Insolvency and Bankruptcy Code 2016

Op EdsOP. ED.

With the introduction of the Insolvency and Bankruptcy Code 2016 (“the IBC”), the multiple Benches of the National Company Law Tribunal have been flooded with petitions (mainly under Sections 7 and 9 of IBC). Two features of the IBC found attraction with petitioners that invoked the jurisdiction of the NCLT: (i) the time-bound nature offered by the IBC vis-à-vis completion of resolution, revival and rehabilitation of companies; and (ii) the lack of discretionary jurisdiction provided to the NCLT whilst admitting/rejecting petitions. To elaborate, under the erstwhile winding-up regime, the High Courts could exercise its discretion in considering whether or not to wind up a company. Seeing as the NCLT was not assigned such discretionary jurisdiction, creditors have used the IBC as a tool for quick resolution of the debts due to them. However, serious questions of law are bound to arise when substituting a legal regime, especially to established legal credit and debt practices. The authors, being regular practitioners before the NCLT have sought to address some of these questions.

Issues

  1. Can the National Company Law Tribunal pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016[1] against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956[2]?

If yes, then:

  1. Is it necessary to obtain leave from the High Court concerned prior to admitting a petition under inter alia Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016?

Analysis

  1. One of the reasons why the Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted was to ensure speedy resolution of insolvent and bankrupt companies in India. The erstwhile regime of winding up under the provisions of the Companies Act, 1956 and the Sick Industrial Companies (Special Provisions) Act, 1985[3] (“SICA”) were seemingly ineffective insofar as providing a timely resolution of such companies that were unable to pay their debts are concerned. With no definitive timeline set out in the provisions of the Companies Act, 1956, winding up proceedings before the respective High Courts in India took up years in litigation (especially including appellate proceedings). The same could be said about the proceedings before the Board of Industrial and Financial Reconstruction (“BIFR”) under the provisions of SICA. In effect, the IBC is a successor statute to the provisions relating to winding up under the Companies Act, 1956 and SICA. In fact, as per the information published by the Official Liquidator attached to the Bombay High Court on its website, 1478 companies are currently undergoing liquidation under the provisions of the Companies Act, 1956. In case of one of them, Akhil Bharat Printers Ltd. , the order of winding up had been made on 22-6-1956 – making it amongst the first companies to be ordered to be wound up under the (then new and novel) Companies Act[4]. Needless to say, a need was felt to streamline the manner in which corporate insolvency could be dealt with. The SICA, as has been noted by the Supreme Court of India in Swiss Ribbons (P)   v. Union of India [5], also failed to ameliorate the situation and rather contributed to the creation of what  R.F. Nariman, J. referred to as a “defaulter’s paradise”[6].
  1. The path towards the IBC began in the year 1999 when the Central Government established the Justice Eradi Committee to formulate a framework to replace SICA, as it was felt insufficient and inefficient. The report of this committee culminated in the promulgation of the Companies (Amendment) Act, 2002, and the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. A framework was sought to be created within the Companies Act, 1956, itself for restructuring of stressed corporations. However, the relevant portion of this amendment, and consequently the entirety of the Sick Industrial Companies (Special Provisions) Repeal Act of 2003, was not brought into force due to several legal challenges and hurdles, including challenges to the formation and constitution of National Company Law Tribunals.
  1. The framework mooted in the amendment, however, continued to evolve notwithstanding that it was stillborn. The framework proposed in the Companies (Amendment) Act, 2002, found its way, with some modifications, into the Companies Act, 2013. However, the legal challenges to the National Company Law Tribunals persisted and Chapter XIX of the Companies Act, 2013, which was to be the comprehensive framework for corporate insolvency could not be enforced. Ultimately, the Bankruptcy Law Reforms Committee submitted its report[7] to the Government of India on 4-11-2015 and this report became the basis for the IBC. As things would transpire, the IBC came into force by repealing Chapter XIX of the Companies Act, 2013, before it could be enforced.
  1. Since its enactment, the IBC has been, largely, well received and has even been considered as one the reasons attributed to India’s rise in the Ease of Doing Business Index[8]. However, like most newly enacted legislations in India, several questions of law arose from various proceedings before the National Company Law Tribunal (“ NCLT”), the National Company Law Appellate Tribunal, the High Courts and the Supreme Court of India. One of these questions of law is the first issue that the authors shall address, can the NCLT pass an order inter alia admitting a petition under Sections 7, 9 or 10 of the IBC against a company even after the passing of an order by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956? While there are multiple judgments of our courts and tribunals that address this question, not all lawyers and Judges in our country seem to have a unified answer to this question.

5. Pre-IBC Jurisprudence

5.1 Before referring to judgments that address the first issue, it is of relevance to understand an aspect of erstwhile winding-up regime vis-à-vis the SICA. For example, a question of law akin to the aforementioned first issue arose in Real Value Appliances Ltd. Canara Bank[9] (“Real Value Appliances”), where a Division Bench of the Supreme Court of India held inter alia that the intent of the SICA is to:

(a) revive and rehabilitate a company before it can be wound up under the provisions of the Companies Act, 1956;

(b) ensure that no proceedings against the assets of a company are taken before a decision has been arrived at by BIFR for in the event a company’s assets are sold, or if a company is wound up it may become difficult later to restore status quo ante.

The relevant portions of the judgment delivered by the Supreme Court of India in Real Value Appliances[10] have been culled out and reproduced hereinbelow:

“23.… the [SICA] is intended to revive and rehabilitate sick industries before they can be wound up under the [Companies Act, 1956]. Whether the Company seeks a declaration that it is sick or some other body seeks to have it declared as a sick company, it is, in our opinion, necessary that the Company be heard before any final decision is taken under the Act. It is also the legislative intention to see that no proceedings against the assets are taken before any such decision is given by  BIFR for in case the Company’s assets are sold, or the Company wound up it may indeed become difficult later to restore the status quo ante…”

5.2 In Rishabh Agro Industries Ltd. P.N.B. Capital Services Ltd.[11] (“Rishabh Agro Industries”), a Division Bench of the Supreme Court of India, whilst following the holding in Real Value Appliances[12], held that a reference in terms of Section 15 of the SICA could be made to BIFR for revival/resolution of a company even after the passing of a winding up order by the High Court. Furthermore, the Supreme Court held that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is not a culmination of proceedings before the High Court concerned. The Court further noted that the passing of a winding up order under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956 is, in fact, the commencement of the process which only meets its end when an order of dissolution is passed under Section 481 of the Companies Act, 1956. The relevant portions of this judgment have been culled out and reproduced hereinbelow:

