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).

Op EdsOP. ED.

Introduction

  1. This article analyses the following issues arising from the Supreme Court (SC) decision in Indus Biotech Pvt. Ltd. v. Kotak India Venture (Offshore) Fund[1]:

(i) Should the adjudicating authority first decide the application under Section 8 of the Arbitration and Conciliation Act, 1996[2] (the A&C Act), before deciding the application under Section 7 of the Insolvency and Bankruptcy Code, 2016[3] (IBC)?

(ii) What should be the inquiry of National Company Law Tribunal (NCLT) under Section 7 IBC?

(iii) Was the procedure for appointment of Arbitral Tribunal followed?

Relevant facts 

  1. 4 entities of Kotak Fund (Kotak) entered into 4 separate share subscription agreement (SSSA) with Indus Biotech Private Limited (Indus).
  2. Kotak subscribed to certain equity shares and optionally convertible redeemable preference shares (OCRPS) of Indus. According to Kotak, (i) Schedule J of SSSA specified that OCRPS were issued for a term of 20 years unless previously redeemed and cancelled or converted; (ii) Kotak also had an option to convert or seek redemption of OCRPS; and (iii) SSSA specified that at the end of the period specified, investment of Kotak is redeemable at internal rate of return (IRR) of 30% and if not redeemed, it will be treated as debt. Indus of course advance a different interpretation of these terms.
  3. According to Kotak, Indus failed to provide Kotak an exit by an agreed date by qualified initial public offering (QIPO). Therefore, Kotak exercised its right of redemption and asked Indus to make payment of Rs 367 crores as the redemption value of OCRPS.
  4. Indus did not make the payment. According to Kotak, as per the calculation and conversion formula to be followed while converting OCRPS into equity shares, Kotak should get 30% of the total paid-up share capital of Indus; while as per Indus, it should only be 10%.
  5. On 16-8-2019, one of the four entities of Kotak filed a petition before NCLT Mumbai, under Section 7[4] IBC, as a financial creditor claiming a default in payment of debt by Indus, a financial debtor, to initiate corporate insolvency resolution process (CIRP) against Indus.
  6. On 20-9-2019, Indus sent an arbitration notice to Kotak seeking to invoke arbitration under all the 4 SSSA. Kotak set up a defence that the notice was defective because (i) under the arbitration clause, Indus had no right to appoint an arbitrator; and (ii) there were 4 separate agreements providing for constitution of separate Arbitral Tribunal.
  7. On 6-11-2019, Indus filed an application, in the pending Section 7 IBC proceedings, under Section 8 of the A&C Act, to refer to dispute to arbitration. Indus had also filed an application seeking dismissal of Section 7 IBC proceedings as not maintainable.

Proceedings before NCLT

  1. The impugned order[5] of NCLT allowed Indus’ application under Section 8 of the A&C Act and dismissed Kotak’s Section 7 IBC application as a corollary.
  2. From the orders of NCLT, it is apparent that NCLT heard and decided the Section 8 application first and did not meaningfully engage or decide the Section 7 IBC application on merits. This article discusses why this approach is problematic.
  3. Kotak’s case before NCLT was:

(i) Existence of arbitration clause is not relevant, not a factor and cannot affect proceedings under Section 7 IBC;

ii) Section 7 IBC deals with subject-matter of insolvency which is non-arbitrable and in rem; and

(iii) Non-payment of redemption value of OCRPS is a default in payment of debt by Indus and, therefore, NCLT should admit the application under Section 7 IBC.

  1. Indus’ response was:

(i) Dispute pertains to valuation of Kotak’s OCRPS, which is arbitrable;

(ii) Indus is a debt-free, profitable company and is not in need of resolution; and

(iii) Investment of Kotak was in the share capital of Indus, by preference shares and Kotak is not a financial creditor.

  1. Without addressing the issue of maintainability i.e. whether Kotak is a financial creditor or whether there is a debt, NCLT Mumbai allowed[6] the application under Section 8 of the A&C Act. While allowing the application, NCLT made observations that:

(i) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;

(ii) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and

(iii) Petition for appointment of arbitrator filed by Indus is pending before the SC.

Proceedings before the Supreme Court

  1. There were 2 proceedings before the SC: (i) petition by Indus, common for the 4 SSSA, under Section 11[7] of the A&C Act for appointment of an Arbitral Tribunal; and (ii) special leave petition (and not appeal) by Kotak against the NCLT order. The SC appointed an Arbitral Tribunal and held:

(i) Mere filing of an application under Section 7 IBC does not make the proceeding in rem. It becomes in rem only on the date of admission; and

(ii) IBC overrides all other laws.

