Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Justice Anant Bijay Singh, Judicial Member and Shreesha Merla, Technical Member held that the Banks cannot freeze accounts, nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of the moratorium for its day-to-day functioning.

Instant appeal was filed by Bank of India, Central Bank of India, Syndicate Bank and State Bank of India against the National Company Law Tribunal’s decision wherein the Adjudicating Authority allowed the application filed by the Resolution Professional under Section 14 read with Section 17 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016.

Resolution Professional had sought a direction against the appellant Banks and Financial Institutions to reimburse the amounts appropriated by them after Insolvency Commencement Date, together with the amount appropriated towards interest payments and further to resume the working capital limits as available to the ‘Corporate Debtor’ as on the Insolvency Commencement Date.

Analysis, Law and Decision

Tribunal noted that the main case of the Appellant Banks was that this Tribunal vide an Order dated 09-08-2017 passed an interim order directing the Company to be run as a going concern, engaging all Banks where the Company had accounts, to co-operate with the IRP for the operation of the accounts.

Further, the IRP requested the banks to make available the limits which were subsisting as on the date of commencement of the process of Resolution. The LC facility was continued on request of the erstwhile RP and the LC Bills negotiated by the beneficiary Banks were retired by the ‘Corporate Debtor’. The amount was paid by the Company into their Cash Credit Account so that fresh LCs could be opened within the sanctioned limits to purchase necessary raw materials to keep the Company a going concern.

Section 17(1)(d) of the Insolvency and Bankruptcy Code states that the Financial Institutions maintaining the accounts of the ‘Corporate Debtor’ have to act on the instructions of the Interim Resolution Professional in relation to such accounts and furnish all information relating to ‘Corporate Debtor’.

Bench reiterated that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to the recovery of the amount.

 Moratorium Period

Tribunal expressed that Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the period of moratorium.

Keeping in view the above discussion, Bench opined that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

Present appeal failed and hence was dismissed.

Further, the new management of the ‘Corporate Debtor Company’ sought the release of the title deeds of the Immovable Properties of the Company which were in possession of Bank of India.

Applicant stated that the non-applicant Bank declined to release the title deeds as conformation from Canara Bank was pending. Though vide an email Bank of India had cited ‘Issuance of No objection Certificate by Canara Bank’ as the ground for non-release of the title deeds.

Further, Section 31 of the Insolvency and Bankruptcy Code was referred which provided that the terms of the ‘Resolution Plan’ are binding on the Company, its employees, creditor and stakeholders. Clauses 3(c)(vii) and 3(c)(viii) of the Plan contemplate that title deeds are required to be released immediately upon distribution of Resolution Process.

Therefore, Bench held that since the debt had been legally extinguished, therefore withholding the title deeds and preventing the Company from being able to create security interest for securing the non-convertible Debentures issued to the Debenture Holders, in terms of the Plan would be unjustifiable.

Tribunal allowed the release of title deeds for effective implementation of the terms of the ‘Resolution Plan’.[Bank of India v. Bhuban Madan, 2021 SCC OnLine NCLAT 189, decided on 28-05-2021]


Advocates before the Court:

Appellants:

Mr Rajiv Ranjan, Sr. Advocate alongwith Dr Sudhir Bisla and Mr Rahul Adlakha, Advocates.

Respondents:

Mr Abhinav Vashisht, Sr. Advocate alongwith Mr Rajat Bector and Ms Charu Bansal, for R-1.

Ms Malak Bhatt, Mr Saurav Panda and Ms Anannya Ghosh, Advocates.

Op EdsOP. ED.

The Insolvency and Bankruptcy Code, 20161 (I&B Code) is a complete code, containing all the necessary provisions for providing a safe haven to corporate debtors under distress. However, the I&B Code being a relatively new enactment, still seems to be working out the kinks. One such ambiguity is that the I&B Code fails to provide a defined procedure for conduct of proceedings that tend to last beyond the duration of Corporate Insolvency Resolution Process (CIRP).

Avoidable transactions or vulnerable transactions, sub-classified into preferential transactions (Sections 43[2]-44[3]), undervalued transactions (Section 45[4]) transactions defrauding creditors (Section 49[5]) and extortionate credit transaction (Section 50[6]) are red-flagged transactions that may be avoided by the corporate debtor for shifting undue onerous burden that places the corporate debtor into distress or defrauds the creditors of the corporate debtor. The resolution professional (RP) in the course of CIRP, is required to identify such vulnerable transactions and files an application before the adjudicating authority for avoiding the said liability. While the said proceedings are an integral part of the I&B Code, they run parallel to the main proceedings which are more focused towards resolution of the corporate debtor and ensuring maximisation of value of assets of the corporate debtor. However, the question as to what happens if the corporate debtor is successfully resolved, thereby concluding CIRP, before the avoidance proceedings are adjudicated or even heard, has not been clearly laid down under the I&B Code. In many of the instances, it has been seen that such proceedings have continued even after the passing of the order under Section 31[7] of the I&B Code (thereby concluding the CIRP), for instance, Bhushan Steel, Essar Steel, etc.

The High Court of Delhi recently identified the present ambiguity in Venus Recruiters (P) Ltd.  v. Union of India[8] (Venus Recruiters). The High Court of Delhi, observed that the present matter raises three important questions:

  1. (i) Whether a RP can continue to act beyond the approval of the resolution plan?