“9.… it cannot be said that … the provision of Section 22 [of the SICA] [which is para materia to Section 14 [of the IBC] would not be attracted after the order of winding up of the company is passed… the effect of [Section 22 of the SICA] would be applicable even after the winding-up order is passed…

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  1. It may also be noticed that winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings pending before the Company Judge but is in effect the commencement of the process. The ultimate order to be passed in such a petition is the dissolution of the company in terms of Section 481 of [the Companies Act, 1956] …”

5.3 In Madura Coats Ltd. Modi Rubber Ltd.[13] (“Madura Coats”), a Full Bench of the Supreme Court of India:

(a) affirmed the aforementioned holdings of its Division Bench judgments in Real Value Appliances[14] and Rishabh Agro Industries[15];

(b) held that once a reference was made to BIFR under Sections 15 and 16 of the SICA, the provisions of the SICA would come into play and would prevail over the provisions of the Companies Act, 1956. Therefore, in such circumstances, proceedings under the Companies Act, 1956 shall give way to proceedings under the SICA.

The relevant portions of Madura Coats[16] have been culled out and reproduced hereinbelow:

“20. While referring to the provisions of  SICA, this Court in Real Value [Appliances] […][17] […] held that [the] SICA is intended to revive and rehabilitate a sick industry before it can be wound up under [the Companies Act, 1956]. The legislative intention is to ensure that no proceedings against the assets of the company are taken before any decision is taken by BIFR because if the assets are sold or the company is wound up, it may become difficult to later restore the status quo ante…

                                    *                              *                      *

  1. … this Court in Rishabh Agro [Industries] […][18] took the view that it could not be said that the provisions of Section 22 of SICA would not be attracted after an order of winding up is passed. While referring to this section it was held that there was no doubt that the provision would be applicable even after the winding-up order is passed and no proceedings even thereafter could be taken under [the Companies Act, 1956]. It was noted that a winding-up order passed under [the Companies Act, 1956] is not the culmination of the proceedings before the Company Court but is in effect the commencement of the process which ultimately would result in the dissolution of the company in terms of Section 481 of [the Companies Act, 1956]…

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  1. From the above it is quite clear that different situations can arise in the process of winding up a company under [the Companies Act, 1956] but whatever be the situation, whenever a reference is made to BIFR under Sections 15 and 16 of SICA, the provisions of SICA would come into play and they would prevail over the provisions of [the Companies Act, 1956] and proceedings under [the Companies Act, 1956] must give way to proceedings under SICA.”

6. Post-IBC Jurisprudence

6.1 In Jotun India (P) Ltd. PSL Ltd.[19] (“Jotun II”), a Division Bench of the Bombay High Court whilst inter alia adjudicating the conflict of law between the provisions of the IBC and the Companies Act, 1956, held that the provisions of the IBC shall prevail over the provisions of the Companies Act, 1956. What is interesting to note here is that while adjudicating this question of law, the Bombay High Court drew a parallel with the provisions of the SICA and the holding of the Supreme Court of India in Madura Coats[20]. The relevant portions of the judgment of the Division Bench of the Bombay High Court in Jotun II[21] have been culled out and reproduced hereinbelow:

“35. A comparative analysis of the provisions of [the] SICA clearly indicates that under the provisions of Section 22 of [the] SICA once the proceeding was initiated, the other proceedings pending before the different forums were suspended. In fact, there was an injunction operating in case the jurisdiction under [the] SICA was invoked by a concerned party. The learned counsel for the appellant made efforts to persuade us that the provisions of [the] SICA and [the] IBC are not pari-materia legislations to make it applicable to the saved petitions under [the Companies Act 1956] …In case the forum [i.e. the NCLT] under the IBC fails to revive the company or to successfully complete the resolution plan, then whether the Company Court and the NCLT would go ahead simultaneously in liquidating the company and complete the winding up proceedings. This situation needs to be harmonized and balanced.

36.We may refer to observations made by the Supreme Court in respect of provisions of [the] SICA in [Madura Coats][22], in paras 27 and 28 which read as under:

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  1. There could be a situation where there are two special statutes operating in the field or a special statute and statute generally governing the field, which may be referred to as general law. Even if it is considered that in respect of subject-matter there are two special statutes operating, one [the Companies Act, 1956] and other [the] IBC […], we need to have a purposive approach and harmonious interpretation to the provisions of law. A harmonious and balanced approach is required to be adopted for the purpose of interpreting the IBC […] and the jurisdictional limitations and areas operating in respect of saved petitions before the Company Court.
  2. The purpose of the IBC […] and the NCLT hearing petitions is primarily to revive the company by having a resolution method. Whereas in the winding up petition pending before the Company Court, ultimate approach and object is to wound up the company. Even under the IBC, if efforts to revive the company fails, then the liquidation proceedings get initiated under Chapter III of the IBC […]. Taking into consideration the statutory scheme of the IBC […] we are of the view that [the] NCLT constitutes a separate and distinct forum and it cannot be attributed to be a subordinate forum to the Company Court as constituted under [the Companies Act, 1956].
  3. The general legal principles of interpretation of statute state that the general law should yield to the special law. In the context of the present statute i.e. [the] IBC […], we are of the view that [the Companies Act, 1956] could be treated as general law and IBC […] to be a special statute to the extent of the provisions relating to revival or resolution of the company as per provision under Chapter II of the IBC. Even if [the Companies Act, 1956] and the IBC […] are considered as special statutes operating in their respective field, we are of the view that the IBC […] being later enactment and in view of the statement and objects and the purpose for which it was enacted, the provisions relating to revival/resolution of the company incorporated under Chapter II will have to be given primacy over the provisions of the winding up proceeding pending before the Company Courts […]”

6.2 In Bank of Baroda Topworth Pipes & Tubes (P) Ltd.[23] (“Topworth Pipes & Tubes”), a Division Bench of the NCLT (Mumbai Bench) whilst inter alia relying on Rishabh Agro Industries[24], Madura Coats[25] and Jotun II[26], admitted a petition filed under Section 7 of the IBC against a company even after the passing of an order directing the commencement of winding up against the same company. The underlying inspiration for admitting the petition in Topworth Pipes & Tubes[27] by the NCLT (Mumbai Bench) appears to be drawn from the reasoning adopted by the Supreme Court of India in Rishabh Agro Industries[28], viz the passing of an order under Section 433(e) r/w Section 434 of the Companies Act, 1956 inter alia directing the commencement of winding up is in not a culmination of proceedings, rather the proceedings culminate when an order of dissolution under Section 481 of the Companies Act, 1956 is passed. The NCLT (Mumbai Bench) did, however, note that in view of the provisions of Section 11(d) of the IBC, a petition filed under Section 10 of the IBC cannot be admitted should a winding up order under Section 433(e) r/w Section 434 of the Companies Act, 1956 already have been passed. The relevant portions of Topworth Pipes & Tubes[29] have been culled out and reproduced hereinbelow:

