Insolvency and Bankruptcy Code 2016

Justice Bhushan Ramkrishna Gavai
Know thy Judge

   

As Justice Bhushan Ramkrishna Gavai is all set to celebrate his 62nd Birthday, it is only fitting that we take look back to the trajectory of his life and career and to his tenure at the Supreme Court through his various decisions.

Early Life

Justice Bhushan Ramkrishna Gavai was born on 24th November, 1960 at Amravati to late R.S. Gavai, who was a noted social activist, Member of Parliament and former Governor of Bihar and Kerala1.

Advocacy2

At the age of 25, he enrolled as an advocate and started practicing at the Nagpur bench of the Bombay High Court. Justice Gavai practiced independently at Bombay High Court from 1987 to 1990 and after 1990, practised mainly before the Nagpur Bench of Bombay High Court. His practise was mostly focussed on issues related to Constitutional Law and Administrative Law.

Justice Gavai served both as an Assistant Government Pleader and Additional Public Prosecutor in the Nagpur Bench of the Bombay High Court from August 1992 to July 1993. He was later appointed as Government Pleader and Public Prosecutor for Nagpur Bench on 17th January, 2000.

Judgeship of the Bombay High Court

He was appointed as a judge of the Bombay High Court on 14th November, 2003 and became a permanent Judge of the Bombay High Court on 12th November, 2005. Justice Gavai presided over Benches having all types of assignments at the Principal Seat in Mumbai as well as Benches at Nagpur, Aurangabad and Panaji.3

Journey towards the Supreme Court

After 16 years of Judgeship at the Bombay High Court, Justice B.R. Gavai was elevated as a Judge of the Supreme Court of India on 24th May, 2019. The Collegium in recommending Justice Gavai's name for the Supreme Court, gave due weight to his seniority, integrity, merit and due representation in the Supreme Court4

*Did You Know? Justice Gavai is the first Supreme Court Judge belonging to a Scheduled Caste, to be appointed in 9 years after Justice K.G. Balakrishnan's retirement in 20105.

Furthermore, if the seniority convention is followed, then Justice Gavai will become the second Chief Justice of India belonging to a Scheduled Caste category after Justice Balakrishnan6.

Notable Judgements

Justice B.R. Gavai has authored almost 100 judgments7 over the course of his tenure. Some important decisions that Justice Gavai has been a part of, are as follows-

Can step- children claim property right in mother's mehar after her death? Does a registered mehar deed become unenforceable for being nominal?

The Division Bench of L. Nageswara Rao and B.R. Gavai*, JJ., in Azgar Barid v. Mazambi, (2022) 5 SCC 334, upheld the impugned judgment of the High Court wherein the High Court had granted property rights to the step- children of the deceased in her mehar property by declaring the mehar deed as unenforceable for being nominal.

Right to establish an educational institution is a fundamental right

The Bench of BR Gavai* and PS Narasimha, JJ., in Pharmacy Council of India v. Rajeev College of Pharmacy, 2022 SCC OnLine SC 1224, held that the right to establish an educational institution is a fundamental right under Article 19(1)(g) of the Constitution of India and reasonable restrictions on such a right can be imposed only by a law and not by an execution instruction.

IBC| Once CIRP is initiated and moratorium is ordered, proceedings under SARFAESI Act cannot continue

The bench of L. Nageswara Rao and BR Gavai*, JJ., in Indian Overseas Bank v. RCM Infrastructure Ltd., (2022) 8 SCC 516, held that the proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) cannot continue once the CIRP has been initiated and the moratorium has been ordered as per the Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Consumer Protection| ‘Business to business' dispute not a consumer dispute

The bench of L. Nageswara Rao and BR Gavai*, JJ., in Shrikant G. Mantri v. Punjab National Bank, (2022) 5 SCC 42, interpreted the true scope of a “consumer” in terms of Section 2(1)(d) of the Consumer Protection Act, 1986 and has held that the ‘business to business' disputes cannot be construed as consumer disputes. The entire Act revolves around “business-to-consumer” disputes and not for “business-to-business” disputes.

“Mighty” Union of India vs “Ordinary Soldier” |Members of Ecological Task Force also entitled to Disability Pension

In Pani Ram v. Union of India, 2021 SCC OnLine SC 1277, where a soldier, after serving in the Regular Army for 25 years, was re-enrolled in the Infantry Battalion (Territorial Army), Ecological Task Force (ETF) and was denied disability pension in view of the letter of the Government of India, Ministry of Defence, which provides that the members of ETF would not be entitled for disability pension, the bench of L. Nageswara Rao and BR Gavai*, JJ., held that it was wrong to deny the claim as the ETF is established as an additional company for 130 Infantry Battalion of Territorial Army and the other officers or enrolled persons working in the Territorial Army are entitled to disability pension.

Nothing wrong with OBC Reservation for consecutive term for the office of Mayor

The bench of L. Nageswara Rao and BR Gavai*, JJ., in Sanjay Ramdas Patil v. Sanjay, (2021) 10 SCC 306, set aside the judgment of the Aurangabad bench of the Bombay High Court wherein it was held that the reservation of the Office of Mayor for the Dhule Municipal Corporation for Backward Class (OBC) for a second term, coupled with the fact that there has been no reservation for the Scheduled Caste category, amounted to violation of rotation policy.

‘Delays in prosecuting the corrupt breeds a culture of impunity'; Sanction requests under PC Act must be decided within 4 months but proceedings cannot be quashed for delay

The bench of BR Gavai and PS Narasimha*, JJ., in Vijay Rajmohan v. State, 2022 SCC OnLine SC 1377, decided two important questions relating to the Prevention of Corruption Act, 1988 and held that:

  1. There is no illegality in the action of the appointing authority, the DoPT, if it calls for, refers, and considers the opinion of the Central Vigilance Commission before it takes its final decision on the request for sanction for prosecuting a public servant.

  2. The period of three months, extended by one more month for legal consultation, is mandatory. The consequence of non-compliance with this mandatory requirement shall not be quashing of the criminal proceeding for that very reason. The competent authority shall be Accountable for the delay and be subject to judicial review and administrative action by the CVC under Section 8(1)(f) of the Central Vigilance Commission Act, 2003 (CVC Act).

Mere lack of State Government's prior consent does not vitiate CBI investigation in absence of prejudice caused to accused

The bench of AM Khanwilkar and BR Gavai*, JJ., in Fertico Marketing and Investment Pvt. Ltd. v. Central Bureau of Investigation, (2021) 2 SCC 525, held that not obtaining prior consent of the State Government under Section 6 of the Delhi Special Police Establishment Act, 1946 (DPSE Act) would not vitiate the investigation unless the illegality in the investigation can be shown to have brought about miscarriage of justice or caused prejudice to the accused.

Wilful disobedience or Wilful breach: Are these necessary requisites for bringing in action for ‘Civil Contempt'?

B.R. Gavai*, J., while addressing the contempt petition in Rama Narang v. Ramesh Narang, 2021 SCC OnLine SC 29, expressed that:

“…contempt proceeding is not like an execution proceeding under the Code of Civil Procedure.”

“…contempt proceedings are quasi-criminal in nature and the standard of proof required is in the same manner as in the other criminal cases.”

“A mere objection to jurisdiction does not instantly disable the Court from passing any interim orders.”

The instant contempt petition arose out of an unfortunate family dispute between a father and his two sons from his first wife.

Article 370| Review all orders imposing curbs in a week and put them in public domain

A 3-judge bench of NV Ramana, R Subhash Reddy and BR Gavai, JJ., in Anuradha Bhasin v. Union of India, (2020) 3 SCC 637, asked the J&K administration to review all orders imposing curbs on telecom and internet services in the state in a week and put them in public domain. 

“The existing Suspension Rules neither provide for a periodic review nor a time limitation for an order issued under the Suspension Rules. Till this gap is filled, the Review Committee constituted under Rule 2(5) of the Suspension Rules must conduct a periodic review within seven working days of the previous review, in terms of the requirements under Rule 2(6).”

Conviction on basis of circumstantial evidence- Onus on accused

In Sudru v. State of Chattisgarh, (2019) 8 SCC 333, wherein a son murdered his father, the bench of Deepak Gupta and B.R. Gavai*, JJ., confirmed the conviction of the accused on the basis of circumstantial evidence, last seen evidence and non-explanation of incriminating evidence by accused, conviction of accused confirmed. 

State can't be estopped from withdrawing the exemption from payment of Excise Duty if such withdrawal is in larger public interest

The 3-judge bench of Arun Mishra, MR Shah and BR Gavai*, JJ., in Union of India v. Unicorn Industries, (2019) 10 SCC 575, held that by invoking the doctrine of promissory estoppel, the Union of India cannot be estopped from withdrawing the exemption from payment of Excise Duty in respect of certain products, which exemption is granted by an earlier notification; when the Union of India finds that such a withdrawal is necessary in the public interest.

Company Court cannot decide in winding up proceeding which party defaulted with the compromise

In the corporate dispute in Shital Fibers Ltd. v. Indian Acrylics Ltd., 2021 SCC OnLine SC 281, the 3-Judge Bench comprising of R.F. Nariman, B.R. Gavai* and Hrishikesh Roy, JJ., held that, “The Company Court while exercising its powers under sections 433 and 434 of the Companies Act would not be in a position to decide, as to who was at fault in not complying with the terms and conditions of the deed of settlement and the compromise deed.”

COVID-19| SC suggests Centre to extend directions to protect children in Protection Homes from spread of coronavirus to Nari Niketans

The 3-judge bench of NV Ramana, SK Kaul and BR Gavai, JJ., Rishad Murtaza v. Union of India, (2020) 15 SCC 288, has asked the Central Government to extend the order passed in In Re Contagion of COVID-19 Virus in Children Protection Homes, to Nari Niketans also, if feasable.

