been settled by the Supreme Court as well as the National Company Law Appellate Tribunal (NCLAT). This comes after the 2018 Amendment to the IBC. In this paper, the issue whether a bank guarantee can be invoked during moratorium period in light of Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd.[2]  has been analysed.

Facts

M/s Worldwide Metals Pvt. Ltd., the operational creditors, had filed a company petition under Section 9[3] of the IBC to initiate the corporate insolvency resolution process against M/s J.P. Engineers Pvt. Ltd., the corporate debtor and Respondent 1. The National Company Law Tribunal (NCLT) admitted the application and appointed an interim resolution professional (IRP). Bharat Aluminium, the appellants, and the corporate debtor had entered into an agreement for purchase and sale of aluminium products. Subsequently, the corporate debtor issued a bank guarantee worth Rs one crore and sixty lakhs which was executed by Respondent 2 i.e., Andhra Bank. At the end of the contractual period, the debtor failed to make the payments as a result of which, the appellant wrote a letter to Respondent 2 for invoking the bank guarantee. To this letter, Respondent 2 replied that the bank guarantee could be encashed only upon the approval of the IRP. Thereafter, the appellant applied to the IRP, but the IRP refused to allow encashment of the bank guarantee on the grounds of enforcing moratorium against Respondent 1. Thereafter, the appellant had filed an application before NCLT seeking encashment of the bank guarantee on the grounds that it is not covered by moratorium as specified under Section 14 of the IBC. The Tribunal dismissed this application and directed the appellant to not ask for encashment of bank guarantee, as the same is covered under moratorium declared under Section 14 of the IBC. Thus, the appellant filed this appeal.

Issue

The NCLAT was posed with the issue whether a bank guarantee can be invoked against the surety once the moratorium has been imposed against the corporate debtor under Section 14 of the IBC.

Background of law

Section 14 of the IBC provides the effect and scope of the moratorium.[4] Until 2018, the law was unclear on whether the bank guarantees can be invoked during moratorium period. However, after an amendment passed in June 2018, a clause was introduced in the IBC which provided that in a contract of guarantee to a corporate debtor, the surety is not shielded under moratorium.[5] However, for a personal debtor, the Supreme Court, relying upon the report of the Insolvency Law Committee, held that moratorium will not apply to such debtor.[6] The report noted that the assets of the debtors and that of the surety are separate and thus, the ongoing proceedings of CIRP against the corporate debtor will not have any impact as a result of any actions taken against the assets of the surety.[7] Further, invoking guarantee will not have any significant impact on the corporate debtor’s debt because the creditor’s right against the debtor simply transfers to the surety, for the amount paid by surety.[8] The Committee recommended that the scope of moratorium should be limited only to the assets of the corporate debtor and actions against the guarantors cannot be barred.[9]

Analysis of the judgment

In the present case, the NCLAT held that “bank guarantee can be invoked even during moratorium period issued under Section 14 of the IBC in view of the amended provision under Section 14(3)(b) of the IBC”.[10] The appellant drew an analogy between performance bank guarantees and financial bank guarantees by referring to  Section 14 and proviso to Section 3(31)[11], which excludes performance bank guarantees from “security interest”, to emphasise their contention that bank guarantees can be invoked during moratorium.[12] They also relied on the amendment discussed above and various case laws to submit that bank guarantees can be invoked during moratorium.[13] On the contrary, the respondent relied on cases to establish that once the moratorium period has begun, no amount can be debited from the account of the corporate debtor.[14] They distinguished between financial and performance bank guarantees.[15] Further, they submitted that since IBC is a specific law, it will prevail over a general law like the Contract Act, 1872.[16]

The Tribunal perused the submissions of the parties and held that the guarantee in question is a financial bank guarantee and not a performance bank guarantee.[17] The Reserve Bank of India (RBI) has also distinguished between the two types of guarantees in one of its circular.[18] The NCLT in its judgment dated 31-7-2020 had relied on Nitin Hasmukhlal Parikh v. Madhya Gujarat Vij Co. Ltd.[19], where the Tribunal held that the moratorium applies for all bank guarantees, except for performance bank guarantees, as they form a part of “security interest” defined under Section 3(31) of the IBC. This case was decided on 9-2-2018. The amendment to Section 14 was introduced on 6-6-2018.[20] The court gave the judgment on 31-7-2020, which was after the amendment was introduced. As mentioned above, the amendment provided that the effect of moratorium will not apply to “a surety in a contract of guarantee to a corporate debtor”.[21] Thus, the NCLT erred in its decision by relying on Nitin case[22] and overlooking the amendment which had a retrospective effect. The Tribunal then relied on Ramakrishnan[23], where the Supreme Court held that Section 14(3) is clarificatory in nature and has retrospective effect.[24] The Tribunal also backed its finding by relying on principles of Contract Act, which provides that the “liability of surety is coextensive with that of a principal debtor and the creditor may go against either of them”.[25] Thus, the NCLAT rightly held that the corporate creditor can invoke bank guarantee during moratorium with no difficulties, as the bank guarantee is irrevocable and unconditional.[26] It was held in U.P. State Sugar Corpn. v. Sumac International Ltd. that a bank is bound to honour irrevocable bank guarantees irrespective of any issue raised by the customers.[27] It further distinguished the assets of the corporate debtor with those of the surety and overruled the decision of the lower court i.e., NCLT.

Conclusion

Prior to the amendment, the law on the point on invocation of bank guarantee during moratorium was not clear. There were several conflicting decisions being passed by the tribunals across the country. The amendment put an end to the series of conflicting judgments. In addition to this, the judgment of the Supreme Court in Ramakrishnan[28], which explained the application and scope of the amended provision, acted as a cherry on top of the cake and gave more clarity on this issue. The NCLT, though, erred in its decision by not taking the amendment into consideration and relying on a case which was decided before the amendment was introduced. The NCLAT corrected the error made by the NCLT and by relying on the reports of the Insolvency Law Committee, the object of IBC and Section 14 of the IBC, rightly held that financial bank guarantee can be invoked during moratorium period under Section 14 of the Code. The judgment of the NCLAT is also in consonance with the judgments of the Supreme Court on the same issues.

The decision of the Court acts as a clarification on the issue whether the guarantees issued by third parties/banks can be invoked during the moratorium period. This decision, though, is definitely in favour of the creditors, banks may find it difficult to recover their money from a corporate debtor on whom moratorium is imposed under Section 14 of the IBC.