“8… the Division Bench of the Bombay High Court [in Jotun II][30] […] held as under:                                                                                                                                                      ***

  1. The [IBC] itself contemplates a bar on filing an application for insolvency resolution under specific circumstances by certain entities. Section 11(d) of the [IBC] inter alia prohibits a corporate debtor against which a liquidation order has been passed from making an application for initiating corporate insolvency resolution process… The intention of the legislation is clear from Section 11(d) of the [IBC], which only bars insolvency proceedings against a corporate debtor, after an order of liquidation against it, in case of an application by the said corporate debtor itself and conspicuously omits any such restriction for applications by financial or operational creditors.

                                                    ***

  1. The Supreme Court in [Rishabh Agro Industries][31] has held that:

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  1. The aforesaid findings in the matter of [Rishabh Agro Industries][32] have been relied upon by the Supreme Court in para 25 in [Madura Coats][33]

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  1. In light of the aforesaid, the position seems settled that an order of winding up or liquidation in no manner means a culmination of proceedings and it is only once an order under Section 481 of [the Companies Act, 1956] is passed for dissolution of the company that the proceedings culminate.

15.… not only can a company be revived post an order of winding up but the ‘proceedings’ post an order of winding up would be covered under the term ‘proceedings’ under Section 14 of the [IBC] and would necessarily be stayed upon admission of an insolvency application under the [IBC].

  1. The question of applicability of the moratorium under SICA to ‘proceedings’ post a winding up order was before the Supreme Court in [Madura Coats][34]. The Supreme Court has held as under: […]”

18.The  Supreme Court in  [Rishabh Agro Industries][35] examined the operation of the moratorium under the SICA to ‘proceedings’ post winding up in greater detail and held as under:

                           *                         *                     *

21… The object of the Code, as is evident from its “Statement and Objects” is to provide a consolidated legal framework for insolvency resolution in a time bound manner. Under the winding up provisions under [the Companies Act, 1956] a single creditor, whose debt was undisputed could wind up a company, thus bringing about its untimely financial death of a debtor. The [IBC] on the other hand mandatorily requires that an attempt at revival be made by appointing an [Interim Resolution Professional] to examine whether such company can be revived…”

22.… It is hence clear that the object of the [IBC] would be defeated in its entirety if a petition for insolvency resolution could not be admitted after an order of winding up has been passed. As discussed above, till an order under Section 481 of [the Companies Act, 1956] is passed there is scope to revive a company…

23.… Hence, it could never be the intention of the legislature that despite the existence of the provisions of [the IBC], a company should be wound up without giving it a chance for resolution of its insolvency…

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  1. … We hereby admit this petition filed under Section 7 of [the IBC] against the corporate debtor for initiating corporate insolvency resolution process against the corporate debtor and declare moratorium with consequential directions…”

6.3 In Forech India Ltd. Edelweiss Assets Reconstruction Co. Ltd.[36] (“Forech India”), a Division Bench of the Supreme Court of India, while validating Jotun II[37], held that the bar imposed vide Section 11(d) of the IBC only applies to petitions under Section 10 of the IBC and not to petitions under Sections 7 or 9. The relevant portions of Forech India[38] have been culled out and reproduced hereinbelow:

“20. … We may hasten to add that the law declared [in Jotun II[39]] has our approval.

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  1. … Section [11(d)] is of limited application and only bars a corporate debtor from initiating a petition under Section 10 of the [IBC] in respect of whom a liquidation order has been made. From a reading of this section, it does not follow that until a liquidation order has been made against the corporate debtor, an insolvency petition may be filed under Section 7 or Section 9 as the case may be, as has been held by the [National Company Law] Appellate Tribunal…”

7. Addressing the 1st Issue

7.1 What can be stated without any uncertainty is that in view of the specific provisions of Section 11(d) read with Topworth Pipes & Tubes[40] and Forech India[41], is that a petition filed under Section 10 of the IBC against a company cannot be admitted by the NCLT in the event a prior order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company.

7.2 However, a harmonious reading of Real Value Appliances[42], Rishabh Agro Industries[43], Madura Coats[44], Jotun II[45], Topworth Pipes & Tubes[46] and Forech India[47] seems to suggest that petitions filed against a company under Sections 7 or 9 can be admitted by the NCLT even after the passing of an order directing the commencement of winding up is passed under Section 433(e) r/w Section 434 of the Companies Act, 1956 against the same company unless an order of dissolution has already been passed under Section 481 of the Companies Act, 1956.

7.3 It is also noteworthy to mention the IBC, in a sense, is a successor statute to the SICA insofar as resolution, revival and rehabilitation are concerned. The Supreme Court in Real Value Appliances[48], Rishabh Agro Industries[49] and Madura Coats[50] has unequivocally held that a reference could be made to BIFR under the provisions of the SICA even after the passing of a winding up order. Considering this, the proposition that a company that has been ordered to be wound up (in accordance with inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956) cannot be resolved, revived or rehabilitated under the provisions of the IBC, but could be under the provisions of the SICA seem to be manifestly arbitrary and wholly unjust for the simple reason that such a company would lose an opportunity to resolve, revive and/or rehabilitate itself before being wound up/liquidated.

7.4 In summation, the specific answer to the 1st issue is: Yes, the NCLT can pass an order inter alia admitting a petition under Sections 7 or 9 of the IBC against a company even after the passing of an order passed by the High Court concerned inter alia directing the commencement of winding up of the same company under inter alia Section 433(e) r/w Section 434 of the Companies Act, 1956. However, the NCLT cannot do the same in a petition filed under Section 10 of the IBC.