Tata's Housing project in Chandigarh stalled for being ‘too close' to Sukhna Lake & Widlife Sanctuary

In the matter concerning the housing project, on the ground that the area in question falls within the catchment area of Sukhna Lake and is 123 meters away from the boundary of Sukhna Wildlife Sanctuary, the 3-judge bench of Arun Mishra, MR Shah and BR Gavai, JJ., in Tata Housing Development Co. Ltd. v. Aalok Jagga, (2020) 15 SCC 784, held that such projects cannot be permitted to come up within such a short distance from the wildlife sanctuary. Stating that the entire exercise smacks of arbitrariness on the part of Government including functionaries, the bench said that the Court has to perform its duty in such a scenario when the authorities have failed to protect the wildlife sanctuary ecosensitive zone­. It said,

“The entire exercise of obtaining clearance relating to the project is quashed. We regret that such a scenario has emerged in the matter and that it involved a large number of MLAs of Punjab Legislative Assembly.”

Scope of the Court to enquire in decision of an Executive: Whether Court is concerned with decision-making process or ultimate decision?

While elaborating the scope of judicial review, Bench of L. Nageswara Rao, B.R. Gavai and B.V. Nagarathna, JJ., in Punjab State Power Corpn. Ltd. v. Emta Coal Ltd., (2022) 2 SCC 1, held that,

“It is not for the Court to determine whether a particular policy or a particular decision taken in the fulfilment of that policy is fair.”

Question relating to interpretation of Section 11 of the Coal Mines (Special Provisions) Act, 2015 which was an outcome of the judgment of this Court's decision in Manohar Lal Sharma v. Principal Secretary, (2014) 9 SCC 516, and ancillary question pertaining to the scope of judicial review of administrative action of the State authority arose for consideration in the instant appeals.

Can 'emotionally dead' marriage be dissolved in exercise of Art. 142 of Constitution?

The Division Bench of L. Nageswara Rao and B.R. Gavai, JJ., in Subhransu Sarkar v. Indrani Sarkar (Nee Das), 2021 SCC OnLine SC 720, dissolved a marriage while exercising its jurisdiction under Article 142 of the Constitution of India as the marriage was emotionally dead.

Extension of tenure of the incumbent Director of Enforcement beyond two years

A Division Bench of L. Nageswara Rao and B.R. Gavai, JJ., in Common Cause v. Union of India, 2021 SCC OnLine SC 687 , upheld the Central Government's order extending the tenure of the incumbent Director of Enforcement Sanjay Kumar Mishra for a period of one year. The Supreme Court held that there is no fetter on the power of the Central Government in appointing the Director of Enforcement beyond a period of two years. Interpreting Section 25 of the Central Vigilance Commission Act, 2003 which prescribes the minimum tenure of the Director of Enforcement, the Court observed:

“The words ‘not less than two years' cannot be read to mean ‘not more than two years' and there is no fetter on the power of the Central Government in appointing the Director of Enforcement beyond a period of two years.”

Directions issued to make voter's right to information more effective

A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ., in Brajesh Singh v. Sunil Arora, (2021) 10 SCC 241, found several political parties guilty of contempt of court for non-compliance of directions given by the Supreme Court in Rambabu Singh Thakur v. Sunil Arora, (2020) 3 SCC 733, in connection with disclosure of information of candidates with criminal antecedents. Penalties have been imposed on the political parties found guilty. The Court also issued further directions in order to make the right of information of a voter more effective and meaningful.

Emergency arbitrator's award is referable to S. 17(1) of Indian Arbitration Act; enforceable under S. 17(2)

Holding that an award passed by Emergency Arbitrator is enforceable under the Arbitration and Conciliation Act, 1996, a Division Bench of R.F. Nariman* and B.R. Gavai, JJ., Amazon.Com NV Investment Holdings LLC v. Future Retail Ltd., (2022) 1 SCC 209 ruled in favour of Amazon in the infamous Future-Amazon dispute. It was held that the interim award in favour of Amazon, passed by the Emergency Arbitrator appointed under the Arbitration Rules of the Singapore International Arbitration Centre is enforceable under the Indian Arbitration Act. The Court declared that full party autonomy is given by the Arbitration Act to have a dispute decided in accordance with institutional rules which can include Emergency Arbitrators delivering interim orders. 

Part IX-B of Constitution relating to cooperative societies unconstitutional for want of ratification by half of the States; Provisions relating to multi-State cooperative societies severable and valid

A 3-Judge Bench of the Court in Union of India v. Rajendra N. Shah,  2021 SCC OnLine SC 474, held that the Constitution (97th Amendment) Act, 2011 which inter alia inserted Part IX-B is ultra vires the Constitution insofar it is concerned with the subject of Cooperative Societies for want of the requisite ratification under Article 368(2) proviso. At the same time, the Court by a majority of 2:1, followed doctrine of severability in declaring that Part IX-B is operative insofar as it concerns Multi-State Cooperative Societies both within various States and in Union Territories.  R.F. Nariman and B.R. Gavai, JJ., formed the majority, whereas K.M. Joseph, J. penned a separate opinion dissenting partly with the majority. He expressed inability to concur with the view on the application of doctrine of severability. 

Whether a residential accommodation for nuns/students would fall under “religious or educational purposes” and be qualified for tax exemption?

The Division Bench comprising of R. F. Nariman* and B.R. Gavai, JJ., in State of Kerala v. Mother Superior Adoration Convent, (2021) 5 SCC 602, addressed the instant case regarding statutory interpretation.  The issue before the Bench was whether a residential accommodation for nuns and hostel for students would fall under “religious or educational purposes” for the purpose of tax exemption. The Bench expressed, “We must first ask ourselves what is the object sought to be achieved by the provision and construe the statute in accord with such object? And on the assumption that any ambiguity arises in such construction, such ambiguity must be in favour of that which is exempted.”

Where one party habitually resides in a foreign country, arbitration becomes an international commercial arbitration even when the business is being carried through an office in India

The Division Bench of R.F. Nariman* and B.R. Gavai, JJ., in Amway India Enterprises (P) Ltd. v. Ravindranath Rao Sindhia, (2021) 8 SCC 465 , addressed an important case regarding nature of arbitration under Arbitration and Conciliation Act, 1996. The Bench ruled, “If at least one of the parties was either a foreign national, or habitually resident in any country other than India; or by a body corporate which was incorporated in any country other than India; or by the Government of a foreign country, the arbitration would become an international commercial arbitration notwithstanding the fact that the individual, body corporate, or government of a foreign country carry on business in India through a business office in India.”

“Can't treat all of them as a liar”: SC while partially setting aside the 2018 SC/ST Act verdict

The 3-judge Bench of Arun Mishra*, MR Shah and BR Gavai, JJ., in Union of India v. State of Maharashtra, (2020) 4 SCC 761, partially set aside the 2-judge verdict in Dr Subhash Kashinath Mahajan v. State of Maharashtra, (2018) 6 SCC 454. It was held that some portions of the said verdict were against the concept of protective discrimination in favour of downtrodden classes under Article 15(4) of the Constitution and also impermissible within the parameters laid down by this Court for exercise of powers under Article 142 of Constitution of India. 

Prashant Bhushan sentenced to a fine of Rupee 1 for his contemptuous tweets

The 3-judge bench of Arun Mishra, BR Gavai and Krishna Murari, JJ., in Prashant Bhushan, In re (Contempt Matter), (2021) 3 SCC 160, sentenced advocate Prashant Bhushan with a fine or Re.1/ (Rupee one) to be deposited with the Registry by 15.09.2020, failing which he shall undergo a simple imprisonment for a period of three months and further be debarred from practising in this Court for a period of three years. It had found advocate Prashant guilty of criminal contempt on 14.08.2020 in the suo motu contempt petition initiated against him after he criticised the Supreme Court and the sitting and former CJIs in a couple of tweets. 

“If we do not take cognizance of such conduct, it will give a wrong message to the lawyers and litigants throughout the country. However, by showing magnanimity, instead of imposing any severe punishment, we are sentencing the contemnor with a nominal fine of Re.1/ (Rupee one).”

†Sucheta Sarkar, Editorial Assistant, EBC Publishing Pvt Ltd.

1. In Justice Gavai Supreme Court gets its first SC Judge in decade, The Times of India

2. Chief Justice and Judges, Supreme Court of India

3. Justice BR Gavai, Bombay High Court

4.  Judges' archive, Supreme Court Observer

5. Judges’ Archive, SC Observer

6. Justice Gavai to be second Dalit CJI, Indian Express

7. www.scconline.com – Judges Only Feature

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Appellate Tribunal : In an appeal filed by the appellant against the order passed by the National Company Law Tribunal (NCLT) for cancellation of non-bailable warrants, a bench comprising of Ashok Bhushan*, M Satyanarayana Murthy, JJ., and Barun Mitra (Technical Member) held that the NCLT was right in refusing to approve the Resolution Plan due to non-serious, casual and non-diligent conduct of the Resolution Applicant.

Factual Matrix

A Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor by the NCLT. The Resolution Professional /Appellant submitted a resolution plan which was later approved in the 10th Committee of Creditors' (CoC) meeting held on 07-11-2018. The CoC authorized the appellant to file Application for approval of the Resolution Plan. The successful resolution applicant was permitted to be impleaded as one of the Respondents by the NCLT vide order dated 03-03-2021.

The resolution applicant failed to deposit the performance guarantee for the Resolution Plan and , he did not appear before the NCLT. The NCLT issued a non-bailable warrant against the resolution applicant vide order dated 03-09-2021 and dismissed the plan approval application vide order dated 24-11-2021. The NCLT directed the initiation of liquidation of the corporate debtor and also, directed the liquidator to take actions against the successful resolution applicant under S. 74(3) of the Insolvency and Bankruptcy Code, 2016. The present appeal is filed by the appellant against the order dated 24-11-2021 passed by the National Company Law Tribunal.