  1. Therefore, if there is an application under Section 8 of the A&C Act pending in a Section 7 IBC application which has not been admitted, the adjudicating authority will first decide Section 7 IBC application and ascertain if there is any default by the financial debtor. This will ensure that mere filing of an application under Section 8 of the A&C Act will now allow corporate debtor to delay the process. There will be no independent consideration of Section 8, A&C Act application dehors the Section 7 IBC application.
  2. The SC justified the NCLT’s approach where it allowed Section 8, A&C Act application and as a corollary rejected Section 7 IBC application, in the facts and circumstances of the case and “construed in the reverse”[8].

Should adjudicating authority first decide the application under Section 8 of the A&C Act, before deciding Section 7 IBC application?

  1. The SC held that if there is an application under Section 8 of the A&C Act pending in a Section 7 IBC application which has not been admitted, the adjudicating authority will first decide the Section 7 IBC application and ascertain if there is any default by the financial debtor. However, in the facts of Indus Biotech[9], the SC does not meaningfully engage with this issue.
  2. There was an application filed by Indus challenging the maintainability of Section 7 IBC proceeding. However, NCLT considered the Section 8, A&C Act application. This is evident from the order of NCLT.
  3. NCLT ought to have first decided whether it would admit Section 7 IBC proceeding. If it chose to admit it, the proceeding would become in rem and there would be no occasion for a pending Section 8, A&C Act application to survive or a future application to be maintainable. However, if it found that there is no default and hence no trigger for Section 7 IBC, there would have been no occasion to decide Section 8, A&C Act application as the main proceeding had terminated. Therefore, it is not easy to reconcile the conclusion of SC to uphold NCLT order of allowing Section 8, A&C Act application even after dismissing Section 7 IBC proceedings.
  4. The scope and inquiry of a Section 7 IBC application is different from the scope and inquiry of a Section 8, A&C Act application. The presence of an arbitration clause and existence of a dispute is relevant for the purpose of Section 9[10] IBC where an operational creditor approaches the court. It will be a bar to initiation of corporate insolvency resolution process. However, not in the case of Section 7 IBC. This is the main difference between Section 7 and Section 9 IBC.
  5. By deciding Section 8, A&C Act application first, NCLT did not actually conduct a proper inquiry under Section 7 IBC. Its inquiry was primarily directed to Section 8 application with a perfunctory mention of the default. This is evident from:

(a) NCLT recorded submissions of Indus in the Section 8 application first, followed by submissions of Kotak’s counsel.

(b) In para 3.1 of NCLT order[11], Kotak submitted that if Section 8 application is dismissed, Section 7 IBC matter should be heard on merits.

(c) In para 3.8[12], the order states “the principal argument in the present IA….

(d) In para 5.2[13] where NCLT records its findings, “[a]t the outset, we must say that the subject-matter of this IA – seeking a reference to arbitration in a petition filed under Section 7 of the IBC – is something that is res integra”.

(e) In para 5.5.[14], the question framed was “[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?”.

  1. The NCLT order extracts Section 238[15]IBC and wrongly concludes in paras 5.10 and 5.11 that the A&C Act will prevail over IBC. Apparently, the NCLT decided the Section 8, A&C Act application on this premise. This is contrary to law.
  2. Even Kotak in its written submissions before the SC argued that it was not heard on merits of Section 7 IBC by NCLT. This should have weighed with the SC. If NCLT did not hear the parties on merits of Section 7 IBC proceedings, the SC could have considered remanding the matter back to NCLT.

What should be the inquiry of NCLT under Section 7 IBC?

  1. The inquiry of NCLT ought to have been:

(i) Is Kotak a financial creditor?

(ii) Whether OCRPS constitute financial debt?

(a) Whether OCPRS issued with IRR of 30% constitute disbursal against consideration for time value of money as per Section 5(8)[16]IBC?

(b) Whether OCPRS constitute “any amount…having commercial effect of a borrowing” under Section 5(8)(f) IBC?

(c) Whether a shareholder can be a debtor and what is the nature of OCRPS?

       (iii) Whether there is a default?

      (iv) If Section 7 IBC application is allowed or rejected, what should be the fate of Section 8, A&C Act application? – not the reverse.

  1. Both NCLT and the SC proceeded on the understanding/assumption that Kotak is a financial creditor, to whom financial debt is due, but go on to find that there is no default yet. Both NCLT and SC did not engage in a meaningful analysis of default. There is also no analysis or finding of debt.
  2. This issue was raised in written submissions before the SC, but the SC in para 36[17] observed that:

36…“[t]he contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.”