7.5 Of course, the matter does not necessarily end here. The IBC, through Section 255 read with the Eleventh Schedule, carried out several amendments to the Companies Act, 2013; including substitution of Section 434 of the Companies Act, 2013. The substituted Section 434 of the Companies Act, 2013 was also amended through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, and the Companies (Removal of Difficulties) Fourth Order, 2016. Section 434 of the Companies Act, 2013 now reads as below:

“434. Transfer of certain pending proceedings.- (1) On such date as may be notified by the Central Government in this behalf, —

(a) all matters, proceedings or cases pending before the Board of Company Law Administration (herein in this section referred to as the Company Law Board) constituted under sub-section (1) of Section 10-E of [the Companies Act, 1956], immediately before such date shall stand transferred to the [NCLT] and the [NCLT] shall dispose of such matters, proceedings or cases in accordance with the provisions of this Act;

(b) any person aggrieved by any decision or order of the Company Law Board made before such date may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Company Law Board to him on any question of law arising out of such order:

Provided that the High Court may if it is satisfied that the appellant was prevented by sufficient cause from filing an appeal within the said period, allow it to be filed within a further period not exceeding sixty days; and

(c) all proceedings under [the Companies Act, 1956], including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the [NCLT] and the [NCLT] may proceed to deal with such proceedings from the stage before their transfer:

Provided that only such proceedings relating to the winding up of companies shall be transferred to the Tribunal that are at a stage as may be prescribed by the Central Government:

Provided further that any party or parties to any proceedings 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 [NCLT] and the proceedings so transferred shall be dealt with by the [NCLT] as an application for initiation of corporate insolvency resolution process under the [IBC]:

Provided further that only such proceedings relating to cases other than winding-up, for which orders for allowing or otherwise of the proceedings are not reserved by the High Courts shall be transferred to the [NCLT]:

Provided further that –

(i) all proceedings under [the Companies Act, 1956] other than the cases relating to winding up of companies that are reserved for orders for allowing or otherwise such proceedings; or

(ii) the proceedings relating to winding up of companies which have not been transferred from the High Courts;

shall be dealt with in accordance with provisions of [the Companies Act, 1956] and the Companies (Court) Rules, 1959.

(2) The Central Government may make rules consistent with the provisions of this Act to ensure timely transfer of all matters, proceedings or cases pending before the Company Law Board or the courts, to the Tribunal under this section.”

                                                                                                      (emphasis supplied)

7.6 The second proviso to Section 434(1)(c) allows any party to a winding up proceeding to apply to the High Court where such winding up proceeding is pending for the purpose of transferring those proceedings to the NCLT which would thereafter initiate a Corporate Insolvency Resolution Process of that company in accordance with the provisions of the IBC. The Supreme Court of India had the occasion to examine the history and intent behind this provision in Jaipur Metals and Electricals Employees Organisation Jaipur Metals and Electricals Ltd. [51], where it was held:

“15.…This is further made clear by the amendment to Section 434(1)(c), with effect from [17 August 2018], where any party  to a winding up proceeding pending before a Court immediately before this date may file an application for transfer of such proceedings, and the Court, at that stage, may, by order, transfer such proceedings to the NCLT. The proceedings so transferred would then be dealt with by the NCLT as an application for initiation of the corporate insolvency resolution process under the Code. It is thus clear that under the scheme of Section 434 (as amended) and Rule 5 of the 2016 Transfer Rules, all proceedings under Section 20 of the [SICA] pending before the High Court are to continue as such until a party files an application before the High Court for transfer of such proceedings post [17 August 2018]. Once this is done, the High Court must transfer such proceedings to the NCLT which will then deal with such proceedings as an application for initiation of the corporate insolvency resolution process under the Code.”

7.7 Thus, the legislative intent appears to favour the IBC as a method of dealing with insolvent corporate entities even in respect of companies for which proceedings relating to their winding up are pending before a High Court under the provisions of the Companies Act, 1956. A perusal of these provisions would show that the legislative intent is to give an option to the stakeholders of a company being wound up under inter alia Section 433 of the Companies Act, 1956 to apply to the High Court concerned for transfer of the proceedings so that they may be dealt with by the NCLT in accordance with the provisions of the IBC. It may also be noted that since the proceedings are being “transferred”, the bar of Section 11 of the IBC may also not apply to the transferred proceedings, as Section 434(1)(c) does not seem to suggest that the transferred proceeding is to be admitted as a normal petition under Sections 7, 9 or 10. In fact, this would be perverse as that would give scope to the NCLT to reject a transferred petition – thus indirectly reviving a company which had been ordered to be wound up.

8. Addressing the 2nd Issue

8.1 This brings us to an important question of law the 2nd issue which had not been addressed in Topworth Pipes & Tubes[52]. The provisions of Section 446 of the Companies Act, 1956 make it manifestly clear that once a company has been be directed to be wound up, the continuance or initiation of any legal proceeding against the company can only be done after obtaining leave of the High Court that directed the commencement of winding up of that company.

8.2 In fact, in Murli Industries Ltd. Primo Pick N. Pack (P) Ltd. [53] (“Murli Industries”), a Single Judge Bench of the Bombay High Court has specifically held that in the event a company has been directed to be wound up/liquidated under the provisions of the Companies Act, 1956, Section 446 mandates that leave of the High Court be sought prior to initiation or continuance of proceedings under Sections 7 or 9 of the IBC. The relevant portions of Murli Industries[54] have been culled out and reproduced hereinbelow:

“33. Section 446 [of the Companies Act, 1956] is an intrinsic part of that process. It mandates that leave of the Company Court to file or continue with any such proceeding, must be obtained. The rationale being that the Company Court must be made aware of any other claims raised against the Company so that it can effectively go about its job of liquidation of the Company. If this is not to happen, there would be a reasonable possibility of two conflicting claims being made and allowed in respect of the Company and authorities allowing such claims would be at their wit’s end in implementing them. Resolution of insolvency of a Company and liquidation of a Company are two processes which pull at each other. Former is about rejuvenation of life and the latter is about termination of life. In such a case, the logic of law, here Section 446 of [the Companies Act, 1956], would require that a forum dealing with a proceeding more drastic in consequences is allowed to take a call on the revival possibility of the Company before it is too late in the day. This would mean that no application can be filed or continued with regard to initiation of resolution process under Chapter II of Part II of the IBC without leave of the Company Court under Section 446(1) of [the Companies Act, 1956]. It would then follow that if any resolution process is initiated without leave of the Company Court, it would be a defective proceeding in the eye of the IBC read with [the Companies Act 1956]. Such a proceeding will acquire sanctity only when leave under Section 446(1) of [the Companies] Act 1956] is granted…

  1. Such an interpretation, in my considered view, is also consistent with the legislative intent as broadly reflected by the aims and objects of the IBC.