Contention of the Parties

The Appellant contended that initially he was not a party to the plan approval application but was made a party later and due to certain miscommunication, he was not able to appear before the NCLT. The Appellant contended that initially there was no requirement for submitting any performance guarantee therefore he did not submit any performance guarantee during submission of resolution plan. The Appellant also contended that he is still ready to abide by the resolution plan and to comply with all the terms and conditions of the resolution plan.

The respondents contended that the appellant had not shown any interest in abiding by the resolution plan and deliberately did not appear before the NCLT therefore the tribunal was correct in rejecting the application for approval of resolution plan.

Appellate Tribunal's Take

The Tribunal opined that it is correct that initially the appellant was not a party to the plan approval application and also, on the date when Resolution Plan was approved, it did not contain any provision for providing performance security.

The Tribunal observed that the NCLT was right in dismissing the plan approval application as the CIRP is a time bound process where timeline has been prescribed for each step and cannot be allowed to continue for an indefinite period. Moreover, the applicant has not shown any willingness to proceed with the Resolution Plan. The Tribunal stated that

“Due to non-serious, casual and non-diligent conduct of the Resolution Applicant, the Adjudicating Authority has rightly refused to approve the Resolution Plan. We do not find any error in the order of the Adjudicating Authority in rejecting CA-734 of 2018.”

The Tribunal cancelled the bailable and non-bailable warrants issued to the appellant as the NCLT dismissed the application for the cancellation of non-bailable warrant without adverting to any of the reasons given by the Appellant.

The Tribunal also held that the direction issued by the NCLT for filing a complaint under S. 74(3) against the appellant is unsustainable as there was no violation of S. 74(3) by the Appellant. The Tribunal stated that

“Since the Resolution Plan was never approved by the Adjudicating Authority, the Corporate Debtor or its officers or creditors or any other persons cannot be said to have knowingly and wilfully contravened any of the terms of the Resolution Plan.”

The Tribunal directed the Liquidator appointed by the impugned order to proceed in accordance with the law and it shall be open for the appellant to participate in liquidation process.

[Cimco Projects Ltd. v. Anup Kumar, 2022 SCC OnLine NCLAT 330, decided on 01-08-2022]

Advocates who appeared in this case :

Mr Ashish Makhija and Mr. Deep Bisht, Counsel for the Appellants;

Ms Abhijeet Sinha and Mr. Aditya Shukla, Counsel for the Respondent 1;

Ms. Shankari Mishra, Counsel for the Respondents (other).

*Ritu Singh, Editorial Assistant has put this report together.

Op EdsOP. ED.

It is a trite law that when an insolvency order is passed, whereby the corporate insolvency resolution process (CIRP) is initiated against a company (corporate debtor), a moratorium is imposed under Section 14 of the Insolvency and Bankruptcy Code, 20161 (IBC) on all legal proceedings (including arbitration proceedings) pending against the corporate debtor.

Nowadays, it is a usual course in arbitrations that an entire arbitration proceeding comes to a halt when a moratorium gets imposed on a party to the dispute under IBC, as all legal proceedings against the principal debtor (party to the arbitral dispute) have to be paused till the completion of the CIRP proceedings. For instance, an arbitration proceeding is ongoing against multiple respondents which include a company and its directors/promoters. Would the arbitration proceeding still continue against such directors/promoters after a moratorium is imposed against the principal borrower i.e. the company? For careful analysis, let us see how the legislature and judiciary have interpreted the law on the same.

Prior to IBC

In Bank of Bihar Ltd. v. Damodar Prasad2, it was observed that the surety has no right to dictate terms to the creditor and ask him to pursue his remedies against the principal in the first instance. But the surety is a guarantee; and it is his business to see whether the principal pays, and not that of the creditor. In the absence of some special equity the surety has no right to restrain an action against him by the creditor on the ground that the principal is solvent or that the creditor may have relief against the principal in some other proceedings. Where the creditor has obtained a decree against the surety and the principal, the surety has no right to restrain execution against him until the creditor has exhausted his remedies against the principal. Thereafter, the Supreme Court of India passed a judgment in Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala3, wherein a bank-initiated proceedings under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 19934, in which stay of further proceedings was sought on the ground that the bank could not proceed against the guarantor till the rights of the bank against the principal borrower company were established. The Debts Recovery Tribunal dismissed the application. However, the High Court, in exercise of power under Article 227 of the Constitution of India5 allowed the objection and stayed further proceedings against the guarantor. The Bank appealed to the Supreme Court wherein the Supreme Court held that the liability of the guarantor and principal debtors is coextensive and not in alternative and the order of the High Court was set aside.

Post IBC

Even after the enactment of IBC in 2016, the legislature was not clear whether a moratorium could be imposed on a surety/guarantor. In the very important case of Sicom Investments and Finance Ltd. v. Rajesh Kumar Drolia6 Section 14 IBC came up for consideration, as well as the liabilities mentioned in Section 14, of the Bombay High Court. The High Court held that the moratorium under Section 14 applies to the corporate debtor; the benefits, as well as the liabilities mentioned in Section 14, are only that of the corporate debtor and corporate debtor alone and not a third party such as a guarantor, be it an individual or a corporate guarantor. The Court further approved the report of the Insolvency Law Committee wherein the Committee had held the following:

  1. all assets of guarantors of the corporate debtor shall be outside the scope of moratorium imposed under the Code;

  2. that surety’s liabilities being put on hold if a CIRP is going on against the corporate debtor, would lead to the contracts of guarantee being infructuous, and not serving the purpose for which they have been entered into;

  3. such a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee;

  4. contractual principles of guarantee require being respected even during a moratorium and an alternative interpretation may not have been the intention of the Code, as is clear from a plain reading of Section 14.

The impugned order of the Tribunal taking the view that Section 14 would apply in favour of the personal guarantor as well and consequently restraining the proceedings against the personal guarantor was set aside.

The above view of the Bombay High Court has been approved by the Supreme Court in SBI v. V. Ramakrishnan7. In Ramakrishnan8, the Supreme Court of India held that the assets of the surety/guarantor can be distinguished from that of the principal debtor and hence the CIRP proceedings may not be affected adversely by the actions against assets of any third party like surety or guarantor. However, it is apposite to take note of Swiss Ribbons (P) Ltd. v. Union of India9, wherein the Court observed that the interest of the corporate debtor is bifurcated and separated from that of its promoters/those who are in management and the moratorium only preserves the assets of the corporate debtor during the resolution process. Furthermore, in IFCI Factors Ltd. v. Ramsarup Industries Ltd.10, a moratorium was imposed against the principal debtor company and the question was whether to continue the ongoing legal proceedings against the director or not. It was observed that the director had declared himself as a guarantor to the company and therefore it was held that legal proceedings will continue against the director being the guarantor.

However, in Paschim Gujarat Vij Company Ltd. v. Manibhadra Ispat Ltd.11, the plaintiff therein sought to seek recovery of dues payable by a company from its directors, the High Court observed that the directors of companies have been described as agents, trustees, or representatives of the company because of the fact vis-à-vis the company they act in a fiduciary capacity and perform acts and duties for the benefit of the company. Thus, the directors are the agents of the company to the extent they have been authorised to perform certain acts on behalf of the company; but the directors of a company owe no fiduciary or contractual duties or any duty of case to third parties who deal with the company. Therefore, by this observation it can be presumed that nothing entitles a third party to continue legal/arbitral proceedings against a director when a moratorium is imposed against the principal debtor company.

Amendment in IBC

Based on the report of the Committee, the IBC Insolvency and Bankruptcy Code (Amendment) Ordinance, 201912 was passed and an amendment was made in Section 1413 IBC wherein in sub-section (3), clause (a) was substituted (w.e.f. 28-12-2019). Section 14 reads as under:

14. Moratorium. — (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 of 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;

(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.

* * *

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

(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;

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

* * *

Therefore, Section 14(3)(b) IBC clearly provides that the moratorium under Section 14(1) does not apply to surety or guarantor. The aforesaid provision can be complemented with Section 128 of the Contract Act, 187214 which provides as under:

128. Surety’s liability. —The liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the contract.

An important observation was made in Lalit Kumar Jain v. Union of India15. In this case the Court took into consideration Section 31(1) IBC16, as also Sections 128 to 141 of the Contract Act, 187217 and held that Section 31(1) IBC in fact makes it clear that the guarantor cannot escape payment as the resolution plan which has been approved may well include provisions as to payments to be made by such guarantor; the moratorium is in relation to the debt and not the debtor; the object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay of the entire outstanding debt, which is why Section 14 is not applied to them.

In the recent case of P. Mohanraj v. Shah Bros. Ispat (P) Ltd.18, the Supreme Court has held that a surety in a contract of guarantee of a debt owed by a corporate debtor cannot avail of the benefit of a moratorium as a result of which a creditor can enforce a guarantee, though not being able to enforce the principal debt during the period of moratorium.

Conclusion

It is now clear that a surety’s liability to pay the debt is not removed by reason of the creditor’s omission to sue the principal debtor, as the law recognises the same under Section 14(3)(b) IBC. The creditor is not bound to exhaust his remedy against the principal debtor before suing the surety/guarantor. Meaning thereby, an arbitral proceeding can be maintained against the surety even when the principal debtor has not been made party or is no longer a party in an arbitral proceeding. It is a settled law that a surety/guarantor’s liability is coextensive with that of the principal borrower. A guarantor can be proceeded against even without keeping the principal borrower as the party to the arbitral proceedings. Thus, where the liability of a person arises in its own capacity (as a guarantor/surety) separate from the corporate debtor, such person cannot seek the shelter of the moratorium imposed in relation to the corporate debtor. Indeed, courts have consistently rejected the defence that proceedings against guarantors cannot continue in view of the moratorium imposed against the principal debtor.19It is also observed that when a moratorium is imposed on the principal debtor, Court often allows the continuance of suit or arbitral proceedings against the promoters/directors of a company mostly in those cases wherein such surety/director has officially made themselves as the personal guarantors/sureties of the company20.