(ii) Whether an avoidance application can be heard and adjudicated after the approval of the resolution plan?

(iii) Who would get the benefit of an adjudication of the avoidance application after the approval of the resolution plan?

While the High Court of Delhi decided the aforesaid questions in a comprehensive manner, the authors herein restrict the scope of the present article to the below mentioned findings/ observations and their implications:

(i) Resolution applicant cannot be permitted to file an avoidance application: A successful resolution applicant (RA) whose resolution plan is approved itself cannot file an avoidance application. The avoidance applications are neither for the benefit of the resolution applicants nor for the company after the resolution is complete. It is for the benefit of the corporate debtor and the creditors of the corporate debtor.

(ii) Avoidance application cannot be adjudicated beyond the period of CIRP: Where preferential transactions are permitted to be adjudicated after the resolution plan is approved, it would, in effect, lead the National Company Law Tribunal (NCLT) to step into the shoes of the new management to decide what is good or bad for the company. Once a resolution plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not.

The ambiguity and the loose ends

The I&B Code had always envisaged that the avoidance proceedings were to proceed independent of the CIRP proceedings. This can be inferred from Section 26[9] which provides that the filing of an avoidance application by the RP shall not affect the CIRP proceedings. However, the Venus Recruiters[10] judgment has linked the two proceedings that may lead to contradictions within the I&B Code. Correspondingly, Regulation 44 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016[11] (Liquidation Regulations) also states that liquidator shall liquidate the corporate debtor within a period of one-year from the liquidation commencement date, notwithstanding pendency of any avoidance application under Chapter III of Part II of the I&B Code.

While the Venus Recruiters[12] judgment held that the resolved corporate debtor can take any decision in respect of an agreement which is deemed to be not beneficial, including termination of the onerous contracts, the I&B Code does not contain any provision for terminating existing contracts by way of a resolution plan. In fact, the NCLT, Mumbai Bench has specifically held that resolution applicants do not have any right to terminate legally binding contract unilaterally without following the due process for termination as per applicable law under the garb of a resolution plan13. Therefore, the same would have to be done without any assistance of the statutory scheme, for taking over or acquiring the corporate debtors, envisaged under the I&B Code.  The judgment seems to have not factored the views of the Insolvency and Bankruptcy Board of India (IBBI) on avoidable transactions. IBBI has specifically observed that there is a distinction between preferential transactions and undervalued transactions. In preferential transaction, the question of intent is not involved and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time, while undervalued transaction requires different enquiry under Sections 45 and 46[14] where the adjudicating authority is required to examine the intent, to examine if such transactions were to defraud the creditors.

The Venus Recruiters[15] judgment observes that avoidance proceedings are only for the benefit of the creditors of the corporate debtor. However, a perusal of the reliefs contemplated under Sections 44 and 48[16] of the I&B Code leads to an inescapable conclusion that the said provisions are all status quo ante in nature i.e. such directions were required to be issued that would place the corporate debtor in its original position before such onerous contracts were executed, therefore, it is clear that the avoidance proceedings are not just for the benefit of the creditors of the corporate debtor but for the resolved corporate debtor as well. Further, the Report of the Insolvency Law Committee published by the Ministry of Corporate Affairs in February 2020 (ILC Report) leaves the discretion to the adjudicating authority to decide the way the proceeds from the avoidance proceedings are to be distributed among the stakeholders.

At this juncture, it is also pertinent to state that the Supreme Court in Jaypee[17] laid out an elaborate mechanism for identification of avoidance transactions by the resolution professional and the determination of avoidance applications by the adjudicating authorities[18].  As is evident from the Jaypee[19] judgment, the Supreme Court have envisaged a high standard for ensuring that tainted transactions are identified and the proceeds are restored to the benefit of the lenders of the corporate debtor as well as the corporate debtor itself.

Pertinently, the I&B Code imposes no bar for the avoidance proceedings to continue beyond the conclusion of CIRP.  In fact, Regulation 39(2)[20] of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) provides that the resolution professional must, at the time of approval of the resolution plans, place the resolution plans along with the details of avoidance transactions and orders, if any, passed therein before the committee of creditors. The use of the words “if any” connotes a liberal interpretation to the timeline for such avoidance proceedings and appears to envisage continuance of such proceedings beyond the period of CIRP. Similarly, Form H of CIRP Regulations i.e. Compliance Certificate, also requires the RP to disclose pendency of avoidance applications at the time of submission of the resolution plan for approval before the adjudicating authority. While this argument has been rejected by the High Court of Delhi, it appears that the cumulative effect of Section 26 of the I&B Code, Regulation 44 of the Liquidation Regulations and the aforementioned provisions was not analysed in the judgment. The aforesaid argument also finds favour in the Indian Institute of Insolvency Professionals of India in its report titled Statement of Best Practices 1:”Role of IPs in Avoidance Proceedings”[21] and the ILC Report[22].

Implications and fallouts

The Venus Recruiters[23] judgment has sought to delineate from the present framework of the I&B Code and attempted to link the two proceedings together. The present modification will have a cascading effect resulting in one of the two following eventualities:

Event 1: The adjudicating authority will mandatorily be required to determine the avoidance proceedings prior to approval of the resolution plan under Section 31 of the I&B Code resulting in further delay in resolution of the corporate debtor under CIRP.