  1. This issue should have formed the basis of the proceedings before NCLT. However, in para 5.5, the question framed by NCLT was “[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?”.
  2. If there is no financial debt, Kotak could not have maintained Section 7 IBC proceedings. The application should have been rejected and there should have been no occasion to even examine Section 8 application. According to Kotak, non-payment is a default which should trigger Section 7 IBC, while according to Indus payment cannot be made till the conversion formula calculation is finalised, hence, no default. Kotak relied on Clauses 5.1 and 5.2 of Schedule J to SSSA to argue that parties had agreed that redemption value shall constitute a debt outstanding by Indus to Kotak.
  3. NCLT in allowing the Section 8, A&C Act application was influenced by the following factors:

(i) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;

(ii) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and

(iii) Petition for appointment of arbitrator is pending before the SC.

  1. In paras 20 and 21[18], the SC agreed that NCLT’s exercise of finding no default is correct. It observed that:

(i) Yes, there is a debt including a clause in the agreement providing that redemption value shall constitute a debt;

(ii) There is a redemption date;

(iii) There were inconclusive discussions between the parties on the redemption value;

(iv)It was premature to arrive at a conclusion of default in payment of debt until the amount payable is determined; and

(v) It is not appropriate to find a default merely because Kotak made a claim as per the agreed date of redemption and filed a petition under Section 7 IBC.

Why is it not appropriate? Would a dispute between parties on the redemption value, postpone the trigger of default? The SC should have given reasons for its findings or the relevance of these questions.

  1. Let us test these factors – in the author’s opinion, none of these are relevant for an inquiry default under Section 7 IBC proceeding:

 (i) In para 27[19] of Monotrone Leasing (P) Ltd.v. PM Cold Storage (P) Ltd.[20], the National Company Law Appellate Tribunal (NCLAT) held that inability to pay debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.

(ii) Similarly, the SC in para 64 of Swiss Ribbons (P) Ltd. v. Union of India[21], observed that the legislative policy is to move away from the concept of “inability to pay debts” to “determination of default”. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation.

(iii) There is no connection between the value of redemption and a finding of default. If the debt is unpaid on the due date, it is default. If the Court’s reasoning is correct, a debtor has to simply create a dispute about the sum/amount to be paid and will escape Section 7 IBC.

(iv)The finding of default under Section 7 IBC is independent from the inquiry whether the subject-matter of the underlying dispute of valuation is capable of being resolved by arbitration.

  1. This decision is a missed opportunity for the SC to develop jurisprudence for issues like – can an agreement change the nature of a security – in this case the agreement specified that OCRPS will constitute debt upon redemption; and whether preference shares/OCRPS constitute financial debt under Section 7 IBC.

Was the procedure for appointment of Arbitral Tribunal followed?

  1. There are 2 issues here. First, Section 11 petition was filed by Indus but as per SSSA, Indus did not have a right to nominate an arbitrator. The agreed procedure had not failed, and Section 11 petition was premature. On this issue, the SC treated the affidavit by promoters (only promoters and Kotak had a right to nominate arbitrator), who had the right to nominate arbitrator, as sufficient to constitute an Arbitral Tribunal. The problem with this is that Indus had no locus standi to file Section 11 petition. Kotak argued that the arbitration notice is defective, and the petition is not in accordance with the arbitration agreement. This was an opportunity for the Court to decide whether Section 11 can be invoked by a party which does not have a right to nominate an arbitrator under the agreement. The author has not come across any decision on this issue. Additionally, such appointment of Arbitral Tribunal is contrary to settled position of law that procedure for appointment has to be followed strictly and appointment which is not in accordance with the procedure is void.
  2. Second, the SC thought it was fit to consider the nature of Arbitral Tribunal, because one agreement will give rise to ICA and other three to domestic arbitration. However, after flagging this issue, the SC does not meaningfully address it. In para 39[22], the SC appointed a single Arbitral Tribunal with same members but separately constituted for each agreement and left it open to the Tribunal to work out the modalities of conducting ICA separately and clubbing the remaining domestic arbitrations.
  3. In the author’s view, the SC could have considered clarifying whether this will be a composite arbitration which will result in 1 award or 4 arbitrations under 4 agreements with 4 separate awards. In absence of this, Kotak is likely to seek 4 separate awards from the Tribunal and Indus will seek a composite common award.