Therefore, arbitration proceedings can be continued against a director/promoter even after a moratorium is imposed against the principal borrower i.e. the company.

*Advocate. Author can be reached at <garimasharma97@gmail.com>.

1. Insolvency and Bankruptcy Code, 2016, S. 14.

2. AIR 1969 SC 297.

3. (2009) 9 SCC 478.

4. Recovery of Debts and Bankruptcy Act, 1993 [as amended], S. 19.

5. Constitution of India, Art. 227.

6. 2017 SCC OnLine Bom 9725.

7. (2018) 17 SCC 394.

8. (2018) 17 SCC 394.

9. (2019) 4 SCC 17.

10. 2019 SCC OnLine Del 9457.

11. 2019 SCC OnLine Guj 6933.

12. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019.

13. Insolvency and Bankruptcy Code, 2016, S. 14.

14. Contract Act, 1872, S. 128.

15. (2021) 9 SCC 321.

16. Insolvency and Bankruptcy Code, 2016, S. 31(1).

17. Contract Act, 1872, Ss. 128–141.

18. (2021) 6 SCC 258.

19. IFCI Factors Ltd. v. Ramsarup Industries Ltd., 2019 SCC OnLine Del 9457.

20. Vijay Kumar Jain v. Standard Chartered Bank, (2019) 20 SCC 455; Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321.

SCC Part
Cases ReportedSupreme Court Cases

   

Constitution of India — Arts. 300-A and 31 — Expropriation of private property by State — Compensation — Entitlement: State on ground of delay and laches cannot evade its legal responsibility towards those from whom private property has been expropriated. Right against deprivation of property unless in accordance with procedure established by law, continues to be a constitutional right under Art. 300-A. It is cardinal principle of rule of law, that nobody can be deprived of liberty or property without due process, or authorisation of law. When it comes to subject of private property, high threshold of legality must be met, to dispossess an individual of their property, and even more so when done by State. [Sukh Dutt Ratra v. State of H.P., (2022) 7 SCC 508]

Criminal Law — Criminal Trial — Sentence — Principles for sentencing — Victimology — Just punishment — Recognises protection of victim’s right — Right of victim or their near and dear ones to seek enhancement of sentence: Victim’s right (including that of victim’s relations, heir or guardian), is a facet of human rights, a substantive and enforceable right and deserves equal regard. Criminal cannot be treated leniently solely on the ground of discretion vested in court. Victim’s relations, heir or guardian should be treated as victim. [Jaswinder Singh v. Navjot Singh Sidhu, (2022) 7 SCC 628]

Debt, Financial and Monetary Laws — Debt, Debt Recovery and Relief — Sale of debtor’s property — Maintainability of writ petition to set aside auction-sale: Hearing of writ petition challenging the auction-sale is not permissible, when proceedings invoked by petitioner in fora below were themselves found non-maintainable. [Deenadayal Nagari Sahakari Bank Ltd. v. Munjaji, (2022) 7 SCC 594]

Evidence Act, 1872 — Ss. 65-A and 65-B — Admissibility of electronic records — Non-compliance with requirement of certification of electronic evidence: Certificate under S. 65-B(4), Evidence Act is mandatory for production of electronic evidence, oral evidence in place of such certificate cannot suffice. [Ravinder Singh v. State of Punjab, (2022) 7 SCC 581]

Insolvency and Bankruptcy Code, 2016 — Ss. 5(13) and 53 — Claims of workmen/employees towards their wages/salaries during CIRP — Payability of, as CIRP costs: While considering the claims of the workmen/employees concerned towards the wages/salaries payable during CIRP, first of all it has to be established and proved that during CIRP, the corporate debtor was a going concern and that the workmen/employees concerned actually worked while the corporate debtor was a going concern during CIRP. Further, as per S. 5(13) only with respect to those workmen/employees who actually worked during CIRP when the corporate debtor was a going concern, their wages/salaries are to be included in CIRP costs and they shall have the first priority over all other dues as per S. 53(1)(a). Also, any other dues towards wages and salaries of the employees/workmen of the corporate debtor shall have to be governed by Ss. 53(1)(b) and 53(1)(c). [Sunil Kumar Jain v. Sundaresh Bhatt, (2022) 7 SCC 540]

Land Acquisition Act, 1894 — S. 23 — Compensation — Determination — Sale exemplars which may be considered: Sale instances of adjacent village either subsequent to land acquired or with respect to small areas of land — Whether may be considered, explained. [Ramrao Shankar Tapase v. Maharashtra Industrial Development Corpn., (2022) 7 SCC 563]

Negotiable Instruments Act, 1881 — S. 138 r/w S. 142 — Dishonour of cheque where a company is payee of that cheque — Filing of complaint in such a case — Maintainability — Prerequisites: When a company is payee of cheque based on which a complaint is filed under S. 138 of the NI Act, the complainant necessarily should be the company represented by an authorised employee. For maintainability of complaint in such cases, prima facie indication in complaint and sworn statement (either orally or by an affidavit) before court to the effect that complainant company is represented by an authorised person who has knowledge about transaction in question, would be sufficient. Such averment and prima facie material is enough to take cognizance and issue process. Issue as to whether aforesaid authorisation and knowledge about transaction is proper, is a matter for trial. [TRL Krosaki Refractories Ltd. v. SMS Asia (P) Ltd., (2022) 7 SCC 612]

Penal Code, 1860 — S. 300 [S. 300 Thirdly] and Ss. 341, 447, 504 and 506 — Case whether one of murder, when the assault is not made with any weapon, but only by legs and hands — Determination of: In this case, material clearly established that after deceased fell down with the help of co-accused, accused K kicked and assaulted deceased on his neck with his legs and hands. Ocular version supported by medical evidence, which indicated that the deceased suffered abraded contusion of reddish blue colour on the neck area and abraded contusion reddish in colour on the left side of the chest. Further, internal dissection revealed profuse bleeding over the muscles of the neck surrounding the arteries that were ruptured. Further, certain left side ribs also fractured. Ventral part of the sternum also broken into two pieces and the spinal cord at certain level also contused, edematous and elongated. Cause of death opined as haemorrhagic shock as a result of multiple injuries, hence, conviction of accused K under Ss. 302, 341, 447, 504 and 506, held, justified. [Krishnamurthy v. State of Karnataka, (2022) 7 SCC 521]

Rent Control and Eviction — Mesne Profits/Compensation/Occupation charges/Damages for wrongful use/trespass: Principles clarified regarding proper basis and reasonable manner of determination of mesne profits of residential property on termination of leave and licence agreement pending first appeal. [Anar Devi v. Vasudev Mangal, (2022) 7 SCC 504]

Service Law — Appointment — Invalid appointment/Wrong appointment/Illegal appointment: Appointment dehors statutory rules, reiterated, is void ab initio. [State of Odisha v. Sulekh Chandra Pradhan, (2022) 7 SCC 482]

Service Law — Judiciary — Promotion: In this case, for promotion to 25% of posts of Higher Judicial Service strictly on basis of merit through Limited Departmental Competitive Examination (LDCE) from Civil Judges (Senior Division), eligibility criteria applicable, only for Delhi Higher Judicial Service (DHJS), was modified, both in terms of: (A) Civil Judges who would be eligible, and (B) Period of qualifying service re different categories of Civil Judges, due to non-availability of candidates as per the existing prescribed criteria, and, parity of work performed by Civil Judge (Junior Division) and Civil Judge (Senior Division) in Delhi. Civil Judges (Junior Division), held, also to be eligible for promotion to DHJS via this channel if they satisfied the norms as specified herein. [All India Judges Assn. v. Union of India, (2022) 7 SCC 494]

Insolvency Law
OP. ED.SCC Journal Section Archives

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) was inter alia enacted to consolidate and amend the laws relating to the reorganisation and insolvency of corporate persons. It marked a sea change (nautical references will be a recurring theme in this piece) in the manner in which corporate insolvencies were treated. Replacing multiple legislation and mechanisms in this field, the legislature saw the need for a complete “Code”, rather than an “Act”, to “bring the insolvency law in India under a single umbrella with the object of speeding up of the insolvency process”.1

Although the Code did address many problems relating to restructuring and insolvency law, one issue that has cropped up is its general application to all corporate entities, whereas certain types of corporate entities would require differential treatment. For instance, real estate companies were a class of corporate entities where the extant provisions in the Code were found to be problematic. Accordingly, by an amendment2, the Code now specifies a minimum number of allottees in a real estate project who must join an action to trigger a corporate insolvency resolution process (“CIRP”). Similarly, financial service providers, despite being corporate entities, are treated differently inasmuch as they are not “corporate persons”3 and an application against them for initiation of a CIRP would not lie as it would for other corporate entities. Pursuant to Section 227 of the Code and to an extensive report which proceeds on the basis that “financial firms are different from other firms”4, the Central Government notified separate rules5 for them.

Therefore, there appears to be a recognition that the Code cannot apply to all corporate entities uniformly. While, perhaps understandably, shipping companies did not loom large on the lawmakers’ horizon, they too are an entirely distinct subset of corporate entities and present unique challenges for the purpose of the Code.