Fallout

(a) It appears that the dual objective, namely, timely resolution of the corporate debtor and identification and annulment of onerous and fraudulent contracts, for which the two proceedings were delinked would not be successfully achieved. Essentially, it would lead to a situation where one is achieved at the cost of the other.

(b) Alternatively, the only way in which the aforesaid dual objective would be obtained is if the avoidance proceedings are dealt summarily. However, considering the procedure formulated by the Supreme Court in Jaypee[24], it can safely be stated that the avoidance applications cannot be disposed off summarily and the linkage of the two proceedings may inevitably lead to a cascading effect.

(c) The emphasis on timely resolution emanated from the needs of India’s plagued financial sector. Time-bound resolution, which is critical for the I&B Code to be a success, would be compromised.

(d) It has been noticed by the Supreme Court in Essar[25] that NCLTs have limited infrastructure and the outside time-limit of 330 days is not mandatory. The issue of lack of institution infrastructure, in particular National Company Law Appellate Tribunal (NCLATs) (which was only established Delhi at the time), was also raised in Swiss Ribbons[26]. The Court, while observing that litigants should be allowed to avail remedy under law and cannot be prejudiced due to lack of infrastructure, had received specific assurance from the learned Attorney General at the time that more NCLATs will be established as soon as it is practicable. Since the requirements to dispose off these applications before the conclusion of CIRP has been introduced vide the Venus Recruiters[27] judgment, the NCLT’s would be left with no other alternative but to find justifications to extend the CIRP in order to dispose of these applications.

Event 2: It will be the duty of the RP to ensure determination of avoidance applications before approval of the resolution plan, failing which the avoidance application will be deemed to be infructuous.

(a) This will provide a window of escape to the offenders engaging in fraudulent transactions and further burden the resolved corporate debtor in protracted rounds of litigation for terminating the onerous contracts.

(b) The disposal of avoidance proceedings without a hearing will be a form of blessing towards the illegal/wrongful transactions made by the errant promoters and provide such errant promoters to escape liability. Such a conclusion is completely antithetical to the I&B Code as it does not intend to grant any benefits for the errant promoters.

(c) The only remedy available with the successful resolution applicants would be to terminate the contracts/transactions after implementing the resolution plan. The termination of the said contracts will expose the resolution applicants to protracted rounds of litigation on a contract which, in all likelihood, would be inordinately favourable to the counterparties and also expose the resolved corporate debtor to damages. Ultimately, the resolution of the corporate debtor will become a near impossibility.


  Naman Singh Bagga (2010-2015) National Law University Odisha, now working as Senior Associate at L&L Partners Law Offices and may be reached at e-mail: namansinghbagga@gmail.com.

†† Maneesh Subramaniam (2014-2019), Amity Law School, Amity University, now working as an Associate at L&L Partners Law Offices and may be reached at e-mail: maneesh.ms10@gmail.com.

†† Anurag Tripathi (2009-2014) National Law University Odisha, now working as in-house counsel at an Indian Conglomerate and may be reached at e-mail: anuragnluo@gmail.com.

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

2 <http://www.scconline.com/DocumentLink/9kKr2L6f>.

3 <http://www.scconline.com/DocumentLink/6k1QKjWn>.

4 <http://www.scconline.com/DocumentLink/G98723Qc>.

5 <http://www.scconline.com/DocumentLink/52aWIpgI>.

6 <http://www.scconline.com/DocumentLink/h2o3bY7O>.

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

8 2020 SCC OnLine Del 1479

9 <http://www.scconline.com/DocumentLink/KaRKCw3S>.

10 2020 SCC OnLine Del 1479

11 <http://www.scconline.com/DocumentLink/PRN1Rndd>.

12 2020 SCC OnLine Del 1479

13 DBM Geotechnics and Constructions (P) Ltd. v. Dighi Port Ltd., 2019 SCC OnLine NCLT 8142

14 <http://www.scconline.com/DocumentLink/pit9G4eg>.

15 2020 SCC OnLine Del 1479

16 <http://www.scconline.com/DocumentLink/rB6ALe98>.

17 Jaypee Infratech Ltd., Interim Resolution Professional  v. Axis Bank Ltd., (2020) 8 SCC 401 

18 Id., paras 28.1 and 28.2.

19 (2020) 8 SCC 401 

20  <http://www.scconline.com/DocumentLink/LhNrU8Vb>

21 IIIPI in its report, titled Statement of Best Practices 1: “Role of IPs in Avoidance Proceedings”, had observed that the pendency of proceedings will not bar the resolution/liquidation or voluntary liquidation of the corporate debtor. It further observed that the two proceedings should be treated separately and even if the corporate debtor is resolved/ liquidated, the application of avoidance transactions will be carried on.

22 Similarly, ILC Report also states that where the adjudicating authority comes to the conclusion that the avoidance proceedings may not be concluded prior to dissolution of the corporate debtor, due to any countervailing factors, it should also provide the manner of continuation of the proceeding after such dissolution.

23 2020 SCC OnLine Del 1479

24 (2020) 8 SCC 401

25 Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531

26 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 

27 2020 SCC OnLine Del 1479

Case BriefsSupreme Court

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

What was under challenge?