± 4th year student, BA LLB (Hons.), West Bengal National University of Juridical Sciences (WBNUJS) 
Kolkata

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

[2] 2021 SCC OnLine NCLAT 57

[3] <http://www.scconline.com/DocumentLink/09ftZIDF>.

[4] The Insolvency and Bankruptcy Code, 2016, S. 14

[5] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, S. 10

[6] SBI v. V. Ramakrishnan, (2018) 17 SCC 394

[7] Shri Injeti Srinivas, Report of the Insolvency Law Committee, 35 (26-3-2018), <http://www.scconline.com/DocumentLink/sYKPTj8e>.

[8] Ibid.

[9] Ibid.

[10] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37

[11] <http://www.scconline.com/DocumentLink/rOllWgj8>.

[12] Id at para 8.

[13] Id at para 9.

[14] Id at para 16.

[15] Id at para 18.

[16] Id at para 17.

[17] Id at para 22.

[18] Reserve Bank of India, Circular DBOD.No.BP.BC.89.21.04.009/2012-13 (Issued on 2-4-2013), <http://www.scconline.com/DocumentLink/z9UP86k8>.

[19] 2017 SCC OnLine NCLT 19360 

[20] The Insolvency and Bankruptcy Code, 2016, S. 14

[21] Ibid.

[22] 2017 SCC OnLine NCLT 19360

[23] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

[24] Bharat Aluminium Co. Ltd v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 31.

[25] Contract Act, 1872, S. 128.

[26] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37.

[27] (1997) 1 SCC 568.

[28] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

Op EdsOP. ED.

Introduction

More than twenty years since liberalisation, as the Indian economy matured and marched towards global competitiveness, a dire need was felt to overhaul the existing legal regime governing the corporate and commercial sector and make it more modern and robust. This led to the enactment of several new legislations and significant amendments in existing legislations impacting these sectors. These include the Companies Act, 2013[1], the Commercial Courts Act, 2015[2], statutes incorporating the Goods and Service Tax, the Insolvency and Bankruptcy Code, 2016 (IBC)[3], the Arbitration and Conciliation (Amendment) Act, 2015[4], the Specific Relief (Amendment Act), 2018[5], etc. all of which were aimed at streamlining the functioning of business, simplifying the tax structure and payment of taxes, enabling easier enforcement of contracts and quicker resolution of disputes. These legislations enabled India to leap frog its way to 77th place in the Work Bank’s “Ease of Doing Business” rankings in 2019[6] from a dismal 142nd place in 2015.[7]

While the intent and substance of these legislations may be noble, there are a few transitional glitches which have impaired their effective implementation. As a matter of fact, transitions in law always bring about some uncertainties requiring judicial or parliamentary clarifications. However, the transitional phase in respect of these legislations has been more disruptive than one would have imagined.

Summary

Where an Act contains substantive, amending or repealing enactments, it commonly also includes provisions which regulates the coming into operation of those enactments and modify their effect during the period of transition.[8] These provisions generally are intended to take care of the events during the period of transition. This article undertakes a critical analysis of the transitional provisions of three recent legislations, more particularly the Goods and Service Tax Acts, the Insolvency and Bankruptcy Code, 2016 and the Arbitration and Conciliation (Amendment) Act, 2015. The article opines how the transitional provisions in these legislations have been drafted with a lack of foresight and vision, which in turn has led to multiple litigations and manifold issues in interpretation of these provisions. The article highlights the immediate need for legislative review and revision of these transitional provisions so as to infuse some much-needed clarity, avoid multiple litigations and ensure a smoother transition to a new legal and regulatory regime.

Part I Goods and Service Tax

A. Brief legislative history

India’s move towards a unified and comprehensive goods and service tax (GST) regime took concrete shape with the enactment of the Constitution (101st Amendment) Act, 2016 [9] (the “Amending Act”) notified in the Official Gazette on 8-8-2016. The Amending Act made suitable changes to the Constitution to pave way for implementation of GST.

Pursuant to the redefining of legislative powers between the State and the Centre under the aforesaid Amending Act, Parliament enacted the Central Goods and Services Tax Act, 2017[10] (CGST), the Integrated Goods and Services Tax Act, 2017[11] (IGST) and the Union Territory Goods and Services Tax Act, 2017[12] (UGST) and the States also enacted their respective State Goods and Services Tax Acts (SGST). Consequently, GST was launched at midnight on 1-7-2017 bringing into effect all these statutes with the hope of creating a simple and integrated system of indirect taxation in India. Almost all indirect taxes (apart from customs) including excise, sales tax, service tax, etc. were sought to be done away with and subsumed under one umbrella head of “Goods and Service Tax”.

B. The transitional provision

Section 19 of the Amending Act[13] sets out the overarching transitional clause and provides as under:

  1. Transitional provisions.Notwithstanding anything in this Act, any provision of any law relating to tax on goods or services or on both in force in any State immediately before the commencement of this Act, which is inconsistent with the provisions of the Constitution as amended by this Act shall continue to be in force until amended or repealed by a competent legislature or other competent authority or until expiration of one year from such commencement, whichever is earlier.

The aforesaid provision is a sunset clause which mandates the State/Parliament to either repeal or amend all existing indirect tax laws (including sales tax/value added tax, excise, service tax etc.) and make them consistent with the Amending Act within a period of one year from 8-9-2016 (the date of notification of the Amending Act) after which all such laws would cease to remain operational.

 C. Cause for concern

It is pertinent to note that while the Amending Act saves the applicability of the erstwhile indirect tax laws up to 8-9-2016, there are no provisions saving actions initiated/proposed to be initiated under such laws against erring assessees. Most State Sales Tax/VAT Acts permit assessment up to 3-5 years from the date of assessable tax[14]. Similarly, the Central Excise Act, 1944[15] permits initiation of proceedings up to 2 years from the incidence of non-payment of duty[16] and up to 5 years in cases where extended period of limitation can be invoked[17]. There is no clarity on whether such right to initiate action/undertake assessment for past years (provided for under the earlier indirect tax laws) survives after GST is brought into effect.