The primary assets of shipping companies tend to be the vessels themselves. The difficulty arises on account of the fact that a vessel is to be treated as an independent juristic person. This has followed the long and storied development of admiralty law internationally, leading to the excellent judgment of Thommen, J. in MV Elisabeth v. Harwan Investment and Trading (P) Ltd.6 reading those internationally-accepted positions into Indian law. A person having a maritime claim (which includes the higher subset of maritime lien) could proceed against the vessel independent of the owner. Unless the owner entered appearance and deposited security, the vessel could be sold and the proceeds appropriated as per a predetermined waterfall amongst different categories of claimants. India codified admiralty law for the first time through the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (“the Admiralty Act”),7 largely following extant international conventions and the position in common law. Pertinently for us, it continued treating vessels as independent juristic persons; allowed those vessels to be proceeded against independently; and prescribed a waterfall for treatment of claimants vis-à-vis the sale proceeds.

It was thus inevitable that the provisions of the Code and the subsequent Admiralty Act would have to be reconciled in the case of a shipping company undergoing a CIRP. In an admirable attempt to resolve this impasse, the Bombay High Court pronounced an exhaustive judgment in Barge Madhwa8.

DECISION IN BARGE MADHWA8

The Court first examined whether or not there was a conflict between the two statutes. It observed that in the event of a conflict between two special statutes—one with a non obstante clause and the other without—the one with a non obstante clause would prevail.9 This presumably proceeds on the basis that both the Code and the Admiralty Act were deemed to be special statutes. However, the Court did not find itself to be in a position where this principle of statutory interpretation would have to be applied because it concluded that there was no conflict and it was possible to harmoniously interpret the two statutes.10

The Court found that since admiralty proceedings were in rem against the vessel, a distinct juridical entity, they were capable of being initiated both during moratorium11 and in liquidation12. However, if the owner of the vessel entered appearance and furnished security, the admiralty suit would no longer be in rem, but would be in personam against the owner of the vessel. Consequently, the moratorium prescribed under the Code13 would apply and the suit would not proceed.8 Where no security was furnished by the owner, the admiralty suit would continue to be a proceeding in rem and thus not barred by the moratorium. However, while the vessel could be arrested/remain under arrest, the suit would not to proceed during the CIRP since that would undermine the objectives of the Code.14 No such limitation would exist once liquidation commenced and the vessel could be sold and the proceeds distributed in accordance with the Admiralty Act. In fact, the Court correctly observed that a sale under the Admiralty Act would likely fetch a better price since it would be free of all encumbrances (including liens).15

Further, it held that an arresting plaintiff would be considered as a secured creditor (qua the vessel) for the purposes of a Resolution Plan under the Code, and would be entitled to satisfaction of its claim as if sale proceeds had been distributed on the basis of the priorities enlisted in Section 10 of the Admiralty Act.16 If, on an application of this formula, the entirety of its claim were not satisfied, it would rank as an operational creditor for the remainder of its claim.17

BATTENING DOWN THE HATCHES

Despite the attempt by the Bombay High Court to harmonise the Code and the Admiralty Act, there are a few issues that require consideration, inasmuch as these form the basis of the harmonisation exercise in Barge Madhwa8 and necessitate a particularly delicate balancing act. For the purpose of this article, the following four broad categories have been dealt with:

(a) Vessels as independent juristic persons.

(b) The treatment of a plaintiff as a secured creditor for the purpose of a resolution plan under the Code.

(c) Distribution of proceeds/determination of priorities in liquidation.

(d) The Code — a general law or special law?

Vessels as Independent Juristic Persons

To aid the process of reorganisation, the Code mandates a moratorium13 during which the institution or continuation of suits or proceedings against the company is prohibited. But what of vessels that are independent juristic persons? If suits against them are allowed to proceed, a shipping company is likely to be left with no assets to offer a prospective resolution applicant. Imagine the steel producing factories of Essar Steel being treated as independent juristic persons against whom the moratorium would not operate — would there be any chance of a successful resolution process?

The Bombay High Court, relying upon the decision in MV Elisabeth6, has reiterated that a vessel is a “separate juridical personality” and, more importantly for this study, that a person having a maritime claim against the vessel: (Barge Madhwa case8, SCC OnLine Bom para 40)

40. … has a right in rem conferred by the Admiralty Act, to arrest the vessel to perfect his claim … a very valuable right which cannot be taken away or destroyed by implication or inference unless there is an express provision in any law to this effect.8

Given that there was no express bar against proceeding against vessels in rem under the Code, it was held that “there is little conflict … the two Acts can be read and construed harmoniously so as to give effect to both”.18 This harmonious construction leads to the mechanism which Barge Madhwa8 prescribes—the existence of a moratorium would not preclude the initiation or continuation of admiralty proceedings, however, they would not proceed beyond the arrest of the vessel since that “would defeat the very purpose of insolvency resolution under the IBC”19.

This tightrope walk i.e. finding that a vessel is a distinct juridical entity and thus a moratorium would not protect it, but then restricting any such action to the arrest of the vessel alone and prohibiting further steps, being the sale of the vessel and distribution of the proceeds, is the price one must pay in terms of conceptual purity at the altar of practicality and harmonious construction. If the vessel was distinct from the corporate entity, which indeed it is, there is no reason in theory that would justify prohibiting a sale and the distribution of proceeds. This would, however, render the insolvency resolution attempt of any shipping company entirely untenable. Any harmonious construction of the two statutes would have to be anchored by the accord struck in Barge Madhwa8 which prohibits these further steps from taking place. However, as will be seen below, this tightrope walk leads to problems of its own.

Treatment of Admiralty Act plaintiffs in an Insolvency Resolution

One of the other pillars of the harmonious construction exercise is the treatment of a plaintiff who has secured an arrest order from an admiralty court. Barge Madhwa8, following the decision of the Court of Appeal in ARO Company Ltd., In re20 holds that once a person has obtained an arrest, the vessel stands charged with his claim and he thus becomes a secured creditor. Accordingly, any resolution plan must treat that plaintiff as a secured creditor for the value of his charge on the vessel.

This proposition is difficult to reconcile with the definition of a secured creditor under the Code. Under the Code21, a secured creditor is defined as one in whose favour a security interest has been created, which in turn is defined22 as any right, title, interest or claim to property created to secure the payment or performance of an obligation. It is submitted that, it is difficult to see how the mere factum of an arrest or the deposit of money into court to secure the release of an arrested vessel, creates a security interest as defined under the Code. This is particularly so because there would be no adjudication of the plaintiff’s claim given that further proceedings are stayed. Even if there is a deposit, it would be in favour of the plaintiff only once the suit is decreed. Such a mechanism would also tantamount to an artificial distinction between similarly placed creditors, say bunker suppliers, in their treatment in the resolution process—some of who may be “secured” by obtaining the arrest and others who have not.

There is a further difficulty. Barge Madhwa8 says that, “In such a situation plaintiff should ordinarily be entitled to realise his claim to the full extent of the security provided.”23 In practice, this would mean that various claimants who qualify as operational creditors under the Code will have to be paid out in full prior to any financial creditors, who effectively control the CIRP. Whether this is something that would appeal to the “commercial wisdom” of the committee of creditors is anyone’s guess; it is entirely likely that such treatment would lead to the exact situation which the Court wished to avoid in the first place, i.e. undermining the resolution process under the Code.

Determination of priorities in liquidation under the Code and the Admiralty Act

Difficulties though, are not confined only to the designation of an arresting plaintiff as a secured creditor in the CIRP. In the event that the CIRP fails, the shipping company would immediately proceed to liquidation. This gives rise to a difference in treatments under the Code and the Admiralty Act which is impossible to overcome without one prevailing over the other.

Under the Code, Section 53, which begins with a non obstante clause, sets out the distribution waterfall with respect to sale proceeds of the liquidation assets. In the Admiralty Act, Sections 9 and 10 deal with the determination of priorities. For several categories of claims these provisions are at odds with one another. For instance, the wages of seamen working on the vessel would constitute the highest category of maritime lien under Section 9 of the Admiralty Act, which consequently is the highest category of maritime claim during the determination of priorities. In other words, seamen wages would be paid out in full and have the first right over the sale proceeds of the vessel. Under the Code, seamen would be considerably worse off. Firstly, a secured creditor of the vessel could choose to remain outside liquidation altogether, in which case the seamen would have no specific right with respect to the sale proceeds of that vessel. Even otherwise, assuming that there is either no mortgagee of the vessel or the mortgagee has relinquished his rights in favour of the liquidation estate, seamen’s claims would rank pari passu with such secured creditors, and that too only for wages which precede the date of liquidation by 24 months. A similar situation would also arise with respect to port dues and statutory dues, which albeit ranking lower than crewmen’s wages, still constitute maritime liens and hence, rank above a secured creditor under the Admiralty Act while falling further down the waterfall under the Code.

In Barge Madhwa8, the Bombay High Court has addressed this conundrum by finding that, on liquidation, the: (SCC OnLine Bom para 102)

102. … determination of priorities will also be done in accordance with Section 10 of the Admiralty Act and inter se priorities of maritime liens will be decided in accordance with Section 9 of the said Act. Section 53 of IBC which refers to distribution of assets will not apply.24

Although the pronouncement of law is categorical, there are a few issues that merit consideration. Firstly, is it fair that wages for seamen are accorded such a high priority in the case of a liquidation under the Code when wages of workmen in other industries fall far lower in the pecking order? Was this the legislative intent i.e. distinguishing between workers on a ship and, for instance, workers in a coal mine, both of whom are subject to considerable personal peril? Secondly, elsewhere in the decision, the Court arrived at a finding that: (Barge Madhwa case8, SCC OnLine Bom para 72)

72. … where there are two special enactments, one of which contains a non obstante provision and bars the jurisdiction of the civil court and the other which does not contain a non obstante provision, the clear legal position is that in the event of conflict, the former Act will prevail. The principle of interpretation that the later Act overrides the earlier Act is not applicable in such a situation.9

Therefore, in the event of a conflict, this would suggest that the Code would prevail over the Admiralty Act. It is then difficult to see the legal justification for why the determination of priorities would proceed in accordance with the Admiralty Act rather than the Code.