Conclusion

In the author’s view, the order of NCLT is not an order on merits of the Section 7 IBC application. If existence of dispute is not an inquiry for a Section 7 IBC proceeding and Section 7 IBC application has to be considered first, the SC should have considered setting aside the impugned order and remanded the matter to NCLT for deciding the Section 7 IBC proceedings on merits. The Court should, if an opportunity arises, consider clarifying that NCLT cannot decide Section 8, A&C Act application first and dismiss Section 7 IBC proceeding as a corollary or consequence.


*Advocate. Author can be reached at renu@renugupta.co.in

[1] 2021 SCC OnLine SC 268.

[2]  The Arbitration and Conciliation Act, 1996.

[3] The Insolvency and Bankruptcy Code, 2016.

[4] 7. Initiation of corporate insolvency resolution process by financial creditor.— (1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the adjudicating authority when a default has occurred:

*                               *                                     *

Explanation.— For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(emphasis supplied)

[5] Indus BioTech (P) Ltd. v. Kotak Venture Fund, 2020 SCC OnLine NCLT 1430 [NCLT Mumbai].

[6] Ibid.

[7]<http://www.scconline.com/DocumentLink/02bfnuC4>.

[8]Indus case, supra Note 1.

“36. In that circumstance though in the operative portion of the order dated 9-6-2020 the application filed under Section 8 of the Act,1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, since the conclusion by the adjudicating authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Section 8 of the Act, 1996 is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court. The contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.

                                                                                                                                                                (emphasis supplied)

[9] Supra Note 1.

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

[11]3.1. Mr Fredun E DeVitre, learned Senior Counsel for the respondent-financial creditor, submitted that the only issue to be decided in the present is this:

“Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an Arbitral Tribunal?”

If the answer is no, then the present IA should be dismissed, and the underlying company petition should be heard on merits.”

[12]3.8. The third aspect of Mr Fredun E DeVitre’s argument centred on the QIPO date. He submitted that in terms of the SSPA, the date was to be December 2011 or a date which is approved by three investors. The principal argument in the present  IA is that the respondent-financial creditor has not redeemed the OCRPS by 2011. In this regard, there was an amendment made to the SSPA in 2017, in terms of which the life of the agreement was extended by another ten years. The amendment retains the QIPO definition from the original document, since all other terms and conditions were retained. Therefore, Mr Fredun DeVitre argues, a fresh right of redemption by agreement was conferred on the respondent.”

(emphasis supplied)

[13]5.2. At the outset, we must say that the subject-matter of this IA – seeking a reference to arbitration in a petition filed under Section 7 IBC – is something that is res integra. The facts of the case are, however, undisputed, and therefore, we seek to address the points of law that need to be addressed. In our endeavour to arrive at a decision, we have tried to be guided by the decisions of the constitutional courts under other laws, and the underlying reasons in arriving at those decisions. The case law cited by both senior counsel is a good starting point in this quest.”

(emphasis supplied)

[14] Be that as it may, the question that really needs to be answered is this: Will the provisions of the Arbitration andConciliation Act, 1996 prevail over the provisions of the Insolvency and Bankruptcy Code, 2016? If so, in what circumstances?

[15]Section 238 IBC.

[16] Section 5(8) IBC.

[17]Indus case, supra Note 1. “36. In that circumstance though in the operative portion of the order dated 9-6-2020 the application filed under Section 8 of the Act, 1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, since the conclusion by the adjudicating authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Section 8 of the Act, 1996 is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court. The contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.”

(emphasis supplied)

[18]Indus case, supra note 1, paras 20 and 21.

20. Therefore, in a fact situation of the present nature when the process of conversion had commenced and certain steps were taken in that direction, even if the redemption date is kept in view and the clause in Schedule J indicating that redemption value shall constitute a debt outstanding is taken note ; when certain transactions were discussed between the parties and had not concluded since the point as to whether it was 30 per cent of the equity shares in the company or 10 per cent by applying proper formula had not reached a conclusion and thereafter agreed or disagreed, it would not have been appropriate to hold that there is default and admit the petition merely because a claim was made by Kotak Venture as per the originally agreed date and a petition was filed. In the process of consideration to be made by the adjudicating authority the facts in the particular case are to be taken into consideration before arriving at a conclusion as to whether a default has occurred even if there is a debt in strict sense of the term, which exercise in the present case has been done by the adjudicating authority.