In order to safeguard the rights of initiating actions/continuing proceedings already initiated under the erstwhile indirect tax laws, Parliament and the State Legislatures sought to incorporate wider transitional clauses in the principal Acts introducing GST. For instance, the CGST Act incorporates a wide savings clause under Section 174[18] which is similar to Clause 6 of the General Clauses Act, 1897 and provides for saving of all actions initiated, rights accrued and remedies proposed to be instituted under the repealed Central Acts including Excise Act, Chapter 5 of the Finance Act, 1994[19] (Service Tax) etc. Furthermore Section 174(3) also saves the applicability of Section 6 of the General Clauses Act, 1897[20]. Similarly, even the various SGST Acts provide for wide transitional clauses under Section 174 of their respective State GST legislation, saving all actions undertaken/proposed to be undertaken thereunder the erstwhile State tax laws including the Sales Tax/VAT Act, tax on entry of goods, etc.

Thus, on account of the absence of a wide, all encompassing transitional clause under the Amending Act, Parliament and the State Legislatures have provided for additional transitional clauses (under the head of repeal and savings clauses) in the CGST Act and respective SGST Acts. This gives rise to a debatable issue as to whether a principal Act, which owes its genesis to a constitutional Amendment Act, can incorporate provisions which not only go beyond such an Amending Act but are also seemingly in variance with the provisions of the Amending Act.

Moreover, different States have incorporated different repeal and savings clauses in their respective SGST legislations. For instance, the Value Added Tax Acts in Kerala, Karnataka and Delhi are repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 of their respective SGST legislations. On the other hand, the Value Added Tax Acts in Gujarat and Maharashtra do not find a mention in the list of repealed Acts under their respective SGST legislations. While the savings provisions under Section 174 of most of these SGST statutes are identical, these savings provisions only save actions undertaken/proposed to be undertaken under the repealed statutes (referred to in Section 173). Conversely, if a statute is not repealed under Section 173, actions undertaken/proposed thereunder are not saved under Section 174. Therefore, while pending and proposed actions under the State VAT Act may get saved in Kerala, Karnataka and Delhi similar actions under the Gujarat VAT Act, 2003 may not be saved based on a literal interpretation of the repeal and savings provisions of the respective SGST Acts of these States. While even the Maharashtra VAT Act, 2002 (MVAT Act) is not repealed under Section 173 of the Maharashtra Goods and Services Tax Act, 2017 (MGST Act). The MGST Act carves out an extremely wide-ranging savings provision which saves the levy, returns, assessment, reassessment, etc. of taxes under all erstwhile laws in force immediately before the enactment of the MGST Act[21]. Thus, the difference in the repeal and savings provisions in different SGST legislations is likely to lead to an unwelcome situation where the impact of GST on the applicability of erstwhile indirect tax laws will have to be looked into separately for each individual State based on its respective SGST legislation and the repeal and savings clauses incorporated therein. This, in turn leads to multiplicity in litigations and brings about ambiguity, uncertainty and inefficiency in the implementation of the GST regime.

D. Judicial opinion

A plethora of litigations in relation to the transitional issues arising pursuant to implementation of GST have been filed across various high courts. The Kerala High Court recently disposed of 3250 petitions (the lead matter being Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer[22]) upholding the right of the State Authorities to proceed against pre-existing VAT liability even after the introduction of the GST regime on the strength of the savings provision incorporated in Section 174 of the State GST Act.  A similar view was taken by the High Court of Karnataka in Prosper Jewel Arcade LLP v.  CCT[23], although on the basis of different reasoning. It was observed that it is the law applicable on the date of the taxable event which is relevant for the purpose of imposition of tax and therefore the introduction of GST cannot weigh down the legality of orders passed under the Karnataka VAT Act for taxable events of the past, even if such orders were passed after the introduction of the GST regime. The Gauhati High Court, in Laxminarayan Sahu v. Union of India[24] was called upon to determine the validity of show-cause notices issued for non-payment of service tax under the Finance Act after the introduction of GST. In conjunction with the rulings of the Karnataka High Court and the Kerala High Court, the Gauhati High Court upheld the validity of such notices. The reasoning adopted however, was that the actions under the erstwhile laws get saved under Section 6 of the General Clauses Act, 1897.  Thus, the view taken by a majority of courts, although based on different reasoning, is that the revenue authorities retain the power to levy appropriate taxes under the erstwhile indirect tax laws for events prior to the introduction of GST.

A similar challenge to the authority of the State to levy, assess and collect tax under the State GVAT Act, 2003 after the introduction of the GST regime was brought before the High Court of Gujarat[25] but vide order dated 26-2-2020 the petitions were withdrawn without any arguments on merits.

E. Analysis and way forward

Section 19 of the Amending Act sets out the date when the new GST regime comes into effect and at the same time provides for continuance of operation of provisions of erstwhile indirect laws up to a period of 1 year from 8-9-2016. The provision contains elements of both, a transitional clause and a savings clause. One of the generally accepted norms of legislative drafting is that lumping transitional and savings provisions in a single section is never a good idea[26].

As stated earlier, most taxing statutes envisage a substantial time gap between occurrence of cause of action against assessees and actual institution of proceedings. In such a scenario, if the power to initiate proceedings/levy taxes under the erstwhile laws for past events of default/past assessment years, is taken away upon the introduction of GST, it will practically create a legal vacuum in respect of levy, assessment and collection of taxes for a certain time period prior to the introduction of the GST. This would deprive the revenue of legitimate and tax arrears, interest and penalty and enable assessees to unjustifiably escape from the tax network, which certainly could not have been the legislative intent. In this background, clubbing a savings provision with a transitional clause, and failing to provide a comprehensive savings provision in the Amending Act, is absurd and irrational, more so when the country is on the cusp of a revolutionary overhaul of the entire indirect tax regime

While it may be argued that States/Centre have the right to incorporate appropriate repeal and savings provisions in their respective GST legislations, the same may lead to a lot of ambiguity and discrepancies as observed earlier. It is suggested that in order to remove any scope for ambiguities and uncertainties, it would be advisable to amend the Amending Act so as to incorporate a broad, comprehensive savings clause akin to Section 6 of the General Clauses Act in order to save actions/proposed actions under all the erstwhile indirect tax laws. Section 19 of the Amending Act ought to be immediately amended to provide for an additional savings sub-clause, which may read as under:

Section 21(2)-Notwithstanding anything contained in clause (1) above, the coming into operation of this Act shall not affect the previous operation of any enactment relating to tax on goods or services or on both in force in any State for the purpose of or the purposes of determination of the levy, returns, assessment, reassessment, appeal, revision, rectification, reference or any other proceedings initiated or proposed to be initiated under the said enactments within the period of limitation as envisaged under the said enactments.