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

The impugned notification dated 15.11.2019 read as:

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

(1) clause (e) of section 2;

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

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

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

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

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

(7) Section 249.”

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

Why was it challenged?

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Judgment by: Justice S. Ravindra Bhat

Know Thy Judge| Justice S. Ravindra Bhat

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

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

For State Bank of India: Senior Advocate Rakesh Dwivedi

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

Case BriefsSupreme Court

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

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

IBC liquidation and Section 230 scheme: Legislative history

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

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

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

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

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

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

Scope of Section 230 of the Companies Act, 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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


*Judgement by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by:

For appellant: Advocates Sandeep Bajaj and Shiv Shankar Banerjee

For Respondent: Senior Advocates Amit Sibal and Gopal Jain

ALSO READ

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

Case BriefsSupreme Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


*Judgment by: Justice BR Gavai

Appearances before the Court by:

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

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

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

For RP: Senior Advocates Shyam Divan

For KIAL: Senior Advocate: Senior Advocate Neeraj Kishan Kaul

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that there is nothing wrong with the bar imposed under Section 10A of Insolvency and Bankruptcy Code, 2016 on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020 retrospectively to application filed before June 5, 2020.


ISSUE


Whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the provision came into force) in respect of a default which has occurred after 25 March 2020?


ARGUMENTS


By appellant

(i) Section 10A creates a bar to the ‘filing of applications’ under Sections 7, 9 and 10 in relation to defaults committed on or after 25 March 2020 for a period of six months, which can be extended up to one year;

(ii) The Ordinance and the Act which replaced it do not provide for the retrospective application of Section 10A either expressly or by necessary implication to applications which had already been filed and were pending on 5 June 2020;

(iii) Section 10A prohibits the filing of a fresh application in relation to defaults occurring on or after 25 March 2020, once Section 10A has been notified (i.e., after 5 June 2020);

(iv) Section 10A uses the expressions “shall be filed” and “shall ever filed” which are indicative of the prospective nature of the statutory provision in its application to proceedings which were initiated after 5 June 2020; and

(v) The IBC makes a clear distinction between the “initiation date” under Section 5(11) and the “insolvency commencement date” under Section 5(12).

(vi) In each case it is necessary for the Court and the tribunals to deduce as to whether the cause of financial distress is or is not attributable to the Covid-19 pandemic.

By Respondent

(i) The legislative intent in the insertion of Section 10A was to deal with an extraordinary event, the outbreak of Covid-19 pandemic, which led to financial distress faced by corporate entities;

(ii) Section 10A is prefaced with a non-obstante clause which overrides Sections 7, 9 and 10; and 9

(iii) Section 10A provides a cut-off date of 25 March 2020 and it is evident from the substantive part of the provision, as well as from the proviso and the explanation, that no application can be filed for the initiation of the CIRP for a default occurring on and after 25 March 2020, for a period of six months or as extended upon a notification.


PROVISION IN QUESTION


Section 10A is prefaced with a non-obstante provision which has the effect of overriding Sections 7, 9 and 10. Section 10A provides that:

(i) no application for the initiation of the CIRP by a corporate debtor shall be filed;

(ii) for any default arising on or after 25 March 2020; and

(iii) for a period of six months or such further period not exceeding one year from such date as may be notified in this behalf.

The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP of a corporate debtor “for the said default occurring during the said period”. The explanation which has been inserted for the removal of doubts clarifies that Section 10A shall not apply to any default which has been committed under Sections 7, 9 and 10 before 25 March 2020.


WHAT THE SUPREME COURT SAID


“The correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated.”

Going into the legislative intent, the Court noticed that the date of 25 March 2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the national lockdown was declared in India due to the onset of the Covid-19 pandemic.

The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date.

  • The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP “for the said default occurring during the said period”.
  • The expression “shall ever be filed” is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified.
  • The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020. The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation.

Reading the provisions together, the Court noticed that the Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Therefore,

“Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020.”

The Court, however, noticed that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.

Section 10A does not contain any requirement that the Adjudicating Authority must launch into an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic.

“Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies (…), which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern.”

Hence, the embargo contained in Section 10A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision.

The Court further explained that the date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application.

To explain this further, the Court referred to the NCLAT’s order which stated that while ‘initiation date’ is referable to filing of application by the eligible applicant, ‘commencement date’ refers to passing of order of admission of application by the Adjudicating Authority.

“The ‘initiation date’ ascribes a role to the eligible applicant whereas the ‘commencement date rests upon exercise of power vested in the Adjudicating Authority. Adopting this interpretation would leave no scope for initiation of CIRP of a Corporate Debtor at the instance of eligible applicant in respect of Default arising on or after 25th March, 2020 as the provision engrafted in Section 10A clearly bars filing of such application by the eligible applicant for initiation of CIRP of Corporate Debtor in respect of such default.”

NCLAT had also noted that the bar created is retrospective as the cut-off date has been fixed as 25th March, 2020 while the newly inserted Section 10A introduced through the Ordinance has come into effect on 5th June, 2020.

“The object of the legislation has been to suspend operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020 i.e. the date on which Nationwide lockdown was enforced disrupting normal business operations and impacting the economy globally. Indeed, the explanation removes the doubt 19 by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.”

[Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd, 2021 SCC OnLine SC 72, decided on 09.02.2021]


*Judgment by: Justice Dr. DY Chandrachud

Appearances before the Court by

For appellant: Senior Advocate Neeraj Kishan Kaul

For respondent: Senior Advocate Gopal Jain

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of Dr. DY Chandrachud*, Indu Malhotra and Indira Banerjee, JJ has held that collusive transactions with the Corporate Debtor would not constitute a ‘financial debt’ under Insolvency and Bankruptcy Code.

Financial Creditor and Financial Debt

Under Section 5(7) of the IBC, a person can be categorised as a financial creditor if a financial debt is owed to it. Section 5(8) of the IBC stipulates that the essential ingredient of a financial debt is disbursal against consideration for the time value of money.

As per the decision in Pioneer Urban Land and Infrastructure Ltd v. Union of India, (2019) 8 SCC 416,

“The expression “disbursed” refers to money which has been paid against consideration for the “time value of money”. In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilises the money….”

Collusive Transactions

Money advanced as debt should be in the receipt of the borrower. The borrower is obligated to return the money or its equivalent along with the consideration for a time value of money, which is the compensation or price payable for the period of time for which the money is lent. A transaction which is sham or collusive would only create an illusion that money has been disbursed to a borrower with the object of receiving consideration in the form of time value of money, when in fact the parties have entered into the transaction with a different or an ulterior motive. In other words, the real agreement between the parties is something other than advancing a financial debt.

The IBC has made provisions for identifying, annulling or disregarding “avoidable transactions” which distressed companies may have undertaken to hamper recovery of creditors in the event of the initiation of CIRP. Such avoidable transactions include:

(i) preferential transactions under Section 43 of the IBC;

(ii) undervalued transactions under Section 45(2) of the IBC;

(iii) transactions defrauding creditors under Section 49 of the IBC; and

(iv) extortionate transactions under Section 50 of the IBC.

The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors.

Hence, collusive transactions with the Corporate Debtor would not constitute a ‘financial debt’.

Related Parties – Interpretation In Praesenti

Where a financial creditor seeks a position on the CoC on the basis of a debt which was created when it was a related party of the corporate debtor, the exclusion which is created by the first proviso to Section 21(2) must apply. For, it is on the strength of the financial debt as defined in Section 5(8) that an entity claiming as a financial creditor under Section 5(7) seeks a position on the CoC under Section 21(2). If the definition of the expression ‘related party’ under section 5(24) applies at the time when the debt was created, the exclusion in the first proviso to Section 21(2) would stand attracted.

“However, if such an interpretation is given to the first proviso of Section 21(2), all financial creditors would stand excluded if they were a ‘related party’ of the corporate debtor at the time when the financial debt was created. This may arguably lead to absurd conclusions for entities which have legitimately taken over the debt of related parties, or where the related party entity had stopped being a ‘related party’ long ago.”

The exclusion under the first proviso to Section 21(2) is related not to the debt itself but to the relationship existing between a related party financial creditor and the corporate debtor. As such, the financial creditor who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party financial creditor divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating the CoC and sabotage the CIRP, by diluting the vote share of other creditors or otherwise, it would be in keeping with the object and purpose of the first proviso to Section 21(2), to consider the former related party creditor, as one debarred under the first proviso.

Hence,

“while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder.”

If this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a ‘related party’ before the Corporate Debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors.

[Phoenix Arc Pvt. Ltd. v. Spade Financial Services Ltd., 2021 SCC OnLine SC 51, decided on 01.02.2021]


*Justice Dr. DY Chandrachud has penned this judgment 

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by

Senior Advocate K.V. Viswanathan for AAA and Spade;

Senior Advocate Neeraj Kishan Kaul for Phoenix; and

Senior Advocate Sanjiv Sen for the Resolution Professional

Legislation UpdatesNotifications

S.O. 4638(E)— In exercise of the powers conferred by Section 10A of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby notifies further period of three months from the 25-12-2020, for the purposes of the said section.


Ministry of Corporate Affairs

[Notification dt. 22-12-2020]

New releasesNews

On 12th December, 2020 Eastern Book Company held its first virtual book launch and panel discussion on the occasion of the release of Mr Akaant Kumar Mittal’s book on Insolvency and Bankruptcy: Law and Practice.  The launch of the book took place online and had several prominent personalities in attendance such as Justice AB Singh, Judicial Member, NCLAT, Dr MS Sahoo, President of Insolvency and Bankruptcy Board of India, Ms Mamta Binani, ex-Chairman, ICSI and others. The book launch was followed by a panel discussion on  “4 Years of IBC – The Revolution Witnessed and the Promise for Future“. This discussion was moderated by Ms Haripriya Padmanabhan, Advocate, Supreme Court of India.

Justice Singh’s Address

Justice AB Singh, Judicial Member, NCLAT was the first to address the audience. He spoke on how the void in the field of insolvency law was being filled by Mr Mittal’s book on IBC and requested Mr Mittal to revise his book every year. He also spoke about how insolvency law is coming to the rescue of homebuyers, about limitation act and the amendments that have taken place in IBC in the last 4 years.  His detailed address can be seen below.