  1.  In such circumstance if the adjudicating authority finds from the material available on record that the situation is not yet ripe to call it a default, that too if it is satisfied that it is profit-making company and certain other factors which need consideration, appropriate orders in that regard would be made; the consequence of which could be the dismissal of the petition under Section 7 of IB Code on taking note of the stance of the corporate debtor. As otherwise if in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in planned manner may also be pushed to the corporate insolvency resolution process and get entangled in a proceeding with no point of return. Therefore, the adjudicating authority certainly would make an objective assessment of the whole situation before coming to a conclusion as to whether the petition under Section 7 of IB Code is to be admitted in the factual background. Dr Singhvi, however contended, that when it is shown the debt is due and the same has not been paid the adjudicating authority should record default and admit the petition. He contends that even in such situation the interest of the corporate debtor is not jeopardised inasmuch as the admission orders made by the adjudicating authority is appealable to the NCLAT and thereafter to the Supreme Court where the correctness of the order in any case would be tested. We note, it cannot be in dispute that so would be the case even if the adjudicating authority takes a view that the petition is not ripe to be entertained or does not constitute all the ingredients, more particularly default, to admit the petition, since even such order would remain appealable to the NCLAT and the Supreme Court where the correctness in that regard also will be examined.”

                                                                                                                                                                                                          (emphasis supplied)

[19] 2020 SCC OnLine NCLAT 581.   “27. We are bound to emphasise that a presumption cannot be drawn merely on the basis that a company, being solvent, cannot commit any default. As observed in financial and economic parlance, the inability to payoff debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.”

                                                                                                                                                                                (emphasis supplied) 

[20]2020 SCC OnLine NCLAT 581. Civil appeal and a review both were dismissed by the Supreme Court.

[21] (2019) 4 SCC 17

64. The trigger for a financial creditor’s application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy.”

                                                                                                                                                                                  (emphasis supplied)

[22]Indus case, supra Note 1. “39. A perusal of the arbitration agreement indicates that the arbitration shall be held at Mumbai and be conducted by three arbitrators. For the purpose of appointment KIVF I, KEIT and KIVL are to jointly appoint one arbitrator and the promoters of Indus Biotech Private Limited, to appoint their arbitrator. In the second agreement dated 20-7-2007, “KMIL” as the investor is on the other side. In the third agreement dated 20-7-2007, “KIVFI” as the investor is on the other side and in the fourth agreement dated 9-1-2008 it has the same clause as in the first agreement. The two arbitrators who are thus appointed shall appoint the third arbitrator who shall be the Chairperson. Recital (c) in the different agreements though refers to each of the entity in  Kotak Investment Venture and amount invested in shares is referred to, it is provided therein that the equity shares and preference shares subscribed by KMIL, KIVF I, KEIT and KIVL are hereafter collectively referred to as the “financial investors shares”. If the said aspect is taken into consideration keeping in view the nature of the issues involved being mainly with regard to the conversion of preference shares into equity shares and the formula to be worked thereunder, such consideration in the present facts can be resolved by the Arbitral Tribunal consisting of same members but separately constituted in respect of each agreement. It will be open for the Arbitral Tribunal to work out the modalities to conduct the proceedings by holding separate proceedings in the agreement providing for international arbitration and by clubbing the domestic disputes. All other issues which have been raised on merits are to be considered by the Arbitral Tribunal and therefore they have not been referred to in this proceedings.”

                                                                                                                                                               (emphasis supplied)

Op EdsOP. ED.

Introduction

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

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

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

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

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

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

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

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

Proposed solution: A middle ground?

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

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

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

Insights from the United States and the United Kingdom

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

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

Conclusion

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


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

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

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

[3] Insolvency and Bankruptcy Code, 2016.

[4] Ibid, Section 3(7)

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

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

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

[8]IBC, Section 224.

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

[10] Supra Note 5, 347.

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

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

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

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

Case BriefsSupreme Court

Supreme Court: Adding to the series of verdicts on the Insolvency and Bankruptcy Code, 2016, the bench of L. Negaswara Rao and S. Ravindra Bhat* has upheld the legality of the notification dated 15.11.2019 which notified provisions of Part III of the Code only in respect of personal guarantors to corporate debtors and has held that approval of a resolution plan does not ipso facto discharge a personal guarantor to a corporate debtor of her or his liabilities under the contract of guarantee.

What was under challenge?

The provisions of IBC were brought into force through different notifications issued on different dates.

The impugned notification dated 15.11.2019 read as:

“In exercise of the powers conferred by sub-section (3) of section I of the Insolvency and Bankruptcy Code. 2016 (31 of 2016). the Central Government hereby appoints the 1st day of December,2019 as the date on which the following provisions of the said Code only in so far as they relate to personal guarantors to corporate debtors. shall come into force:

(1) clause (e) of section 2;

(2) section 78 (except with regard to fresh start process) and section 79;

(3) sections 94 to 187 (both inclusive);

(4) clause (g) to clause (i) of sub-section (2) of section 239;

(5) clause (m) to clause (zc) of sub-section (2) of section 239;

(6) clause (zn) to clause (zs) of’ sub-section (2) of section 240; and

(7) Section 249.”