 Part II Insolvency and Bankruptcy Code, 2016

A. Legislative history

In order to address the concerns of an inadequate framework governing bankruptcy in India, a Bankruptcy Law Reforms Committee (BLRC) was constituted in October 2014 and tasked with drafting a single unified framework which provides for a quick and effective insolvency process for individuals, partnerships, companies, etc. In November 2015, the BLRC came out with a report which proposed a complete institutional overhaul of the existing framework and suggested a quick, time-bound, creditor controlled and regulator driven insolvency process[27].  This led to the enactment of the Insolvency and Bankruptcy Code, 2016.

B. Transitional provisions

The enactment of the Insolvency Code led to repeal and amendments of several enactments in order to unify a fragmented network of laws dealing with insolvency. The repealed enactments include the Presidency-Towns Insolvency Act, 1909[28], the Provincial Insolvency Act, 1920[29] and the Sick Industrial Companies Act, 1985[30]. Unlike the repeal and savings provision of the Amending Act heralding GST, Section 243 of the IBC[31] provides for an exhaustive savings clause clearly specifying what is proposed to be saved under the repealed statutes.

In addition to repeal of the aforesaid statutes, the Insolvency Code also provided for amendments to approximately 11 other statutes, most significant amongst those being amendments to the Companies Act, 2013.[32]

Since the CA 2013 and the IBC function in overlapping areas, more particularly in the area of winding up of companies, there is a likelihood of transitional conflict over the pending cases with regard to the appropriate forum as well as the applicable statute. In order to deal with such conflict, the Central Government notified the Companies (Transfer of Pending Proceedings) Rules, 2016[33] (the “Rules”) in exercise of powers under Section 434 of the CA, 2013[34] and Section 239 of the IBC[35]. The Rules provide for the bifurcation of proceedings between the CA, 1956[36]/CA, 2013 and the IBC and between Court and National Company Law Tribunal (NCLT). So far as treatment of pending winding-up petitions is concerned, based on the nature stage of the proceedings, some winding-up petitions were to be retained by the High Court while others were to be transferred to NCLT[37]

 C. Cause for concern

The aforesaid Rules brought into place a splintered structure for dealing with the transition of various proceedings from the CA 1956/CA 2013 to the IBC. The overlapping of jurisdiction as well as subject-matter is riddled with severe concerns and needs to be addressed urgently.

The constitutional validity of these Rules was challenged by Nissan Motor India and Renault Nissan Automotive before the High Court of Madras. It was alleged that on account of operation of the Rules, winding-up petitions filed against these companies in the High Court were transferred to the NCLT in spite of the fact that the entire pleadings were already over, and the matter was about to conclude, thereby causing severe prejudice to these companies. The High Court granted an interim order in favour of the companies by staying the NCLT proceedings against them.[38]

Furthermore, there is no clarity on a scenario where multiple proceedings in respect of the same company have arisen before different forums. For instance, in a situation where a notice for winding-up petition has been served upon the respondent prior to 15-12-2016, the same is retained by the Court for adjudication as per the stipulations under the Rules and is not transferred to the Tribunal. Now, if a fresh petition for winding up against the same company is filed by a financial or operational creditor or the corporate debtor itself under the provisions of IBC, it gives rise to several questions including:

  • Whether such a fresh petition is maintainable notwithstanding the pendency of another winding-up petition against the same company in the Court?
  • If maintainable, whether the parallel proceedings before the Tribunal under the IBC and those before the court under the Companies Act, 1956 can proceed simultaneously?
  • If simultaneous proceedings are permitted, would the proceedings under the Companies Act, 1956 stall in the event of a moratorium under Section 14 of the IBC[39]? On the other hand, would proceedings under IBC stall in the event a winding-up order is passed under Companies Act, 1956 on account of the operation of a moratorium under Section 446 of the Companies Act?
  • If simultaneous proceedings are not permitted, which statute is to be given a primacy over the conduct of winding-up proceedings?

D. Judicial opinion

The aforementioned issue as to whether the IBC can be triggered in the face of a pending winding-up petition has led to wide-spread litigations seeking judicial clarification on the quandary being faced by all stakeholders in an insolvency proceeding.

The NCLT Benches at Chennai (Alcon Laboratories (India) (P) Ltd. v. Vasan Health Care (P) Ltd.[40]) and Ahmedabad (SBI v. Alok Industries Ltd. [41]) took the view that the pendency of a winding-up petition cannot be a bar under the Code for initiating a corporate insolvency resolution process unless a winding-up order is passed by the  High Court or Official liquidator is appointed.   On the other hand, the Hon’ble NCLT Bench at Delhi (Nauvata Engg. (P) Ltd. v. Punj Llyods Ltd.[42]) took the view that in cases where winding-up petitions are pending against a company, it would not be conducive for the NCLT to trigger insolvency resolution process against that very company and therefore, the proceedings instituted earlier in point of time may constitute a better basis for adjudication. On account of the aforesaid divergent views taken by coordinate benches of the NCLT, a Special Bench at NCLT, Delhi referred the issue to a larger Bench in Union Bank of India v. Era Infra Engg. Ltd.[43]. The Hon’ble three-member larger Bench came to the conclusion that there is no bar on NCLT against triggering an insolvency resolution process even when a winding-up petition is pending, unless an official liquidator is appointed and winding-up order is passed.

Apart from various NCLT Benches, the issue has also been raised before the  High Court of Bombay on several occasions. In Ashok Commercial Enterprises v. Parekh Aluminex Ltd.[44] the  Court was pleased to pass a winding-up order notwithstanding the pendency of the IBC proceedings, observing that as per the Rules, not all winding-up proceedings are to be transferred to NCLT. The legislative intent was that two sets of winding-up proceedings would be heard by two different forum i.e. one by NCLT and another by the High Court depending upon the date of service of petition.