This leads straight to the next part of this article where it is considered whether the Code is in fact a general law and the Admiralty Act, being a special law, ought to prevail.

The Code: A General Law or Special Law?

The decision in Barge Madhwa8 tries to harmonise the Code and Admiralty Act—as any judgment must attempt to—and finds that there is no conflict. The difficulties with such an approach have been considered above and the apparent conflicts that arise. While it may be possible to harmonise the statutes in the context of proceedings in rem against a vessel, which Barge Madhwa8 has done excellently, it is submitted that in the treatment of the plaintiffs as secured creditors and the determination of priorities in liquidation, the two statutes are completely divergent, and harmonisation may not have been the appropriate answer.

It is submitted that it would have been apposite for the Court to consider whether one statute would prevail over the other in these circumstances. Although having found that the two statutes are capable of harmonisation, the Court has observed that, in the case of two special statutes, one of which contains a non obstante clause, that statute would prevail in the case of a conflict. This would suggest that the Code would prevail. However, there is another way to consider this situation.

A statute may be general in one context, but special in another; what has to be seen to determine whether or not a statute is general is (i) its principal subject-matter, and (ii) the perspective in consideration.25 As we have seen above, the Code was enacted to consolidate and amend insolvency laws.26 In doing so, it does not distinguish amongst different types of corporations and applies uniformly to all of them. The Admiralty Act, on the other hand, applies only in the context of shipping corporations.

Moreover, claims such as “rewards for salvage services”, and in respect of “loss of life and personal injury” do not even find a mention under the Code. These are claims which are unique to the Admiralty Act and would, at best, fall under the residual category of “any remaining debts and dues” under Section 53 of the Code. They would thus rank sixth in the order of priorities under the Code, but rank highest under the Admiralty Act. Mortgage debts, on the other hand, would be satisfied on a priority basis under the Code whereas, under the Admiralty Act, they would be satisfied only after all maritime liens have been discharged.

Therefore, it is apparent that, while the Code deals generically with classes of creditors that would ordinarily be found in any corporation, the Admiralty Act recognises certain stakeholders that are unique to maritime operations and provides for a distinct manner in which their interests are to be satisfied. This again suggests that the Admiralty Act is a special law vis-à-vis the Code.

Maritime liens are another marker for why the Admiralty Act should be treated as a special law qua the general Code. As Nigel Meeson puts it poignantly, a maritime lien, although a sui generis concept,27 is essentially a charge which adheres to the vessel from the time the fact giving rise to the lien occurs and which continues to bind the ship until it is discharged.28 The fact that a vessel may change hands, whether in terms of possession or ownership, is immaterial.29 A maritime lien continues to attach itself to the vessel.

Under Section 31(1) of the Code, a resolution plan, once approved by the adjudicating authority, is binding on the corporate debtor and its creditors. However, insofar as maritime lien holders are concerned, they are not just creditors of the corporate debtor, but their claim also attaches to the vessel regardless of ownership, until it is discharged. Therefore, conceptually, this charge would continue to attach itself to the vessel even if the ownership of the corporate debtor changed hands under a resolution plan. The Code neither contemplates, nor deals with such a scenario. On the contrary, Section 8 of the Admiralty Act does. It says that, on the sale of a vessel by an admiralty court, it would vest free of all liens, attachments, charges, encumbrances and registered mortgages.

In light of these reasons, we believe that considering the subject-matters of the two statutes as well as from the perspective of the stakeholders involved, the Admiralty Act is a special statute vis-à-vis the Code. Although Barge Madhwa8 has made a creditable attempt to harmonise the two statutes, given the difficulties that are likely to arise, it is submitted that the Court ought to have held that the Admiralty Act prevails over the Code. This would no doubt lead to a CIRP for shipping companies being rendered difficult—given that their assets would be the subject-matter of admiralty proceedings—but we see that as something that is likely to arise even under the harmonisation method. It would, however, lead to a quicker resolution through sale of the vessel in case the shipowner is defunct, and the distribution of proceeds as per the maritime industry’s time-honoured priorities (now encapsulated in the Admiralty Act), without undergoing a CIRP and dealing with competing creditors. It would also serve the overarching principle of the Code i.e. maximisation of value given that a prompt admiralty sale is likely to achieve a far higher price, in light of Section 8 and without the delays of the CIRP.

† Advocates, Bombay High Court.

*The article has been published with kind permission of SCC Online cited as (2021) 5 SCC J-31

1 Innoventive Industries v. ICICI Bank, (2018) 1 SCC 407, para 13 (Nariman, J.).

4 Report of the Sub-Committee of the Insolvency Law Committee for Notification of Financial Service Providers under Section 227 of the Insolvency & Bankruptcy Code, 2016, 1 (dated 4-10-2019).

7 The Act came into effect on 1-4-2018.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651

9 Id, para 72.

10 Id, paras 78 to 131.

11 Id, para 112.

12 Id, para 123.

14 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651, para 100.

15 Id, para 125.

16 Id, para 104.

17 Id, para 106.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

6 MV Elisabeth v. Harwan Investment and Trading (P) Ltd., 1993 Supp (2) SCC 433

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651, para 40.

18 Id, para 90.

19 Id, para 92.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

23 Id, para 98.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

24 Id, para 102.

9 Id, para 72.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

25 See: LIC v. D.J. Bahadur, (1981) 1 SCC 315; Yakub Abdul Razak Memon v. State of Maharashtra, (2013) 13 SCC 1.

27 Nigel Meeson & John Kimpbell, Admiralty Jurisdiction and Practice (4th Edn., Lloyd’s Shipping Law, 2011) p. 260.

28 Id, p. 266.

29 Id, pp. 260-61.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

SCC Part
Cases ReportedSupreme Court Cases

   

Army Act, 1950 — Ss. 125, 126, 69, 3(ii) and 70 — Criminal trial — Concurrent jurisdiction of court martial under Army Act and criminal courts under CrPC: When Designated Officer/Commanding Officer impliedly declined to exercise discretion to conduct trial in court martial. Trial by criminal court under CrPC, held, mandatory. In a case of concurrent jurisdiction, when court martial has impliedly declined to conduct trial, criminal court cannot direct the court martial to do the same. [State of Sikkim v. Jasbir Singh, (2022) 7 SCC 287]

Civil Procedure Code, 1908 — Or. 41 R. 27 — Admissibility of additional evidence in appellate court not adduced in the court of original jurisdiction: Admissibility of additional evidence under Or. 41 R. 27 CPC does not depend upon the relevancy of the issue on hand, or whether the applicant had an opportunity for adducing such evidence at an earlier stage or not, but it depends upon whether or not appellate court requires the evidence sought to be adduced to enable it to pronounce judgment or for any other substantial cause. That is, whether such additional evidence has a direct bearing on pronouncement of the judgment. [Sanjay Kumar Singh v. State of Jharkhand, (2022) 7 SCC 247]

Constitution of India — Arts. 21, 32 and 226 — Constitutional/Public Law Torts/Public Safety — Violation of life and personal liberty: Where life and personal liberty have been violated, absence of any applicable statutory provision(s) for compensation is of no consequence. Right to life guaranteed under Art. 21 is the most sacred right preserved and protected under the Constitution, violation of which is always actionable and there is no necessity of any statutory provision as such for preserving that right. Thus, a writ petition seeking compensation is maintainable. Furthermore, Art. 21 has to be read into all public safety statutes, since prime object of public safety legislation is to protect individual and to compensate him for loss suffered. Duty of care expected from State or its officials functioning under public safety legislation is very high. [Sanjay Gupta v. State of U.P., (2022) 7 SCC 203]

Constitution of India — Arts. 300-A and 226 — Right to property: Deprivation of property can only be permitted when and to the extent it is strictly in compliance with applicable law. Land reserved for public purpose under Town Planning law. Lapse of acquisition due to inaction of executive to acquire land within prescribed statutory time period cannot be interfered with by Court contrary to scheme of the applicable statute. [Laxmikant v. State of Maharashtra, (2022) 7 SCC 252]

Education Law — Professional Colleges/Education — Medical and Dental Colleges — Reservation of seats/Quota/Exemption/Priority in Medical/Dental Institutions: In this case, directions were issued to implement roster point-based reservation for preferential candidates as followed by JIPMER in all AIIMS institutes. However, roster points need not be similar to that of JIPMER. This order directed to be applicable for admission from year 2022. Students Assn. [AIIMS v. AIIMS, (2022) 7 SCC 201]

Insolvency and Bankruptcy Code, 2016 — Ss. 8, 9, 5(20), 5(21), 3(6) and 3(12) — Procurer/purchaser of services/goods from corporate debtor by rendering advance payments to it — Consideration of, as operational creditor: Debt arising from a contract in relation to supply of goods/services by corporate debtor amounts to “operational debt”. [Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164]

Land Acquisition Act, 1894 — S. 23 — Compensation awarded in another proceeding: Extent to which compensation awarded in another proceeding may be relied on, all relevant factors and necessity of consideration of it, explained. [LAO v. N. Savitha, (2022) 7 SCC 256]

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — S. 35 r/w Ss. 13(2), 13(4) and 2(1)(zc) to (zf) — Dues of secured creditor, priority of, over dues of Central Excise Department: Dues of secured creditor over the properties of assessee have priority over dues of Central Excise Department. Prior to insertion of S. 11-E of the Central Excise Act, 1944 there was no provision in the 1944 Act inter alia providing for first charge on the property of the assessee or any person under the 1944 Act. Further, S. 35 of the SARFAESI Act inter alia provides that the provisions of the SARFAESI Act shall have overriding effect on all other laws. Also, even the provisions contained in S. 11-E of the Central Excise Act are subject to the provisions contained in the SARFAESI Act. [Punjab National Bank v. Union of India, (2022) 7 SCC 260]

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Appellate Tribunal, Delhi: The Bench of Anant Bijay Singh, J., Judicial Member, and Shreesha Merla, Technical Member, dismissed a company appeal and held that a One-Time Settlement Proposal (OTS proposal) falls within the definition of ‘acknowledgment of debt' as defined the provisions of the Limitation Act, 1963.