The validity of a notification dated 15.11.2019 issued by the Central Government which notified provisions of Part III of the Code only in respect of personal guarantors to corporate debtors, was under challenge. Part III of the Code governs “Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms”.

Why was it challenged?

It was argued before the Court that the executive government could not have selectively brought into force the Code and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors.   

(i) There is no intelligible differentia or rational basis on which personal guarantors to corporate debtors have been singled out for being covered by the impugned provisions, particularly when the provisions of the Code do not separately apply to one sub-category of individuals, i.e., personal guarantors to corporate debtors. Rather, Part III of the Code does not apply to personal guarantors to corporate debtors at all.

(ii) the provisions of Part III of the Code, which are partly brought into effect by the impugned notification, provide a single procedure for the insolvency resolution process of a personal guarantor, irrespective of whether the creditor is a financial creditor or an operational creditor. Treating financial creditors and operational creditors on an equal footing in Part III of the Code is in contrast to Part II of the Code, which provides different sets of procedures for different classes of creditors.

“Unlike delegated legislation, they say, conditional legislation is a limited power which can be exercised once, in respect of the subject matter or class of subject matters. As long as different dates are designated for bringing into force the enactment, or in relation to different areas, the executive acts 41 within its powers. However, when it selectively does so, and segregates the subject matter of coverage of the enactment, it indulges in impermissible legislation.”

Analysis

Why does the impugned Notification not amount to impermissible and selective application of provisions of the Insolvency and Bankruptcy Code?

Insolvency proceedings relating to individuals is regulated by Part-III of the Code. Before the amendment of 2018, all individuals (personal guarantors to corporate debtors, partners of firms, partnership firms and other partners as well as individuals who were either partners or personal guarantors to corporate debtors) fell under one descriptive description under the unamended Section 2(e). The unamended Section 60 contemplated that the adjudicating authority in respect of personal guarantors was to be the NCLT. Yet, having regard to the fact that Section 2 brought all three categories of individuals within one umbrella class as it were, it would have been difficult for the Central Government to selectively bring into force the provisions of part –III only in respect of personal guarantors. It was here that the Central Government heeded the reports of expert bodies which recommended that personal guarantors to corporate debtors facing insolvency process should also be involved in proceedings by the same adjudicator and for this, necessary amendments were required. Consequently, the 2018 Amendment Act altered Section 2(e) and subcategorized three categories of individuals, resulting in Sections 2(e), (f) and (g).

The earlier notification dated 30.11.2016 had brought the Code into force in relation to entities covered under Section 2(a) to 2(d).

The scheme of the Code always contemplated that overseas assets of a corporate debtor or its personal guarantor could be dealt with in an identical manner during insolvency proceedings, including by issuing letters of request to courts or authorities in other countries for the purpose of dealing with such assets located within their jurisdiction. The impugned notification authorises the Central Government and the Board to frame rules and regulations on how to allow the pending actions against a personal guarantor to a corporate debtor before the Adjudicating Authority.

“There is sufficient indication in the Code- by Section 2(e), Section 5(22), Section 60 and Section 179 indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors.”

The intent of the notification, facially, is to allow for pending proceedings to be adjudicated in terms of the Code.

Section 243, which provides for the repeal of the personal insolvency laws has not as yet been notified. Section 60(2) prescribes that in the event of an ongoing resolution process or liquidation process against a corporate debtor, an application for resolution process or bankruptcy of the personal guarantor to the corporate debtor shall be filed with the concerned NCLT seized of the resolution process or liquidation. Therefore, the Adjudicating Authority for personal guarantors will be the NCLT, if a parallel resolution process or liquidation process is pending in respect of a corporate debtor for whom the guarantee is given.

The same logic prevails, under Section 60(3), when any insolvency or bankruptcy proceeding pending against the personal guarantor in a court or tribunal and a resolution process or liquidation is initiated against the corporate debtor.

“Thus if A, an individual is the subject of a resolution process before the DRT and he has furnished a personal guarantee for a debt owed by a company B, in the event a resolution process is initiated against B in an NCLT, the provision results in transferring the proceedings going on against A in the DRT to NCLT.”

Hence, it was safe to conclude that the Parliamentary intent was to treat personal guarantors differently from other categories of individuals and hence, the impugned Notification does not amount to impermissible and selective application of provisions of the Insolvency and Bankruptcy Code.

“The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals, for whom the Adjudicating authority was common with the corporate debtor to whom they had stood guarantee.”