On the other hand, in Jotun India (P) Ltd. v. PSL Ltd.[45], the Bombay High Court observed that there was no bar on NCLT from proceeding with an application filed by a corporate debtor under Section 10 of IBC[46] even though a winding-up petition was admitted against the same corporate debtor in the High Court. It was observed that “Till the company is ordered to be wound up i.e. the final order is passed, NCLT can entertain a petition or an application.

In order to address the ambiguities arising as a consequence of divergent judicial opinions, the Insolvency Law Committee in its report of March 2018 proposed amendments to the CA, 2013 to clarify that there was no bar on the application of the Code to winding-up petitions pending under prior legislations before any court of law. However, to avoid duplication of proceedings, it was suggested that the leave of the High Court or NCLT, if applicable, under Section 446 of the CA, 1956[47] or Section 279 of the CA, 2013[48], must be obtained, for initiating corporate insolvency resolution process (CIRP) under the Code, if any petition for winding up is pending in any High Court or NCLT against the corporate debtor.[49]

In pursuance of the aforesaid recommendation, Section 434 of the Companies Act, 2013[50] was amended with effect from 6-6-2018[51] and a proviso was added permitting parties to approach the High Court and request for transfer of a pending winding-up proceeding to the NCLT under the IBC regime. However, it is pertinent to note the amendment is not in consonance with the recommendation of the Committee. The recommendation of the Committee was to seek permission of the High Court/NCLT, if applicable, for initiation of CIRP under the Code. Therefore, the recommendation presupposes the grant of permission for even initiation of CIRP. However, the amendment proposes that the High Court is to be approached only for the purpose of seeking a transfer of proceedings and not for initiation of CIRP per se.

Pursuant to the amendment to Section 434 of the CA, 2013 the Supreme Court in Forech India Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.[52], somewhat settled the issue with regard to the apparent transitional conflict between the IBC and the Companies Act holding that an insolvency resolution may be filed against a corporate debtor notwithstanding the pendency of a winding-up petition before the High Court, since proceedings under IBC are independent proceedings. It further gave liberty to the party that had filed the pending petition before the  High Court to seek transfer of the petition to NCLT in accordance with the amendment to Section 434 of the Companies Act, 2013.

While the aforesaid judgment lends clarity on the right to initiate CIRP under the IBC during the pendency of a winding-up proceedings in the High Court under the CA 1956, there is no clarity on the probable issues that are bound to arise as a consequence of the duality in proceedings under the IBC and the Companies Act. Questions with regard to the impact of moratorium period on the winding-up proceedings in the High Court, potential revival of winding-up proceedings at the end of the moratorium period in case of failure of resolution, etc. remain unanswered. Furthermore, there is no clarity with regard to the stage of winding-up proceedings at which fresh applications may be made under the IBC and proceedings before the High Courts may be allowed to be transferred to the NCLT. In Sicom Ltd. v. Hanung Toys & Textiles  Ltd.[53], the High Court of Delhi observed that if the process is at a nascent stage and only a provisional liquidator is appointed, proceedings before the High Court may be transferred to the NCLT, but if the proceedings are at an advanced stage and the chances of insolvency resolution process are bleak, proceedings are not to be transferred to the NCLT.  Recently, the Supreme Court, in the case of Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd.[54] held that even post-admission and appointment of Official Liquidator transfer of winding up petition to NCLT may be permitted, if no irreversible steps have been taken in relation to the properties of the company in liquidation i.e. so long as no actual sale of movable or immovable properties has taken place.

E. Analysis and way forward

The Rules failed to clarify if fresh proceedings could be initiated under the IBC even where there were pending winding-up proceedings against the same debtor company being heard by Court and left the same to judicial discretion. After divergent views taken by different forums, the Supreme Court in Forech International case[55] (supra) finally took the position that the pendency of winding-up proceedings under the CA, 1956/CA, 2013 has no bearing on fresh proceedings under the IBC. However, this stand taken by the Supreme Court does not appear to be in tune with legislative intent and raises other important issues as a consequence.

First and foremost, it is questionable as to what purpose the savings provision in the Rules retaining certain proceedings in the High Court would serve if the legislative intent was to anyway permit fresh proceedings under the IBC notwithstanding the pending proceedings in the High Court. The interpretation sought to be given by the Supreme Court destroys the very purpose and essence of saving proceedings under the Rules.

Secondly, the Rules were amended vide Notification dated 29-6-2017[56]. Pursuant to the same a proviso was added under Section 5 of the Rules clearly laying down that where a winding-up petition is retained by the High Court in accordance with the Rules, all other winding-up petitions against the same company pending on the cut-off date would also be retained by the High Court, regardless of service/non-service of such petitions.[57] The proviso appears to indicate that the legislative intent is to ensure that once the High Court is seized of a winding-up matter of a particular debtor company in accordance with the Rules, it should operate as the sole forum to adjudicate upon all winding-up petitions pertaining to such debtor company. However, the  Supreme Court has taken a different view which appears to be contrary to legislative intent.

Furthermore, even from a practical perspective, this duality in regime for dealing with winding-up matters has harsh consequences for all stakeholders involved. Petitioner creditors who have spent a considerable amount of time and resources in a winding-up petition may have to restart all over again and prove their claims before the insolvency resolution professsional and the Committee of creditors.  Corporate debtors may be burdened with the task of defending themselves in two parallel proceedings of a similar nature. Even resolution applicants will be circumspect and cautious in submitting resolution plans during the moratorium period under the IBC, if faced with the prospect of revival of a winding-up petition against the corporate debtor under the CA, 1956/CA, 2013, after the end of the moratorium period/approval of the resolution plan.

In order to avoid multiple proceedings, ensure a smooth transition and avoid the risk of contrary orders by different forums in parallel winding-up petitions, it would be advisable to suitably amend the Rules in such a manner that the transitional/savings provision in the Rules operate upon the debtor company as a whole and not only upon a particular winding-up proceeding against that debtor company. In other words, once winding proceedings against a particular debtor company are retained by the High Court in terms of the Rules, all other pending winding-up petitions, if any, as well as fresh proceedings under the IBC in respect of the same debtor company ought to be consolidated and continued before the said High Court. Furthermore, in order to ensure that the benefit of a time-bound process is not lost out in the course of a winding-up proceeding, it would be apt to amend the law in a manner so as to ensure that all pending winding–up proceedings are completed within a period of one year from a particular cut-off date, failing which the proceedings pertaining to the corporate debtor concerned would automatically be transferred to the Tribunal. In light of the aforesaid, it would be appropriate to suitably amend Rule 5 of the Transfer Rules and add an additional proviso, in the following manner:

Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under clause (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016 or a fresh petition under Sections 7, 9 or Section 10 of the 1BC is initiated in respect of the same company after 15-12-2016, such other petitions shall not be transferred to or heard by the Tribunal, even if the petition has not been served on the respondent.