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  1. The object of the IBC is to consolidate and amend the law relating to re-organisation and insolvency resolution of the corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The whole theme of [the] IBC is based upon efficacy and speed to be achieved in making efforts to revive a dying Company, and securing protection of the interests of its creditors and other stakeholders. The object of the IBC is not to repeal [the Companies Act, 1956] and substitute it by another enactment, but it is to consolidate and amend relevant laws. Such an object of the IBC should underline the need for attaining harmony while interpreting the provisions of […] the IBC […] qua Section 446 of [the Companies Act, 1956] so that what is in the best of interests of the Company and its stakeholders is allowed to happen in a natural way. This is what I have done in the present case and accordingly, I conclude that leave to continue with the proceedings before the NCLT, under Section 446(1) of [the Companies Act, 1956], is necessary …”

8.3 In view of this, the answer to the 2nd issue is: Leave of the concerned would be required to be obtained for the continuation or initiation of proceedings filed under Sections 7 or 9 of the IBC. However, we would have to also consider Section 434 of the Companies Act, 2013, described above. Taking the essence of the judgments set out above and applying them to Section 466(1) of the Companies Act, 1956, as well as Section 434(1)(c) of Companies Act, 2013, a picture emerges where the legislature intends for pending winding up proceedings to be transferred rather than for individual creditors to invoke the IBC without involving the High Court seized of the winding up proceedings. This would make sense as the High Court cannot be denuded of any discretion in the matter. For example, if the Official Liquidator has identified avoidable transactions during the course of his activities, or has taken out proceedings alleging misfeasance against the erstwhile management of the company in liquidation, the High Court may choose to decline transferring the proceedings out of its jurisdiction pending the outcome of those proceedings. That being said, judicial pronouncements consistently suggest that the route of IBC is preferable to winding up under the Companies Act, 1956.

9. To summarise, in the event a company has been directed to be wound up by a High Court under Sections 433(e) r/w Section 434 of the Companies Act, 1956, the NCLT may admit a petition filed under Sections 7 or 9 of the IBC provided leave has been granted by the High Court concerned in terms of Section 446 of the Companies Act, 1956, or the High Court concerned makes an order for transferring the proceedings under Section 434(1)(c) of the Companies Act, 2013. However, in the former case, petitions under Section 10 of the IBC are not maintainable in the event an order directing the commencement of winding up has already been passed.

*Advocate-on-Record, Supreme Court of India, BBA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

**Advocate, Bombay High Court, BA LLB, Symbiosis Law School (a constituent of Symbiosis International University)

[Authors’ Note: The views expressed herein are personal and independent. No third party has funded inter alia the issuance of this paper or the research conducted by the authors. The authors have based their views in this research paper on prevalent legislation, judicial opinions/interpretations pertaining to the same and their experience as practicing advocates in India.]

[1] Insolvency and Bankruptcy Code, 2016

[2] Companies Act, 1956

[3] Sick Industrial Companies (Special Provisions) Act, 1985 

[4]http://www.officialliquidatormumbai.com/pdf/Alphabetical%20List%20Under%20Liquidation.pdf

[5] (2019) 4 SCC 17

[6]Ibid  at para 121, p. 121

[7] Reports on Insolvency and Bankruptcy, Viswanathan Committee Report (Insolvency and Bankruptcy)

[8]Srivastava, P. “Ease of Doing Business 2019: GST, IBC big winners; list of reforms that put India among top 10 improvers”. Financial Express (dated 31 October 2018). https://www.financialexpress.com/economy/ease-of-doing-business-2019-gst-ibc-big-winners-list-of-reforms-that-put-india-among-top-10-improvers/1368186/

[9] (1998) 5 SCC 554

[10]Ibid

[11] (2000) 5 SCC 515

[12] (1998) 5 SCC 554

[13](2016) 7 SCC 603

[14] (1998) 5 SCC 554

[15] (2000) 5 SCC 515

[16] (2016) 7 SCC 603

[17] (1998) 5 SCC 554

[18]  (2000) 5 SCC 515

[19] 2018 SCC OnLine Bom 1952

[20]  (2016) 7 SCC 603

[21] 2018 SCC OnLine Bom 1952

[22] (2016) 7 SCC 603

[23] 2018 SCC OnLine NCLT 31299

[24] (2000) 5 SCC 515

[25] (2016) 7 SCC 603

[26] 2018 SCC OnLine Bom 1952

[27] 2018 SCC OnLine NCLT 31299

[28] (2000) 5 SCC 515

[29] 2018 SCC OnLine NCLT 31299, pp. 8-14

[30] 2018 SCC OnLine Bom 1952

[31] (2000) 5 SCC 515

[32]Ibid

[33]  (2016) 7 SCC 603

[34] (2016) 7 SCC 603

[35] (2000) 5 SCC 515

[36] 2019 SCC OnLine SC 87

[37] 2018 SCC OnLine Bom 1952

[38]  2019 SCC OnLine 87

[39] 2018 SCC OnLine Bom 1952

[40] 2018 SCC OnLine NCLT 31299

[41]  2019 SCC OnLine 87

[42] (1998) 5 SCC 554

[43] (2000) 5 SCC 515

[44] (2016) 7 SCC 603

[45]  2018 SCC OnLine Bom 1952

[46] 2018 SCC OnLine NCLT 31299

[47] 2019 SCC OnLine 87

[48] (1998) 5 SCC 554

[49]  (2000) 5 SCC 515

[50] (2016) 7 SCC 603

[51] (2019) 4 SCC 227

[52] 2018 SCC OnLine NCLT 31299

[53] 2018 SCC OnLine Bom 4178  

[54]Ibid

COVID 19Op EdsOP. ED.

Amid the outbreak of Novel Coronavirus or COVID-19, the Government of India on 24-3-2020, announced a nationwide lockdown. The Ministry of Home Affairs, Government of India vide Order dated 24-03-2020 issued certain directions which ensued the closure of majority of Government and private offices and other commercial establishments barring a few essential services. As a result of this country wide lockdown, many Micro, Small and Medium Enterprises (MSME) faced the imminent threat of going out of business. To curtail the panic among the MSME sector and alleviate the imminent threat of insolvency, a slew of measures have been taken to provide a cushion to the companies likely to face the downturn. Among these measures were the increased threshold of invoking insolvency to Rs 1,00,00,000 (Rupees one crore only) from the earlier amount of Rs 1,00,000 (Rupees one lakh only) and exclusion of the lockdown period from the 330-day timeline prescribed under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) for completion of the insolvency process.