Mr Sumeet Malik, Director, EBC’s Address

Next, we had Mr Sumeet Malik, Director, Eastern Book Company congratulating Mr Mittal on the release of his book and how his hard work will contribute to India’s legal academia and come to aid all insolvency law practitioners. He further elucidated that Mr Mittal’s book was the 10th book in EBC’s Commercial Titles List and had undergone stringent review by Mr Murali Neelakantan, Partner, Amicus.  He also spoke about the publishing industry and it’s role of bridging the gap between legal information and those who need it and EBC’s policy of providing prompt, accurate and complete information. His detailed address can be seen below.

Release of the book

This was followed by the release of the book. All the panelists congratulated Mr Mittal for this achievement.

 Ms Padmanabhan’s Address

Ms Haripriya Padmanabhan, Advocate, Supreme Court of India was the moderator for the panel discussion that followed the book launch. She started the discussion by first congratulating Mr Mittal for his achievement and also shared her insights on the new law. Her address can be seen here.

Vote of Thanks

Ms Padmanabhan’s address was followed by a panel discussion which we will cover in a subsequent post. After the panel discussion, a vote of thanks was given to thank all panellists for their involvement in the book launch and panel discussion. The vote of thanks can be seen below.

 

Details of the book and appreciation

Insolvency and Bankruptcy Code: A Commentary by Akaant Kumar Mittal is a practitioner’s guide on the jurisprudence that has developed on the Insolvency and Bankruptcy Code, 2016 so far. The commentary deals with both corporate insolvency and individual-related insolvency and bankruptcy. It discusses the procedure stipulated under the IB Code along with the relevant Rules and Regulations framed by the Government and the Insolvency and Bankruptcy Board of India. The book touches upon the issues of cross-border insolvency and group insolvency. It covers almost all the decisions of the Supreme Court and National Company Law Appellate Tribunal along with rulings from different High Courts and National Company Law Tribunal Benches. The commentary discusses the interplay of the IB Code with different statutes such as Arbitration law, SEBI, Money laundering etc.

****

In India’s otherwise infamous regulatory quagmire, the IBC stands out as a cohesive piece of legislation.The author documents this evolution of our nascent insolvency framework through detailed appreciation of judicial decisions, and like an erudite academician he subtly hints at future trends. Such a contrast in focus between the past and the future, progressiveness, and reflexivity, makes this commentary a must read both for professionals seeking to transition from the old regime to the new, as well as for fresh entrants to the field of insolvency.

Justice Surya Kant, Judge, Supreme Court of India

I find that this publication “Insolvency and Bankruptcy Code: A Commentary” by Shri Akaant Kumar Mittal is an exemplary initiative in this direction. I am sure, this will prove to be a great resource for practitioners, policymakers, researchers and academics to understand in detail the change that is in the offing. I am certain that this will motivate more inquisitive minds to delve deeper into various aspects of the Code from an interdisciplinary perspective, enriching the Indian literature on bankruptcy and insolvency in the days ahead. It will also build institutional capacity in the economy to implement and contribute to the insolvency and bankruptcy reforms in the country in letter and spirit.

Dr M.S. Sahoo, Chairman, Insolvency and Bankruptcy Board of India

The author, Akaant Mittal has through this book, made a conscious attempt to make every reader aware of the rules and regulations of the existing insolvency laws in India. I am sure, this “Handbook” will be a useful addition to the Insolvency & Bankruptcy Law in India and will help every reader in having an in-depth knowledge of the existing insolvency regime. It is a very useful and well thought material for both practitioners and students. I wish this venture a great success.

Prof (Dr.) Ranbir Singh, Vice-Chancellor, National Law University, Delhi

The book can be bought through this link: https://www.ebcwebstore.com/product_info.php?products_id=99097372


Nilufer Bhateja, Associate Editor has put this story together 


Additional Information:

Get an insight on the interplay of IB Code with several other statutes in “Insolvency and Bankruptcy Code: Law and Practice” | Buy Your Copy Now!

New releasesNews

An event was organised on 12th December at noon to launch the commentary on Insolvency and Bankruptcy: Law and Practice by Mr Akaant Kumar Mittal. The book is foreworded by Justice Suryakant, Judge, Supreme Court of India, with messages from Dr MS Sahoo, Chairperson Insolvency and Bankruptcy Board of India and Prof. (Dr.) Ranbir Singh, Former Vice-Chancellor of National Law University, Delhi. 

 The launch of the book took place online and had several prominent people in attendance such as Justice AB Singh, Judicial Member, NCLAT, Dr MS Sahoo, President of Insolvency and Bankruptcy Board of India, Ms Mamta Binani, ex-Chairman, ICSI and others. The book launch was followed by a panel discussion on  “4 Years of IBC – The Revolution Witnessed and the Promise for Future”. This discussion was moderated by Ms Haripriya Padmanabhan, Advocate, Supreme Court of India.

About the Book

Insolvency and Bankruptcy Code: Law and Practice by Akaant Kumar Mittal is a practitioner’s guide on the jurisprudence that has developed on the Insolvency and Bankruptcy Code, 2016 so far. The commentary deals with both corporate insolvency and individual-related insolvency and bankruptcy. It discusses the procedure stipulated under the IB Code along with the relevant Rules and Regulations framed by the Government and the Insolvency and Bankruptcy Board of India. The book touches upon the issues of cross-border insolvency and group insolvency. It covers almost all the decisions of the Supreme Court and National Company Law Appellate Tribunal along with rulings from different High Courts and National Company Law Tribunal Benches.