 Provided that all pending winding-up petitions pending and retained before the High Court pursuant to the commencement of these Rules shall be disposed of by the Hon’ble Court by (cut-off date) failing which such proceedings shall be converted to IBC proceedings and transferred to the Tribunal.[58]

A legislative clarification in accordance with the aforesaid terms will ensure that winding-up proceedings in the High Court do not get delayed indefinitely. Moreover, certainty in forum of adjudication will also resolve jurisdictional conflict, reduce the burden on NCLTs and ensure finality and conclusiveness in adjudication of winding-up matters.

Part III –Arbitration and Conciliation (Amendment) Act, 2015

 A. Legislative history

The Arbitration and Conciliation (Amendment) Act, 2015 (the “Amendment Act”) was enacted on the basis of the proposals made by the Law Commission of India in its 246th Report on “Amendments to the Arbitration and Conciliation Act, 1996”[59].  The Commission was tasked with reviewing the provisions of the Arbitration and Conciliation Act, 1996 (the “Act”) in view of the several inadequacies observed in the functioning of the Act, which included exorbitant costs, protracted proceedings, excessive court intervention, etc. In order to address these issues and promote India as an arbitration friendly regime, the Commission recommended ample amendments to the Act.

The amendments are promising and in sync with the larger objectives of bringing about expediency, transparency and efficiency in arbitral proceedings. However, as was the case with GST and the IBC, the lack of clarity in transitional provisions led to a flurry of litigations on technical and transitional issues, which somewhat constricted the impact and essence of the Amendment Act.

 B. Transitional provisions

The transitional provision, provided for under Section 26 of the Amendment Act[60], reads as under:

  1. Act not to apply to pending arbitral proceedings.—Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.

 On a prima facie reading, it appears as though the Amendment Act is to apply prospectively to arbitrations commencing after the date of enforcement of the Amendment Act i.e. 23-10-2015. However, there is no clarity on whether the Amendment Act applies to court proceedings emanating from arbitral proceedings commenced under the Act prior to 23-10-2015. The Act envisages court intervention at various stages before, during and after the commencement of arbitral proceedings.[61] Considering the same, it is baffling as to how and why the Amendment Act is silent on the said issue.

It is pertinent to note that the Law Commission of India, which proposed the amendments in the Act had recommended the insertion of Section 85-A, a comprehensive transitory provision that provided clarity to the effect that the Amendment Act was prospective in nature and was to apply only to fresh arbitrations and to fresh applications filed before the court or a tribunal after the date of enforcement of the Amendment Act. However, for some inexplicable reason, the proposed Section 85-A never found its way into the Act and instead the legislature enacted Section 26 in the Amending Act.

 C. Cause for concern

The lack of clarity in Section 26 of the Amendment Act highlights the apparent lack of legislative foresight to consider three peculiar but extremely foreseeable issues:

  • Applicability of the Amendment Act to court proceedings initiated prior to 23-10-2015 under the Act;
  • Applicability of the Amendment Act to court proceedings initiated/proposed to be initiated on/after 23-10.- the Act,
  • Applicability of the Amendment Act to fresh applications before the Arbitral Tribunal for pending arbitrations initiated prior to 23-10-2015; (for instance whether an application filed under Section 17 of the Act[62] after 23-10-2015 in a pending arbitration which has commenced prior to 23-10-2015 would be governed by the old provision or the amended provision)

Since the Amendment Act has made some significant and substantial changes in the arbitration regime, the aforesaid issues have caused confusion and chaos in pending arbitrations. The lack of procedural clarity has led to multiple litigations for determining the appropriate applicable provisions under the Act in pending arbitrations at the cost of the merits of disputes being sidetracked. This in turn has caused unnecessary delays in arbitrations, which ironically, was one of the primary issues sought to be addressed by the Amendment Act.

D. Judicial opinion

One of the foremost issues that has arisen on account of the ambiguity in Section 26 of the Amendment Act is with regard to the applicability of Section 36 as substituted under the Amendment Act to (1) court proceedings initiated prior to the enforcement of Amendment Act; and (2) court proceedings initiated after the enforcement of the Amendment Act.

Prior to the Amendment Act, Section 36 provided that an arbitral award shall be enforced only after the time-limit for filing an application for setting aside the award under Section 34 of the Act has expired, or such application having been made has been refused. Thus, this implied that there would be an automatic stay on enforcement of the award as soon as an application is filed under Section 34 for setting aside the award. The Amendment Act sought to do away with such automatic stay on enforcement by appropriately substituting Section 36. The substituted Section 36 provided that in order to stay enforcement of an arbitral award, it was necessary for the party seeking to set aside the award to file a separate application for stay of enforcement. Further, upon filing of the application, the stay is not to be granted as a matter of right, but the Court “may” in its discretion grant such a stay, subject to such conditions, and on recording of specific reasons.

In light of such substitution of Section 36, various courts have given divergent opinions with regard to the application of substituted Section 36 to court proceedings initiated/proposed to be initiated in respect of arbitrations which took place prior to the enforcement of the Amendment Act i.e. prior to 23-10-2015.

The view taken in Electrosteel Castings Ltd. v. Reacon Engineers (India) (P) Ltd.[63], and Ardee Infrastructure Pvt. Ltd. v. Anirudh Bhatia[64] was that that if an arbitration has commenced before 23-10-2015, the entire gamut court proceedings in respect of such arbitrations will be governed under the old regime and will not be covered by the Amendment Act. As a consequence, the unsubstituted Section 36 would continue to apply to such court proceedings, and this would amount to an automatic stay on enforcement of award pursuant to filing of a Section 34 petition. On the other hand, a starkly contrasting view was taken in New Tirupur Area Development Corporation Ltd. v. Hindustan Construction Co. Ltd. and Rendezvous Sports World v. Board of Control for Cricket in India[65] (Bombay High Court) that that the Amending Act will be applicable to all court proceedings pending on 23-10-2015 or filed after 23-10-2015 in relation to arbitration proceedings initiated prior to the enforcement date of the Amendment Act. As a consequence, Section 36 in its substituted form would be applicable to such court proceedings and there would be no automatic stay on enforcement of an arbitral award.