The fact that the process of insolvency in Part III is to be applied to individuals, whereas the process in relation to corporate debtors, set out in Part II is to be applied to such corporate persons, does not lead to incongruity. On the other hand, there appear to be sound reasons why the forum for adjudicating insolvency processes – the provisions of which are disparate- is to be common, i.e through the NCLT. As was emphasized during the hearing, the NCLT would be able to consider the whole picture, as it were, about the nature of the assets available, either during the corporate debtor’s insolvency process, or even later; this would facilitate the CoC in framing realistic plans, keeping in mind the prospect of realizing some part of the creditors’ dues from personal guarantors.

Hence, the impugned notification is not an instance of legislative exercise, or amounting to impermissible and selective application of provisions of the Code. There is no compulsion in the Code that it should, at the same time, be made applicable to all individuals, (including personal guarantors) or not at all.

Does approval of a resolution plan ipso facto discharge a personal guarantor of liabilities?

The sanction of a resolution plan and finality imparted to it by Section 31 does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself. However, this court has indicated, time and again, that an involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability.

Hence, the approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee and,

“the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.”

[Lalit Kumar Jain v. Union of India, 2021 SCC OnLine SC 396, decided on 21.05.2021]


Judgment by: Justice S. Ravindra Bhat

Know Thy Judge| Justice S. Ravindra Bhat

For petitioners: Senior Advocates Harish Salve, P.S. Narasimha, Sudipto Sarkar and Advocates Rohit Sharma, Pruthi Gupta, Rishi Raj Sharma, and Manish Paliwal

For Union of India: Attorney General K.K. Venugopal, Solicitor General of India Tushar Mehta,

For State Bank of India: Senior Advocate Rakesh Dwivedi

For other respondents: Senior Advocates K.V. Vishwanathan and Ritin Rai

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Division Bench of Justice Venugopal M. (Judicial Member) and V.P. Singh (Technical Member) dismissed an appeal filed against the order of the National Company Law Tribunal, Hyderabad (“NCLT”), whereby the NCLT had admitted an application filed by the Financial Creditor−Punjab National Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for initiation the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor−Saptarishi Hotels (P) Ltd. The appellant was the promoter/suspended director of Saptrishi Hotels (P) Ltd.

The Corporate Debtor is a ”special purpose vehicle” incorporated to undertake a certain public-private partnership project with Government of Telangana. The Corporate Debtor availed of a loan facility from a ‘consortium’ which included Punjab National Bank (“PNB”). Having defaulted in repaying the loan amount within time, PNB filed a Section 7 IBC application which was admitted by the NCLT.

Corporate Debtor’s Argument

The Corporate Debtor raised the issue of limitation. It was contended that the NCLT erred in admitting the application since it was barred by limitation. The Corporate Debtor took a stand that the ‘date of default’ for all facilities extended by PNB was 30-3-2016, whereas the Section 7 application was filed by PNB only on or after 18-7-2019. According to the Corporate Debtor, the period of limitation (3 years) for filing the Section 7 application expired on 29-6-2019. Therefore, PNB’s application, having been filed beyond the 3 years’ period of limitation, was liable to be rejected.

Financial Creditor’s Argument

The Punjab National Bank refuted Corporate Debtor’s argument by stating that the Corporate Debtor has not filed two a vital documents, viz. ‘Balance and Security Confirmation Letter’ dated 20-2-2018 executed by the Corporate Debtor, which amount to an ‘acknowledgment of debt’ as contemplated under Sections 18 and 19 of the Limitation Act, 1963.

Discussion

Insolvency and Bankruptcy Code, 2016

For deciding the appeal, the Appellate Tribunal referred to certain provisions of IBC, including:

(i) Section 3(6)(a), which defines “claim” meaning a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

(ii) Section 3(8), which defines “Corporate Debtor” meaning a Corporate person who owes a debt to any person.

(iii) Section 3(10), which defines “Creditor” meaning any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

(iv) Section 3(11), which defines “debt” meaning ‘a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

(v) Section 3(12), which defines “default” meaning non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

Acknowledgment − Limitation Act, 1963

The Appellate Tribunal noted that Section 18 (Effect of acknowledgment in writing) of the Limitation Act does not enjoin that an ‘acknowledgement’ has to be in any particular form or to be express. The Appellate Tribunal further said that it must be borne in mind that an ‘acknowledgement’ is to be examined resting upon the attendant circumstances by an admission that the writer owes a ‘debt’. No wonder, an ‘unconditional acknowledgement’ implies a promise to pay because that is the natural inference if there is no other contrary material.