Background of the case

Financial Creditor, Bank of Baroda, extended financial assistance to the Corporate Debtor through various term loans for an amount of Rs.9,91,00,000/-. On 01-08-2016, an OTS proposal was filed by the Corporate Debtor before the DRT, Pune, but it was not accepted by Financial Creditor. Thereafter, a new OTS proposal was proposed on 07-03-2018 which was accepted by the Financial Creditor on 27-03-2018. However, the Corporate Debtor failed to pay its repayment obligations.

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Act, 2016 (IBC), seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Adjudicating Authority admitted the application and initiated CIRP against the Corporate Debtor. The Corporate Debtor filed an appeal before the NCLAT, challenging the initiation of CIRP.

Analysis and decision

After considering the facts, the Bench relied on the Supreme Court judgment, Dena Bank v. C. Shivkumar Reddy, (2021) 10 SCC 330, where it was held that “Section 18 of the Limitation Act, 1963 gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate Resolution Process under Section 7 of IBC ensures. Section 18 of the Limitation Act would come into whenever the Principal Borrower and/or the Corporate Guarantor (Corporate Debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgment, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to ‘acknowledgment of the debt', from time to time, for the institution of the proceedings under Section 7 of IBC. Further, the acknowledgment must be of a liability in respect of which the ‘Financial Creditor' can initiate action under Section 7 of IBC. Hence, the Court sees no reason why an offer of One Time Settlement of a live claim, made within the period of limitation, should not also be construed as an acknowledgment to attract Section 18 of the Limitation Act.”

In the light of the above-mentioned judgment, the Bench held that the OTS proposal dated 01-08-2016 and 27-03-2018 falls within the definition of the ambit of ‘acknowledgement of debt' as envisaged under Section 18 of the Limitation Act, 1963. Hence, dismissed the company appeal.

[Tejas Khandhar v. Bank of Baroda, Company Appeal (AT) (Insolvency) No. 371 of 2020, decided on- 12-07-2022]

Advocates who appeared in this case :

Pulkit Deora, Advocate, for the Appellant;

Mr Brijesh Kumar Tamber , Advocate, for the Bank of Baroda;

Lzafeer Ahmad B.F, Advocate, for the Resolution Professional.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Hyderabad: The Bench of N. Venkata Ramakrishna Badarinath, Judicial Member, and Veera Brahma Rao Arekapud, Technical Member held that a guarantor cannot enjoy the right of subrogation enunciated in the Contract Act, 1872, when the payment made by the guarantor regards the debt for which the guarantee was provided.

The company petition was filed by the financial creditor seeking to initiate the Insolvency Resolution Process against the personal guarantor by invoking the provisions under Section 95 of Insolvency Bankruptcy Code, 2016 (Hereinafter as IBC) read with Rule 7 (2) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 for a resolution of Rs 208,21,65,555.24 Crores.

The issue to be decided on

Whether the approved Resolution Plan bars the financial creditor to initiate Insolvency Resolution Process against the personal guarantor?

Analysis and decision

The Bench observed that as per Section 134 of the Contract Act, 1872 a guarantor is discharged of its liability towards the creditor only if the creditor in its instance discharges the principal debtor. The main ingredient of this Section is that the debtor discharges through a voluntary act of the creditor and not due to the operation of law.

Further, the Bench opined that a Corporate Insolvency Resolution Plan does not bar a financial creditor against a guarantor, and a financial creditor can always approach an adjudicating authority as envisaged under the IBC.

At this juncture, the Bench relied on the judgment of the Supreme Court in Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, wherein it was held that 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. The release or discharge of a principal borrower from the debt owed by it to its creditor is 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.

Therefore, the Bench applied the same principle as laid down in the aforementioned case and held that a guarantor cannot be subrogated from his liabilities towards a debt for which a guarantee is provided.

Hence, the Bench allowed the company petition, and directed to initiate an insolvency resolution process against the personal guarantor by declaring him insolvent.

[State Bank of India v. Ghanshyam Surajbali Kurmi, 2022 SCC OnLine NCLT 177, decided on- 07-07-2022]

Advocates who appeared in this case :

Shri. Amir Bavani, Advocate, for the Petitioner;

Shri. Varun Ambati, Advocate, for the Respondent;

Resolution Professional in person, for Resolution Professional.

Op Ed
Op EdsOP. ED.

Introduction

In its decision in Lalit Kumar Jain v. Union of India2, the Supreme Court allowed creditors like banks and other financial service providers to proceed against personal guarantors including promoters, MDs, and Chairmen of the corporate debtor for recovery of corporate loans under the Insolvency and Bankruptcy Code, 20163 (IBC). The common objection of the petitioners who had furnished personal guarantees was against the validity of the Central Government Notification dated 15-11-2019 (notification) which brought into force Part III of the IBC relating to insolvency and bankruptcy of individuals and partnership firms insofar as it is applicable to personal guarantors and corporate debtors. This piece seeks to examine the judgment in light of its consistency with Indian contract law and also analyse its impact on the sector.

Case outline

Post the release of the notification, several personal guarantees were invoked causing complications in insolvency proceedings at different stages since adjudication against both corporate debtor and personal guarantor were now clubbed under National Company Law Tribunal’s (NCLT) charge. The petitioners contended that the exercise of power by the Central Government conferred to it under Section 1(3)4 IBC was vitiated by excessive delegation, as it does not have the authority to impose conditions on the enforcement of the IBC. Thus, enforcing provisions of Part III only in relation to personal guarantors of the corporate debtors was a condition imposed by the Central Government which was ultra vires of its powers. Since it is not a compulsion under IBC for it to be applied to all individuals at the same time, the Supreme Court upheld the notification and held the exercise of power as intra vires. Another substantive question of law to be ascertained by the Supreme Court was whether the personal guarantor is also discharged of its liability on sanction of a resolution plan like the corporate debtor. The Court’s examination of the same is analysed in the following section.

Consistency with the contract law regime

A. Co-extensive liability

The petitioners urged that the application of IBC to only personal guarantors would override the protection of guarantors in contract of guarantee under the Contract Act, 18725 . Reliance was placed on the co-extensive principle under Section 1286 of the Contract Act, 1872, whereby, the liability of the surety is co-extensive with that of the principal debtor, and if the latter’s liability is discharged, so would the former’s. Thus, since the corporate debtor is discharged of any liability once a resolution plan is accepted, the personal guarantor’s liabilities must also be extinguished. Hence, by allowing creditors to separately proceed against the personal guarantors before the NCLT, the notification deprived them of their substantive statutory rights.

Rejecting this contention, the Supreme Court clarified that the sanction of a resolution plan and its finality under Section 317 IBC does not per se discharge the guarantor’s liability. Relying on Maharashtra SEB v. Official Liquidator8, the Court held that within the meaning of Section 128 of the Contract Act, in a case of an unequivocal guarantee, the liability of the guarantor continues as there is no discharge under Section 1349 of the Contract Act. It was observed that the principal debtor is discharged by an involuntary process of operation of law and not by an act or omission of the creditor and thus the creditor can proceed against the guarantor. Therefore, the discharge of liability of the corporate debtor due to an operation of law in liquidation proceedings does not ipso facto absolve the personal guarantor from its liability.

Reliance was also placed upon SBI v. V. Ramakrishnan10 wherein the Supreme Court held that a discharge of liability could not be sought by the guarantor upon approval of a resolution plan which could contain terms allowing continuation of debt of the guarantors. Moreover, since the liability of the personal guarantor arises from an independent contract, the nature and extent of the liability would depend on the terms under the contract. Therefore, conclusively, the creditors have the option to simultaneously proceed against the corporate debtor and its personal guarantor or they can choose to proceed in any order.

B. Principle of double dip

The continuation of a creditor’s claim against the guarantor does raise a legitimate concern over double recovery. The Solicitor General in Lalit Kumar case11 argued against this by relying on the principle of double dip, whereby the creditor can recover the same debt from two entities — principal debtor and guarantor or co-debtors or co-guarantors. Thus, until the creditor is paid the full amount, it can assert a claim for recovery against both or either of the entities or in case a portion is already paid by one, the other would be liable for the remaining amount as the liabilities of both are joint and several. Safeguards against double recovery are embedded in the contract law as also reiterated in the report of the Insolvency Law Committee that availability of simultaneous remedies against principal debtor and guarantor does not allow the creditor to recover more than the total debt due.12 Other safeguards can be found in IBC provisions itself. For example, Section 1413, under which a moratorium prohibiting institution of suits or continuation of pending suits/proceedings against the corporate debtor can be declared by the adjudicating authority.