Section 4(1) of IBC provides for the threshold limits for triggering the insolvency proceeding. Section 4(1) of the IBC reads as follows: 

“4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

Exercising the powers conferred upon it under Section 4 of IBC, the Central Government vide Notification dated 24-03-2020 in the Official Gazette of India [1], has increased the minimum amount of default for the purpose of initiating a proceeding under IBC to Rs 1 Crore , which is the maximum threshold limit that the Central Government is empowered to prescribe.

A special provision, namely, Regulation 40-C has also been inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to exclude the lockdown period from the timelines prescribed under the IBC vide Notification dated 29.03.2020 [2] which reads as follows:

“40-C. Special provision relating to time-line.— Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

Thus, the present timeline of 330 days prescribed in the proviso to Section 12(3) of the IBC for the insolvency resolution process would not include the lockdown period of 21 days.

In a suo motu action, taking a cue from the Supreme Court, the National Company Law Appellate Tribunal (“NCLAT”) vide order dated 30-03-2020 in Suo Motu – Company Appeal (AT) (Insolvency) No. 01 of 2020 [3] held the following:

“(1) That the period of lockdown ordered by the Central Government and the State Governments including the period as may be extended either in whole or part of the country, where the registered office of the corporate debtor may be located, shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in appeal before this Appellate Tribunal.

(2) It is further ordered that any interim order/stay order passed by this Appellate Tribunal in anyone or the other appeal under Insolvency and Bankruptcy Code, 2016 shall continue till next date of hearing, which may be notified later.”

IMPLICATIONS OF INCREASED THRESHOLD LIMIT

It is pertinent to note that Section 7(1) of the IBC envisages initiation of Corporate Insolvency Resolution Process (“CIRP”) against a corporate debtor by a financial creditor either by itself or jointly with other financial creditors. The Explanation to Section 7(1) of the IBC provides that for the purpose of financial creditors, the default would include 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. Such an explanation is significantly absent from Section 8 of the IBC, which lays down provisions for operational creditors. Section 8(1) of the IBC provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. In absence of a provision of joint action by operation creditors, the increased threshold limit of Rupees one crore  would essentially drive out the operational creditors from the realms of IBC as most of the operational debts would fail to meet the one crore mark individually, especially with respect to MSME.

It is further pertinent to note that the Notification dated 24-03-2020 deals with Part II of the IBC which is concerned with Insolvency Resolution and Liquidation for Corporate Persons. The threshold limits pertaining to personal guarantors specified under PartIII of the IBC, namely, Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms have been left untouched. The provisions of Part III of the IBC so far as they are applicable to personal guarantors to corporate debtors were brought into force from 1-12-2019 [4]. Section 78 of the IBC which provides for threshold limit for triggering insolvency and bankruptcy proceedings against individuals reads as under:

“78. Application.- This Part shall apply to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.”

The minimum amount of default for initiation of insolvency resolution against personal guarantors of corporate debtors continues to be pegged at Rs. 1000 (Rupees one thousand). Consequently, while the revised threshold limits have made it difficult to initiate insolvency proceedings against an MSME, the applications for initiation of insolvency proceedings against the personal guarantors of such MSME might witness an increase in numbers.

EFFECTS ON PENDING AND FUTURE CASES

The said Notification dated 24.03.2020 does not provide for retrospective application of the revised limits. Therefore, the earlier threshold of Rupees one lakh would continue to apply to cases that are pending. The new applications seeking commencement of CIRP would necessarily have to meet the revised criterion of default of minimum Rupees one crore by the corporate debtor.

The financial distress may also pose difficulties for companies undergoing CIRP to complete the process within the period of 330 days prescribed in the proviso to Section 12(3) of the IBC even after the exclusion of the lockdown period. Section 12(3) of the IBC which read as follows:

“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:”

In this regard, it is pertinent to refer to the judgement in Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory v. Satish Kumar Gupta [5], whereby the Supreme Court struck down the word “mandatorily” used in the abovesaid proviso as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution and held as follows: (SCC OnLine para 108)

“108. …The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days…”

Furthermore, in view of the uncertainty caused by the pandemic, the companies that are presently undergoing the CIRP would possibly find it difficult to attract resolution applicants. In cases where a resolution plan has been submitted by the resolution applicant and is pending approval of the Committee of Creditors or the Adjudicating Authority, the resolution applicant might seek modification of the resolution plans already submitted or cancellation of the process of submission/finalisation as the valuations and viability of businesses is likely to be severely affected due to the COVID-19 outbreak. Although there is no provision in the IBC that allows the resolution applicant to modify or withdraw a resolution plan which is pending approval of the Adjudicating Authority, the National Company Law Tribunal, Mumbai has vide order dated 27.09.2019 in State Bank of India v. Metalyst Forgings Ltd.[6] allowed the prayer of the resolution applicant seeking cancellation of the process of submission of the resolution plan and held as follows:

“72. The IBC neither confers the power or jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant. The letter and spirit of the IB Code mandate the acceptance of only a viable and lawful resolution plan being implemented at the hands of a willing resolution applicant. Absence of these factors renders the Section 31 application liable to be rejected. The IB Code envisages a scheme whereby the corporate debtor is taken over by the successful resolution applicant. This scheme must contain a provision for its implementation and supervision under Section 30(2)(d) and as required by the proviso to Section 31(1).

73. At this point, it is fit to refer to the sub-section (4) of Section 30 of the IB Code as it lays down the basis on which a resolution plan would be approved by the Committee of Creditors. For the sake of reference, the said clause is reproduced below:

“(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, after considering its feasibility and viability, and such other requirements as may be specified by the Board.”

74. Thus, a resolution plan is to be approved by the CoC only after being satisfied that it is feasible and viable. This clearly implies that if a resolution plan is not viable and found unfit for implementation or does not have proper provisions for its successful implementation or is based on incorrect assumptions which would lead to failure of the resolution plan and eventual, inevitable death of the corporate debtor, then the CoC ought to reject such a resolution plan. Regulation 38(3) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the resolution plan shall demonstrate with (a) it addresses the cause of default, (b) it is feasible and viable, (c) it provides for effective implementation, (d) it provides for approvals required and the time lime for the same, and (e) the resolution applicant has the capability to implement the resolution plan.”