Further, to treat the writing signed by an individual as an ‘acknowledgement’, the person acknowledging must be conscious of his liability and the commitment ought to be made in respect of that liability.

Decision

After a careful consideration of respective contentions projected on either side, the Appellate Tribunal held that considering the prime fact that the ‘guarantors’ in respect of the Corporate Debtor had executed a Balance and Security Confirmation Letter (confirming the correctness of debit balance) and keeping in mind yet another fact that a certain part payment was made by the Corporate Debtor on 15-10-2018 towards its liability to Punjab National Bank, the irresistible conclusion was that there was an acknowledgment of debt as per Sections 18 and 19 of the Limitation Act in respect of the loan account of the Corporate Debtor.

Therefore, the Appellate Tribunal dismissed the appeal filed by the Corporate Debtor holding that the NCLT rightly admitted the Section 7 application filed by the Financial Creditor. [Lakshmi Narayan Sharma v. Punjab National Bank, 2021 SCC OnLine NCLAT 155, decided on 12-5-2021]

Op EdsOP. ED.

I. Prelude

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

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

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

II. Existing mechanism for cross-border insolvency under IBC

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

Section 234: Agreements with foreign countries

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

Section 235: Letter of request

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

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

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

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

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

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

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

The “access” principle

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

The “recognition” principle

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

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

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

The “relief” principle

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

The “cooperation” and “coordination” principle

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

V. Concluding remarks

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


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

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

[1] Insolvency and Bankruptcy Code, 2016.

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

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

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

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

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

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

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

[9] Id. at 4.

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

[11] Supra Note at 4.

[12] Supra Note at 5.

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

[14] (1890) 25 QBD 399.

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

[16] (1908) 1 KB 675.

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

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

[19] No. 07/11447.

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

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

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

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

[24] Id., § 1520.

Case BriefsSupreme Court

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

Resolution Plan – When becomes binding?

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

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

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

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

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

2019 Amendment – Nature and effect of  

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

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

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

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

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

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

“Creditor” – If covers Government

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

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

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

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

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

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

Key findings

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

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

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

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

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


*Judgment by Justice BR Gavai

Know Thy Judge| Justice B.R. Gavai

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

For respondents: Senior Advocate Gurukrishna Kumar, Advocate Prashant Bhushan

For State Authorities: Advocate V. Shekhar

 

 

Case BriefsSupreme Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Kamini Sharma, Editorial Assistant has put this story together 

*Judgment by: Justice Rohinton Fali Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearance before the Court:

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

For SREI: Adv. Abhijeet Sinha,

Case BriefsSupreme Court

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

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

Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


*Judgment by: Justice Dinesh Maheshwari

Case BriefsSupreme Court

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

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

IBC liquidation and Section 230 scheme: Legislative history

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

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

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

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

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

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

Scope of Section 230 of the Companies Act, 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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


*Judgement by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by:

For appellant: Advocates Sandeep Bajaj and Shiv Shankar Banerjee

For Respondent: Senior Advocates Amit Sibal and Gopal Jain

ALSO READ

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

Case BriefsSupreme Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


*Judgment by: Justice BR Gavai

Appearances before the Court by:

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

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

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

For RP: Senior Advocates Shyam Divan

For KIAL: Senior Advocate: Senior Advocate Neeraj Kishan Kaul

Case BriefsSupreme Court

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

Jurisdiction of the NCLT/NCLAT over contractual disputes

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

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

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

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

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

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

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

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

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

Ruling on facts 

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

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

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

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

The Court took further care to clarify that,

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

Conclusion

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

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

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

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

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

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


*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by”

For appellant: Senior Advocate Shyam Diwan and Advocate Ranjitha Ramachandran

For Respondent: Senior Advocate C U Singh and Nakul Dewan

Case BriefsSupreme Court

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

The Court held that

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

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

OBJECT AND INTERPRETATION OF SECTION 14 OF THE IBC

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

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

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

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

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

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

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

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

NATURE OF PROCEEDINGS UNDER CHAPTER XVII OF THE NEGOTIABLE INSTRUMENTS ACT

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

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

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


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellants: Senior Advocate Jayanth Muth Raj

For Respondent: Advocate Jayant Mehta

Case BriefsTribunals/Commissions/Regulatory Bodies

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

Who all are the applicants?

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

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

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

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

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

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

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

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

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

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

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

Analysis, Law and Decision

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

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

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

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

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

Natural Justice

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

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

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

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

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

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

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

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


Image credits of the aircraft: Business Today

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

Present appeal has been heard in ex-parte.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tribunal further added to its reasoning that

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

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

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