Juxtaposing the principle of double dip with the principle of double proof, the Solicitor General in Lalit Kumar case14 contended that the latter is concerned with the claim of recovery of the same debt against the same estate twice, thereby leading to double payment out of one estate. On the other hand, the former involves claim of recovery of same debt against two separate estates, which is permissible under the insolvency laws. Accepting the arguments of the Solicitor General, the Supreme Court relied on Kaupthing Singer & Friedlander Ltd., (No. 2), In re15, wherein the UK Supreme Court had held that the principle of double proof does not prevent creditors to benefit from the principle of double dip and creditors can claim the same debt against two separate estates. The UK Supreme Court had further clarified that the creditors can proceed against either or both principal borrower and guarantor. However, if both are insolvent, then the creditor can proceed against each for the full amount but cannot recover more than the full amount in all. Therefore, the Supreme Court recognised the double dip principle and allowed the recovery of only the stipulated debt amount irrespective of who the creditor decides to proceed against and in which order.

In an earlier decision of Vishnu Kumar Agarwal v. Piramal Enterprises Ltd.16, the Nclat held that an application once admitted against one of the corporate debtors including principal debtor or corporate guarantor(s), the second application by the same creditor for the same set of claims and default cannot be admitted against the other corporate debtor. It was also held that a claim cannot be filed by the same creditor in two separate corporate insolvency resolution processes (CIRP) of principal borrower and corporate guarantor, for the same set of debt. However, advancing Rakhecha argument, this is a kind of double dip which is permissible in law as by following the rationale in Kaupthing Singer case17, if both the principal borrower and the guarantor are insolvent, then the creditor can proceed against each for the full amount but cannot recover more than the full amount.18 Pursuant to the evident violation of the principle of co-extensive liability of both the principal borrower and the guarantor under Section 128 of the Contract Act, an appeal against the decision is still pending before the Supreme Court. It infringes upon the statutory right of the creditors by restricting them to proceed against any corporate debtor.

The Supreme Court in Lalit Kumar case19 provided much needed clarity for personal guarantors, especially since Piramal judgment20 deals with corporate guarantors and not personal guarantors. The Supreme Court in Lalit Kumar case21 also held that the exception to moratorium envisaged under Section 14 extends to only corporate guarantors and not personal guarantors, thereby allowing a possibility of moratorium protection to personal guarantors unlike corporate guarantors. There is still an impending need for IBC to address such gaps in the legislation, especially in case of differential treatment of personal guarantors and corporate guarantors.

C. Right of subrogation

This statutory right under Section 14022 of the Contract Act puts the guarantor in the shoes of the creditor, allowing it to recover the amount paid on behalf of the principal debtor after the discharge of liabilities. A substantive question is whether a resolution plan allowing creditors to recover their dues from guarantors can, at the same time take away guarantor’s statutory right of subrogation. The IBC does not consider this right as an absolute right as it renders the process of insolvency pointless by further hampering the assets of the corporate debtor.

The petitioners in Lalit Kumar case23 argued that the creditors’ rights enjoyed by the guarantor would also include the right to file a resolution plan against the corporate debtor after the resolution process, which in the petitioners’ contention, the promoters (who are personal guarantors in most cases) are barred from filing under Section 29-A24 IBC. Thus, the petitioners criticised the impugned notification for the inability of personal guarantor to recover amounts from the corporate debtor.

The Court only briefly addressed this issue without delving into the fundamentals. Reliance was again placed on Kaupthing Singer & Friedlander Ltd. case25, wherein the UK Supreme Court had reiterated that the principal debtor has a primary obligation towards the creditor and only a secondary obligation to indemnify the guarantor if and so far, as it discharges the principal debtor’s liability. Similarly, the guarantor has an obligation to the creditor to pay on behalf of the principal debtor but has only a secondary right to recovery from the principal debtor. However, the Supreme Court in Lalit Kumar case26 left the argument at a vague note quoting UK Supreme Court’s observation in Kaupthing case27 that, if the principal debtor is already insolvent then the guarantor may not enforce its secondary right in competition with the creditor.

Thus, it can be modestly inferred that the Court’s assessment is biased towards the fulfilment of the sole purpose of debt recovery. In Essar Steel (India) Ltd. Committee of Creditors v. Satish Kumar Gupta28, the approval of Arcelor Mittal’s resolution plan providing deemed extinguishment of all claims of guarantors based on subrogation under the guarantee clearly indicated the prevalence of resolution plans over contractual rights of the personal guarantors. Such a right to denial vested with the corporate debtor is discriminatory as it advocates silencing of one set of guarantor’s rights to advance the rights of the creditors. Thus, effective safeguards need to be employed to prevent overriding of contractual rights.

Impact on the sector and concluding remarks

The judgment is beneficial to the creditors as it opens doors for them to access the asset pool of personal guarantors for debt recovery. However, it will also add to the already high bargaining power of the creditors against the corporate debtor leading to a concentration of powers with the creditors as now they have another route to recover loans besides the existing ones under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 200229 and debt recovery proceedings among other civil remedies. This might lead to a rise in quantity of litigation between the three stakeholders, creditors, corporate debtors, and their personal guarantors. The judgment may be worrisome for the promoters who act as personal guarantors for companies burdened with debt as they are not off the hook even after the acceptance of the resolution plan. In Ramanujam’s view, this violates the principle of limited liability and disincentivises entrepreneurial risk-taking which is equally important as comforting lenders for keeping the sector afloat.30 Thus, it is agreed that the promoters do take an additional risk by offering personal guarantee, however, for further nourishment of the sector, the focus must be on diligence on borrowing over giving additional comfort support to the creditors.

The unification of proceedings under NCLT will not only allow the adjudicating authority and committee of creditors to consider the complete picture while evaluating the nature of assets and framing of an optimal resolution plan, respectively, but also help in avoiding unnecessary delays in the recovery process. During the hearings, Attorney General K.K. Venugopal contended in support of the notification that roping in guarantors would incentivise them to pay off the debt faster in view of obtaining a quick discharge. However, the decision of non-discharge of personal guarantors even after acceptance of resolution plan would evidently disincentivise them to respond quickly, thereby leading to delays.

Overall, there is no doubt that the judgment is more inclined towards the debt recovery aspect of insolvency proceedings as opposed to encouragement of the prime objective of IBC i.e. rescue of corporate debtors in distress. Without concretising the boundaries of right to subrogation after the recovery of debt by invocation of the personal guarantee puts the already debt-laden corporate debtor in a more uncertain position vis-à-vis repayment to the personal guarantor. With the possibility of extinguishing this right of the guarantors in the aftermath of Essar decision31, the corporate debtors would increasingly rely on the assets of the personal guarantor which may result in an increased risk appetite for taking loans, owing to the added cushioning. On the other hand, some also contend that the inclusion of the personal guarantor’s assets to mitigate the corporate debtor’s liabilities might lower the total debt servicing of the corporate debtor.32

Post Supreme Court’s favourable decision, the creditors have invoked personal guarantees worth of Rs 34,000 crores in view of Rs 37,861 crores as the total debt default by companies.33 Thus, evidently, the majority of the burden is falling on the personal guarantors as lenders try to recover the total debt. Although this will improve the financial health of the banking sector, but the interests of the personal guarantors need to be the top priority in order to keep it afloat in the future.

† BBA LLB (Hons.), Jindal Global Law School, O.P. Jindal Global University, Haryana, India. Author can be reached at <muskaangarg2018@gmail.com>.

2. (2021) 9 SCC 321.

3. Insolvency and Bankruptcy Code, 2016.

4. Insolvency and Bankruptcy Code, 2016, S. 1(3).

5. Contract Act, 1872.

6. Contract Act, 1872, S. 128.

7. Insolvency and Bankruptcy Code, 2016, S. 31.

8. (1982) 3 SCC 358.

9. Contract Act, 1872, S. 134.

10. (2018) 17 SCC 394.

11. (2021) 9 SCC 321.

12. Ministry of Corporate Affairs, Report of the Insolvency Law Committee (February 2020).

13. Insolvency and Bankruptcy Code, 2016, S. 14.

14. (2021) 9 SCC 321.

15. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

16. 2019 SCC OnLine NCLAT 81.

17. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

18. Shradha Rakhecha, “Double Dip under IBC — A Tough Choice for Lenders — Contracts and Commercial Law — India” (Mondaq.com, 2019) <https://www.mondaq.com/india/contracts-and-commercial-law/864448/double-dip-under-ibc–a-tough-choice-for-lenders>.

19. (2021) 9 SCC 321.

20. 2019 SCC OnLine NCLAT 81.

21. (2021) 9 SCC 321.

22. Insolvency and Bankruptcy Code, 2016, S. 140.

23. (2021) 9 SCC 321

24. Insolvency and Bankruptcy Code, 2016, S. 29-A.

25. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

26. (2021) 9 SCC 321

27. (2012) 1 AC 804 : (2011) 3 WLR 939 : 2011 UKSC 48.

28. (2020) 8 SCC 531.

29. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

30. S. Ramanujam, “Double Whammy for Personal Guarantors to Corporate Debtors” (Lawstreetindia.com, 2021) <http://www.lawstreetindia.com/experts/column?sid=571>.

31. (2020) 8 SCC 531.

32. Utkarsh Anand, “Personal Guarantors Accountable in IBC:  SC” (livemint.com, 2021) <https://www.livemint.com/news/india/personal-guarantors-accountable-in-ibcsc-11621618103236.html>.

33. Dev Chatterjee, “Banks Invoke Rs 34K-Crore Personal Guarantees in 200 Cases So Far” (Business-standard.com, 2021) <https://www.business-standard.com/article/finance/lenders-rush-to-invoke-personal-guarantees-of-promoters-121090701089_1.html>.

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…

*                                    *                       *

  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]…

                                           *                                      *                                  *

  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:

                           *                         *                        *

  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:

    *                                                 *                                            *

  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]

      *                                          *                                                      *

  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…

*                                                       *                                                                       *

  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.

*                                                    *                                                                  *

  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.

 *                                                 *                                  *

  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

Reserve Bank of India
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]