(emphasis in original)

The National Company Law Appellate Tribunal vide order dated 07-02-2020 in Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP [7] upheld the order dated 27-09-2019 passed by the NCLT, Mumbai Bench in State Bank of India v. Metalyst Forgings Ltd. (supra) and observed that the IBC does not confer any power and jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant.

CONCLUSION

The exclusion of lockdown period and the increased threshold limit are welcome steps taken by the legislature to ensure that the Micro, Small and Medium Enterprises have enough cushion to recover from the financial distress caused by the COVID-19 pandemic and would also declutter the cases under IBC by filtering out the frivolous ones. The low threshold of Rupees one lakh was hitherto criticised for potentially pushing an otherwise strong enterprise into liquidation for a default of a small amount at the instance of a single operational creditor. The critiques of the earlier threshold limit have hailed the revision as a positive move as it curtails the expansive powers of trigger-happy operational creditors who were more interested in recovery rather than resolution. It is ought to be remembered that the operational creditors do not stand to benefit in case a company undergoes liquidation as they are below the financial creditors in the line of proportionate repayment. The  IBC is only a measure of last resort for the operational creditors. However, in cases where there is a personal guarantee, mostly given by the promoters/directors, it might still be used as a mechanism for recovery as the limit for initiation of the proceedings has not proportionately been increased and could possibly be a route that may be used to put pressure on the companies.

Nevertheless, in the times of the unprecedented downturn being experienced on account of the COVID-19 pandemic, the aforesaid measures would prove to be beneficial for resurrection of the enterprises facing the heat. After all, the key objective of the IBC is to ensure that the corporate debtor keeps operating as a going concern.

*Abhinav Shrivastava, Partner, GSL Chambers

**Sana Kamra, Associate, GSL Chambers

[1] https://www.ibbi.gov.in/uploads/legalframework/48bf32150f5d6b30477b74f652964edc.pdf

[2] https://ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf

[3] Suo Motu, In re, 2020 SCC OnLine NCLAT 206

[4] https://ibbi.gov.in//uploads/legalframework/1fb8c2b785f35a5126c58a2e567be921.pdf

[5] 2019 SCC OnLine SC 1478

[6] CP 1555(IB)/MB/2017, https://nclt.gov.in/sites/default/files/Interim-Order-pdf/SBI%20vs%20Metalyst%20Judgement%20CP%201555-2017%20NCLT%20ON%2027.9.2019.pdf

[7] Company Appeal (AT) (Insolvency) No. 1276 of 2019, https://nclat.nic.in/Useradmin/upload/8392498195e4106c6488b1.pdf

Business NewsNews

The Reserve Bank filed an application for initiation of corporate insolvency resolution process against Dewan Housing Finance Corporation Limited (DHFL) under Section 227 read with clause (zk) of sub-section (2) of Section 239 of the Insolvency and Bankruptcy Code (IBC), 2016 read with Rules 5 and 6 of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudication Authority) Rules, 2019 (“FSP Insolvency Rules”).

As per Rule 5 (b) (i) of the FSP Insolvency Rules, an interim moratorium shall commence on and from the date of filing of the application till its admission or rejection. The explanation to Rule 5 (b) provides that “interim moratorium” shall have the effect of the provisions of sub-sections (1), (2) and (3) of Section 14. Sub-sections (1), (2) and (3) of Section 14 of the IBC have been reproduced below:

“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to —

(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;

(b) a surety in a contract of guarantee to a corporate debtor.

Reserve Bank of India

[Press Release dt. 29-11-2019]

Cyril Amarchand MangaldasExperts Corner

The enactment of the Insolvency and Bankruptcy Code, 2016 (IBC) in 2016 was one of the most significant reforms introduced by the Government of India (GoI) in the recent years. However, it lacked clarity on its interface with various other regulatory authorities, particularly the Competition Commission of India (CCI). Pertinently, the IBC did not contemplate the timelines for a resolution applicant to notify and seek the approval of the CCI, thereby posing several complex questions, in particular—what would qualify as a binding agreement for insolvency cases? Whether notification process can be triggered prior to approval of a resolution plan? Whether IBC related cases would be granted an expedited approval? Whether preferential treatment would be granted to companies approaching the CCI post obtaining an approval from the Committee of Creditors (CoC)?

With the notification of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Second Amendment), the Ministry of Corporate Affairs has provided much needed clarity to all stakeholders in relation to the above issues. The Second Amendment by way of introduction of a new provision, mandates the approval of the CCI prior to the approval of a resolution plan by the CoC, thereby taking away the discretion exercised earlier by resolution applicants as to the timelines of notifying the CCI. In this backdrop, the article touches upon the merits of the amendment, active role of the CCI in the past two years and the way forward.

Legal Framework

The corporate insolvency resolution process (CIRP) is initiated with the admission of an application against a corporate debtor to the National Company Law Tribunal (NCLT). Thereafter, a resolution professional issues request for resolution plans inviting the interested bidders to submit resolution plans in relation to resolution of the corporate debtor. This is followed by approval of such resolution plan by the CoC and stamping of final approval by the NCLT. The IBC mandates a 180-day period which can be extended to 90 days for the completion of the CIRP.

In the construct of Section 5 of the Competition Act, 2002 (Competition Act), where certain jurisdictional thresholds prescribed under it are breached, a transaction under the CIRP would trigger a mandatory approval from the CCI before closing such a transaction. Under the Competition Act, the CCI is required to form a prima facie opinion of whether a transaction notified to it causes an appreciable adverse effect on competition (AAEC) within a period of 30 working days from the date of such notification. Besides the 30 working day period, the CCI is required to approve/reject/approve with modification any notified transaction within 210 days from the date of such notification, which can be extended to 60 days in limited cases where remedies are warranted. It is important to note that a majority of the cases notified to the CCI have been approved in Phase I of the review period i.e. within the preliminary 30 working day period.

Reasons for the Second Amendment vis-à-vis Competition Act

The Ministry of Corporate Affairs by way of its Notification dated 17-8-2018 added Section 31(4) to the IBC, which inter alia provides that—

… where the resolution plan contains a provision for combination, as referred to in Section 5 of the Competition Act, 2002 (12 of 2003), the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors.

The above amendment is a welcome step as it clarifies the trigger event for a transaction under the CIRP i.e. essentially the stage at which the CCI approval should be sought. Having a clear mandate to obtain approval from the CCI will go a long way in preventing complex situations which have come up due to the regulatory uncertainties around the CCI approval process.