The divergent views taken by different high courts culminated into a series of special leave petitions before the  Supreme Court of India, which heard these petitions together with the lead matter being Board of Control for Cricket in India v. Kochi Cricket (P) Ltd.[66]

Analysing the language of Section 26 of the Amending Act, the Supreme Court came to the conclusion that a careful reading of the section indicates that :-(1) the Amendment Act will not apply to arbitrations that commenced prior to 23-10-2015, unless the parties agree; but (2) the Amendment Act will apply to court proceedings initiated after 23-10-2015 emanating from arbitrations that commenced prior to 23-10-2015.

With regard to the question as to whether the Amendment Act will retrospectively apply to court proceedings initiated before 23-10-2015, the Court observed that Section 36 embodies the procedure of enforcement. The same being procedural in nature any change/amendment in Section 36 does not affect any accrued/vested substantive rights of the judgment-debtor and therefore, the substituted Section 36 ought to be applied retrospectively. The Court further opined that if the substituted Section 36 is not applied retrospectively, it would defeat the very object of the Amendment Act, which is to ensure speedy dispute resolution and reduce court interference at various stages.

Thus, pursuant to the aforesaid judgment, the position with regard to the applicability of the Amended Act was clarified in the following manner:

  • The Amended Act will not apply to arbitration proceedings instituted prior to 23-10-2015 unless parties agree otherwise.
  • The Amended Act will apply to all court proceedings instituted on or after 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015
  • Section 36 as substituted under the Amended Act will apply retrospectively to all court proceedings instituted before 23-10-2015 in relation to arbitration proceedings which commenced prior to 23-10-2015

E. Analysis and way forward

While the aforesaid judgment rendered by the Supreme Court rendered some much-needed clarity on the interpretation of Section 26 of the Amendment Act, the issue was rekindled when in 2017, a High-Level Committee headed by Justice (Retd.) B.N. Srikrishna suggested that the Amendment Act should apply only to arbitral proceedings commenced on or after the enforcement of the Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings.[67] The proposal found its way in the Arbitration Amendment Bill, 2018 which provided for insertion of Section 87 in the principal Act[68] as per which, in the absence of an agreement between the parties, the Amendment Act shall not apply to: (1) arbitral proceedings that have commenced prior to 23-10-2015; and (2) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after 23-10-2015. The said Bill received assent from the President on 9-8-2019 and led to the enactment of Arbitration and Conciliation (Amendment) Act, 2019. (2019 Amendment Act).  As a consequence, the Act stood amended with effect from 30-8-2019 (date of notification in Official Gazette) with a newly inserted Section 87 which specified that:

Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—

(a) not apply to––

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.

The aforesaid legislative clarification with regard to the applicability of 2015 Amendment  completely diluted the ratio of the Kochi Cricket case[69] and reversed the position in respect of applicability of the 2015 Amendment Act. In other words, pursuant to the 2015 Amendment Act would no longer apply to any proceedings under the Act initiated prior to 23-10-2015, regardless of whether such proceedings were arbitral proceedings or court proceedings in relation to such arbitral proceedings.  This led to a scathing criticism of the 2019 Amendment Act, which was derided by jurists and practitioners for completely watering down the beneficial impact of the 2015 Amendment Act, which aimed at reducing court interference and improving the speed and efficacy of proceedings under the Act. The constitutional validity of Section 87 of the 2019 Amendment Act was subsequently challenged in the case of Hindustan Construction Company v. Union of India[70] and vide a unanimous verdict of a 3-judge bench of the Hon’ble Supreme Court, the said Section was set aside on the ground of being manifestly arbitrary, and the position as propounded by the Kochi Cricket case was restored.

Thus, as seen in the case of other legislations, failure to draft a conspicuous transitional provision in the Arbitration Amendment Act, 2015 led to confusion regarding the applicability of the amendments proposed therein, which in turn led to multiple litigations as discussed hereinabove. While the dust seems to have been finally settled on the issue with the Supreme Court’s seminal verdict in the Hindustan Construction Company case, one cannot help but ponder how a needless squandering of judicial time and resources could have been avoided with clear, concise and unambiguous legislative drafting.

 Conclusion

Transitional provisions in a legislation play a key role in regulating its coming into operation and effect. A carefully worded transitional provision is therefore an indispensable necessity to ensure a smooth change in a legal regime with minimum disruption of existing rights and liabilities. Transitional provisions, may affect relatively few cases, but they are extremely complicated; and they can be important to the cases affected.[71] The absence of clarity in transitional provisions causes chaos and confusion leading to multiple litigations requiring the judiciary to draw inferences based on apparent legislative intent.

The newly enacted commercial legislations in India aim at making business easier, transparent, and efficient by providing for simplicity in taxation structure, facilitating easy exits and offering a speedier mode for dispute resolution. However, loosely worded transitional provisions in these legislations coupled with baffling judicial opinions have substantially diluted the impact of positive changes sought to be brought about by these legislations. The colossal litigations that have arisen in respect of these transitional provisions stand as a testimony to the poor draftsmanship. As discussed in the chapters hereinabove, the judiciary often outweighs practical considerations in the eagerness to give effect to the so-called object and purpose of a newly enacted legislation. Based on the developments so far, it appears as though the judiciary as well as the Government are bent upon simply ensuring quick operationalisation of these legislations at the cost of their effective implementation. Such an approach will defeat the very purpose and essence of these legislations. It is imperative for India to immediately address these transitional issues through appropriate legislative amendments and clarifications, failing which, the true potential of these newly enacted legislations are likely to get sidetracked in the face of a convoluted web of unnecessary and avoidable litigations.


* Advocate, High Court of Gujarat.

[1]  http://www.scconline.com/DocumentLink/A5aqjfDv.

[2]  http://www.scconline.com/DocumentLink/7566Y3w5.

[3] http://www.scconline.com/DocumentLink/86F742km.

[4]  http://www.scconline.com/DocumentLink/9ajA4z9b.

[5]  http://www.scconline.com/DocumentLink/0mV0KcW4.