The commentary discusses the interplay of the IB Code with different statutes such as arbitration law, SEBI, money laundering, etc.


Reviews

In India’s otherwise infamous regulatory quagmire, the IBC stands out as a cohesive piece of legislation. The author documents this evolution of our nascent insolvency framework through detailed appreciation of judicial decisions, and like an erudite academician, he subtly hints at future trends. Such a contrast in focus between the past and the future, progressiveness, and reflexivity, makes this commentary a must-read both for professionals seeking to transition from the old regime to the new, as well as for fresh entrants to the field of insolvency.

–Justice Surya Kant
Judge, Supreme Court of India

I find that this publication “Insolvency and Bankruptcy Code: Law and Practice” by Shri Akaant Kumar Mittal is an exemplary initiative in this direction. I am sure, this will prove to be a great resource for practitioners, policymakers, researchers and academics to understand in detail the change that is in the offing. I am certain that this will motivate more inquisitive minds to delve deeper into various aspects of the Code from an interdisciplinary perspective, enriching the Indian literature on bankruptcy and insolvency in the days ahead. It will also build institutional capacity in the economy to implement and contribute to the insolvency and bankruptcy reforms in the country in letter and spirit.

—Dr M.S. Sahoo
Chairperson, Insolvency and Bankruptcy Board of India

The author, Akaant Mittal has through this book, made a conscious attempt to make every reader aware of the rules and regulations of the existing insolvency laws in India. I am sure, this “Handbook” will be a useful addition to the Insolvency & Bankruptcy Law in India and will help every reader in having an in-depth knowledge of the existing insolvency regime. It is a very useful and well-thought material for both practitioners and students. I wish this venture za great success.

—Prof. (Dr) Ranbir Singh
 Vice-Chancellor, National Law University, Delhi


Buy your copy here: Insolvency and Bankruptcy Code: Law and Practice

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, Hemant Gupta and Ajay Rastogi, JJ has directed that all the Writ Petitions that are pending in the High Courts pertaining to the challenge to the Notification dated 15.11.2019, by which Part III of the Insolvency and Bankruptcy Code, 2016 and other provisions in so far as they relate to personal guarantors to corporate debtors have been brought into force, be transferred to the Supreme Court.

Stating that transfer of the Writ Petitions to this Court would avoid conflicting decisions by the High Courts, the Court said,

“The Insolvency and Bankruptcy Code is at a nascent stage and it is better that the interpretation of the provisions of the Code is taken up by this Court to avoid any confusion, and to authoritatively settle the law. Considering the importance of the issues raised in the Writ Petitions which need finality of judicial determination at the earliest, it is just and proper that the Writ Petitions are transferred from the High Courts to this Court.”

Directing the Registries of the High Courts to transmit the records of the Writ Petitions forthwith, the Court also directed that no further Writ Petitions involving the challenge to the Notification dated 15.11.2019 by which Part III of the Insolvency and Bankruptcy Code, 2016 and other provisions in so far as they relate to personal guarantors to corporate debtors have been brought into force shall be entertained by any High Court.

“The interim orders passed by the High Courts, if any, shall continue till further orders.”

By a Notification dated 15.11.2019, the Ministry of Corporate Affairs brought into force the following provisions of the Insolvency and Bankruptcy Code, 2016 insofar as they related to ‘personal guarantors to corporate debtors’ with effect from 01.12.2019: –

  1. Clause (e) of Section 2;
  2. Section 78 (except with regard to fresh start process) and Sections 79;
  3. Sections 94 to 187 (both inclusive);
  4. Clause (g) to Clause (i) of sub-section (2) of Section 239
  5. Clause (m) to Clause (zc) of sub-section (2) of Section 239;
  6. Clause (zn) to Clause (zs) of sub-section (2) of Section 240; and
  7. Section 249

[Insolvency and Bankruptcy Board of India v. Lalit Kumar Jain,  2020 SCC OnLine SC 884, decided on 29.10.2020]

Op EdsOP. ED.

Introduction

The Insolvency and Bankruptcy Code, 2016 came as a ray of hope amidst the deteriorating condition of the recovery mechanisms available to the creditors in the Indian market. Recovery rates had sunk to new lows, and the need to hit the refresh button to reset the entire system was paramount.

The intent behind any legislation can be truly brought from the Preamble, something that the entire text of the legislation follows. The Preamble of the Insolvency and Bankruptcy Code envisages it as an Act which will primarily look into the aspects of consolidation and updating of the numerous laws regarding insolvency and resolution of the same for corporate entities, partnership firms and individuals as well. It has to be carried out within strictly defined time-frames, so that the value of the assets is maximised. All of this is done to promote the entrepreneurial ventures and to equitably serve the interest of the various stakeholders.

In  Binani Industries Ltd. v. Bank of Baroda,[1] the National Company Law Appellate Tribunal (NCLAT) held that:

  1. … The first order objective is “resolution”. The second order objective is “maximisation of value of assets of the ‘corporate debtor’ and the third order objective is promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.[2]

The point that has to be kept in mind is that the Preamble explicitly mentions of the maximising of the value of the assets. Over the course of this article, an evaluation has been attempted regarding whether the provisions in the Code dealing with the aspect of the valuation of assets have stayed true to what was first mentioned in the Preamble of the Act.

