Insolvency and Bankruptcy Code 2016

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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]