[6]  http://www.doingbusiness.org/en/rankings

[7] World Bank Group Project Report, Doing Business 2015: Going Beyond Efficiency, 12th Edition, sourced from: http://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB15-Full-Report.pdf

[8]  Francis Bennion, Bennion on Statutory Interpretation, 14th Edn., LexisNexis, p. 442 (as cited in Union of India v. Filip Tiago De Gama of Vedem Vasco, (1990) 1 SCC 277

[9] http://www.scconline.com/DocumentLink/4386Cb1k.

[10] http://www.scconline.com/DocumentLink/ZN57RKH6.

[11] http://www.scconline.com/DocumentLink/ADSpTtpt.

[12] http://www.scconline.com/DocumentLink/ni9RfDmQ.

[13] http://www.scconline.com/DocumentLink/4386Cb1k.

[14] See Gujarat Value Added Tax Act, 2003-, S.38(9); Karnataka Value Added Tax, 2003-,S. 40 http://www.scconline.com/DocumentLink/0s79tGDg.

[15] http://www.scconline.com/DocumentLink/E4zd0gLl.

[16] See Central Excise Act, 1944, S. 11-A(1) 

[17] See Central Excise Act, 1944, S. 11-A(4) 

[18] http://www.scconline.com/DocumentLink/1OzBQOxZ.

[19] http://www.scconline.com/DocumentLink/EO3l1CkL.

[20] http://www.scconline.com/DocumentLink/r556YlOs.

[21] See Maharashtra Goods and Services Tax Act, 2017, S. 174(g)

[22] 2019 SCC OnLine Ker 973

[23] 2018 SCC OnLine Kar 3887

[24] 2018 SCC OnLine Gau 1457

[25] Preston India (P) Ltd. v. State of Gujarat, 2020 SCC OnLine Guj 3048

[26]  Prof. Henlen Xanthaki, Thornton’s Legislative Drafting, Bloomsbury Professional, 5th Edn., 2013 (as cited in Sheen Golden Jewels (India) (P) Ltd. V. State Tax Officer, supra note 22, para 98).

[27] <https://ibbi.gov.in/BLRCReportVol1_04112015.pdf>.

[28] http://www.scconline.com/DocumentLink/k84vmP4Y.

[29]  http://www.scconline.com/DocumentLink/f2dr6UL1 S. 243, IBC, 2016.

[30] Sick Industrial Companies (Special Provisions) Repeal Act of 2003 notified on 1-12-2016

[31] http://www.scconline.com/DocumentLink/30VFrXzu.

[32] S. 255 of the Code read with Sch. 11, provides for about 36 amendments to the Companies Act, 2013.

[33] http://www.scconline.com/DocumentLink/bK498A3y.

[34] http://www.scconline.com/DocumentLink/z7lc38J9.

[35] http://www.scconline.com/DocumentLink/rYQ78CX4

[36] http://www.scconline.com/DocumentLink/pm3Rt2A0

[37] See Rr. 4 and 5 of the Companies (Transfer of Pending ProFceedings) Rules, 2016

[38] https://barandbench.com/madras-hc-stays-winding-up-proceedings-in-nissan-renault-case/.

[39] http://www.scconline.com/DocumentLink/e2E5pU46.

[40]  2017 SCC OnLine NCLT 547

[41] 2017 SCC OnLine NCLT 7586

[42] 2017 SCC OnLine NCLT 16255

[43] 2018 SCC OnLine NCLT 813

[44] 2017 SCC OnLine Bom 421

[45] 2018 SCC OnLine Bom 1952  .

[46] http://www.scconline.com/DocumentLink/Kp5IKPzm.

[47] http://www.scconline.com/DocumentLink/Q8FHMgT3.

[48] http://www.scconline.com/DocumentLink/8et977Qj.

[49] Report of the Insolvency Committee, March 2018, Para 25.7 accessed at: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf.

[50] http://www.scconline.com/DocumentLink/z7lc38J9.

[51] Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 http://www.scconline.com/DocumentLink/4mkp5CaB, S. 39 – Amendment of Section 434 of CA 2013: “Provided further that any party or parties to any proc eedings relating to the winding up of companies pending before any Court immediately before the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, may file an application for transfer of such proceedings and the Court may by order transfer such proceedings to the Tribunal and the proceedings so transferred shall be dealt with by the Tribunal as an application for initiation of corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.”

[52] (2019) 18 SCC 549

[53]  2019 SCC OnLine Del 10399

[54] 2020 SCCOnline SC 1025

[55] (2019) 18 SCC 549

[56] Companies (Transfer of Pending Proceedings) Second Amendment Rules, 2017, Ministry of Corporate Affairs, Notification dated 29-6-2017

[57] R. 5 http://www.scconline.com/DocumentLink/bK498A3y; The proviso states that “Provided also that where a petition relating to winding up of a company is not transferred to the Tribunal under this rule and remains in the High Court and where there is another petition under cl. (e) of Section 433 of the Act for winding up against the same company pending as on 15-12-2016, such other petition shall not be transferred to the Tribunal, even if the petition has not been served on the respondent..”

[58] The portion highlighted in bold is the suggested amendment

[59] http://www.scconline.com/DocumentLink/N7O69Zxv.

[60] http://www.scconline.com/DocumentLink/9ajA4z9b.

[61] See, S. 8 (reference to arbitration) , S. 9 (grant of interim measures) , S. 11 (appointment of arbitrator) , S. 34 (Setting aside of arbitral award), S. 36 (enforcement of awards)

[62] http://www.scconline.com/DocumentLink/27KJ0N1c.

[63] 2016 SCC OnLine Cal 1257

[64] 2017 SCC OnLine Del 6402

[65] 2016 SCC OnLine Bom 16027

[66] (2018) 6 SCC 287

[67] Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India

accessed at <http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf>.

[68] Unless parties agree otherwise the Amendment Act, 2015 shall not apply to the following:

(1) arbitral proceedings that have commenced prior to the Amendment Act, 2015 coming into force i.e. prior to 23-10-2015; (2) -court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act, 2015.

[69] (2018) 6 SCC 287 

[70] 2019 SCC OnLine SC 1520, Decided on 27th November, 2019

[71] Craies on Legislation, Sweet & Maxwell, South Asian Edn. 2010, p. 399 (cited in Sheen Golden Jewels (India) (P) Ltd. v. State Tax Officer, supra note 22,para 97).