In the past, we have seen certain cases being notified to the CCI both prior to and post the approval of the CoC. For instance, in the acquisition of Binani Cement Limited (BCL) (one of the first few IBC matters examined by the CCI) two resolution applicants i.e. Dalmia Cement Limited (Dalmia) and UltraTech Cement Limited (UltraTech), both filed separate notifications with the CCI prior to receiving an approval from the CoC. The CCI accorded an approval, finding no AAEC to both Dalmia and UltraTech. However, the approval to UltraTech was accorded by the CCI post the CoC’s approval of the Dalmia resolution plan, thereby making CCI’s approval of UltraTech immaterial.

In another case on point relating to the acquisition of Electrosteel Steels Limited (Electrosteel) by Vedanta Limited (Vedanta), the CCI was notified post the approval of the resolution plan by the CoC. Importantly, Vedanta’s resolution plan was subsequently approved by the NCLT during the CCI’s review process. Such a situation i.e. approval by the NCLT pending the CCI approval could possibly lead to two issues — (1) disqualification of Vedanta and ultimately liquidation of Electrosteel assuming that CCI’s approval took more than 270 days (mandated under the IBC); and (2) potential gun-jumping concerns under the Competition Act because of the conflict between the IBC and the Competition Act resulting from the implementation of “control” provisions under a resolution plan (pursuant to the approval of NCLT).

CCI, IBC and the Way Forward

The CCI has up until now expeditiously assessed a number of IBC transactions and approved such transactions, with an average of 20 days per transaction. As mentioned above, the Second Amendment is a welcome step given that it clarifies the exact timelines for notifying the CCI in the CIRP framework. The Second Amendment emphasises the intent of the GoI to ensure expedited clearances for transactions, defined roles for the various regulators and harmony between the implementation of the statutes.

More importantly, the mandate of the Second Amendment requiring a resolution applicant to obtain approval from the CCI prior to the CoC approval of a resolution plan ensures that the two potential issues highlighted above are avoided, even if it results in multiple filings for the same transaction before the CCI by different resolution applicants.

While the Second Amendment (to the extent it applies to the Competition Act) is an outcome of the need for streamlining regulatory approval process, it would also be interesting to see whether further amendments will be rolled out in this regard or, whether the GoI, following the suit of Securities and Exchange Board of India, would resort to exempting such transaction from the purview of CCI altogether.

*Anshuman Sakle is a Partner with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anshuman.sakle@cyrilshroff.com.  Dhruv Rajain, Senior Associate can be contacted at dhruv.rajain@cyrilshroff.com and Ruchi Verma, Associate, can be contacted at ruchi.verma@cyrilshroff.com with the Competition Law Practice at Cyril Amarchand Mangaldas.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice A.I.S Cheema, Member (Judicial) and Kanthi Narahari, Member (Technical) allowed the appellant (shareholder of the Corporate Debtor) to pay the total dues of the Operational Creditor after the application filed against it under Section 9 of the Insolvency and Bankruptcy Code, 2016 was admitted by the the National Company Appellate Tribunal, Bengaluru.

The appellant submitted that though the Section 9 application was admitted against it, however, the Committee of Creditors was not yet constituted. He submitted that he was ready to pay the total dues of the Operational Creditor which brought the application before NCLT.

Three demand drafts brought by the appellant were produced before the Appellate Tribunal, which were directed to be handed over to the Operational Creditor in the discharge of Corporate Debtor’s liability towards it. In view of the fact that the total amount was paid to the Operational Creditor and the Committee of Creditors was not yet constituted, the Appellate Tribunal set aside the impugned order of NCLT admitting the Section 9 application against the Corporate Debtor. [A.P. Abdul Kareem v. Om Industrial Corpn., 2019 SCC OnLine NCLAT 154, Order dated 16-04-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), dismissed an appeal filed against the judgment of National Company Law Tribunal, New Delhi whereby Respondents 1 and 2 were held to be Financial Creditors.

Factual matrix of the case is that the said respondents were the erstwhile Directors of the Corporate Debtor company. They extended loan to the Corporate Debtor from time to time at an interest of 18% per annum. The question that arose for consideration in this appeal was whether the respondents came within the meaning of Financial Creditors as defined in Section 5(7) and (8) of the Insolvency and Bankruptcy Code, 2016. It is pertinent to note that Section 5(7) defines a Financial Creditor as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

The Appellate Tribunal perused various provisions of the Code and observed that the expression debt defined under Section 3(11) means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. Non-payment of such debt which has become due and payable and is not repaid by the Corporate Debtor falls within the mischief default defined under Section 3(12) of the Code. Further, in the present case, the manner and circumstances in which the amount of loan was borrowed by the Corporate Debtor from time to time with stipulated interest, left no room for doubt that the outstanding unsecured debt had all the trappings of a Financial Debt. Hence, the said respondents (erstwhile Directors) were safely held to be Financial Creditors. All the contentions raised by the appellant were repelled holding them sans merit. The appeal was, thus, dismissed. [Rajesh Gupta v. Dinesh Chand Jain,2018 SCC OnLine NCLAT 412, Order dated 09-08-2018]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed against the order of the National Company Law Tribunal, Mumbai.

The directors of Fortune Pharma (P) Ltd., Corporate Debtor, had executed a  personal guarantee in favour of State Bank of India, Financial Creditor. Subsequently, the Bank enforced Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 and the company was directed to hand over possession of the factory premises to the Bank. Thereafter, the company filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 which was allowed. Subsequently, the director of the company assigned his debt in favour of the appellant. The appellant was inducted as member of the committee of creditors by the Resolution Professional. This was objected to by the Bank, contending that the appellant was a related party. The NCLT upheld the objection of the Bank. Aggrieved thus, the appellant filed the instant appeal.

The Appellate Tribunal, at the outset, observed that the assignor was a director of the Corporate Debtor, therefore, he was a related party under Section 5(24) of the Code. Further, a debt assignment is a transfer of debt with all the rights and liabilities associated with it. The assignor assigns its debt in favour of the assignee, who steps in the shoes of the assignor. The assignee thereby takes over the right and also takes over the disadvantages by virtue of such assignment. Accordingly, the director being a related party, with assignment of debt, the disadvantage also goes to the appellant. For the aforesaid reasons, it was held that the issue was rightly decided by the NCLT. The appeal was dismissed sans merit. [Pankaj Yadav v. State Bank of India, 2018 SCC OnLine NCLAT 389, dated 07-08-2018]