The primary foundation towards the valuation of assets is laid down as soon as with the appointment of Valuer. Valuer stands for a registered valuer, who can be a resolution professional as well. They are tasked with putting a monetary value on the debtor’s properties, securities, other assets and liabilities as well.

However, our primary concern here is the aspect of valuation of assets. To understand this part of the liquidation process, it is essential to have a thorough understanding of how the value is to be estimated and certain other related concepts.

Valuation Standards

Under Section 247 of the Companies Act, 2013, the Ministry of Corporate Affairs has notified Companies (Registered Valuers and Valuation) Rules, 2017. The valuation standards are to be set up in accordance with Rule 18 of the aforementioned Rules. These standards are notified by the committee as constituted under Rule 19. As of now, the standards issued by Institute of Chartered Accountants of India (ICAI) in its 375th meeting are said to be in force in India.

This system of valuation speaks of valuation bases, approaches, scope of work, reporting, business valuation, intangible assets and financial instruments. These standards are aimed at bringing uniformity in the system, so as due to anarchy, one valuer is leaps and bounds ahead in giving a monetary value to the same asset as opposed to another valuer.

However, by establishing valuation standards, sometimes the motive of “value maximisation” takes a back seat as the valuation standards are not one dimensional in approach. They also take the interest of the buyer into account and are justified in doing so as well. But an argument can be made to make the entire standards lean in favour of the debtor, as the standards being followed are domestic in nature, and the domestic agency should prioritise the notion of keeping the standards in such a manner that they encourage the continuation in one form or the other to help the growing economy of the country.

Sale of Assets under the Code

The Act in itself does not shed much light upon how assets can be sold by the liquidator. However, to clarify the same, the Board, in Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, has laid down the manner in which the assets can be sold.

According to Regulation 32 of the above mentioned Regulations, the assets of a corporate debtor can be sold in various ways, such as on a standalone basis, in a slump sale, collectively as a set, in parcels, the corporate debtor as a going or the business of corporate debtor as a going concern.

Regulation 32-A further states that when in the opinion of the committee of creditors or the liquidator himself, it is beneficial for the corporate debtor to be sold as a going concern i.e. the sale as a going concern under Regulations 32(e) and (f) is only allowed if its allows value maximisation of the assets of the corporate debtor.

The Regulations provide with two methods in which the sale of assets can be carried about. The primary methods under Regulation 33 read with Schedule I is by the way of an open online bidding process. However, in special circumstances, such as in the case of perishable goods, the sale can be made by the way of a private sale as well, when it is understood that private sale will be more beneficial in realising the maximum value of the assets.

Apart from the legislative input, certain principles laid down by the judiciary are also safeguarding the interest of the buyers and sellers as well. In Gordhan Das Chuni Lal Dakuwala v. T. Sriman Kanthimathinatha Pillai[3], the Court held that when the property is sold by a private contract, then it is the duty of the court to satisfy itself that the price offered is the best that could be offered, because, the court is the custodian of the interest of the company.

In TCI Distribution Centres Ltd. v. Official Liquidator,[4] the Court held that the liquidator should not keep any information to himself, and shall convey any information he has regarding nature, description, extent of property, non-availability of title deeds, etc.

Asset Sale Report: A Mere Formality

Regulation 36 mandates that a liquidator has to prepare an asset sale report as a part of the progress reports. This regulation also spells out the contents of the asset sale report, however, the list is merely indicative, further details regarding the sale can be furnished in the report, what the liquidator feels may be of relevance.

The following details are a mandatory part of the asset sale report, as per the ambit of Regulation 36:

(a) the realised value;

(b) cost of realisation, if any;

(c) the manner and mode of sale;

(d) if the value realised is less than the value in the asset memorandum, the reasons for the same; and

(e) the person to whom the sale is made.[5]

However, the Code and the accompanying Regulations are silent on the purpose of this report. It might lead one to think that this report is a mere formality. Another reasonable presumption which can be drawn from the fact that it is to be enclosed with the progress report is that the function of this report is to make the entities concerned aware of the situation of the assets during the liquidation process.

Suggested Reforms

To achieve the elusive dream of “value maximisation”, the Code and the supplementary Regulations have laid down various provisions, such as the idea of private sale. Private sale has been allowed by the Code and the Regulations in certain cases. For example, in case the assets are of a perishable nature, or, the value of the assets will diminish with the passage of time, in such situation, a departure from the online bidding process, in the form of a private sale is allowed.

On a second look and on reading between the lines, one can easily infer that the kind of sale mentioned above is set to serve the primary purpose of “value maximisation”. Allowing the sale of the assets as a whole, or in parts, or even as a going concern is also based on the same narrative.

Hence, the Code has indeed made an effort to stick to the principle of “value maximisation”, as given in the Preamble. However, certain changes can be brought about in the legal framework of insolvency and bankruptcy in India to give a better justification to the aforementioned principle of the Preamble.

The idea of sale of assets is only introduced during the liquidation process. But during the resolution process, the interim resolution professional and the resolution professional are empowered to sell the assets of the company. But, the Code is silent on whether the sale is allowed as a part of the resolution plan. If it is explicitly laid down that the sale of assets can be made during the resolution stage, a better value can be attached to the assets, as, the fair value of the assets is generally more than the liquidation value. The value of the assets which are prone to perish or deteriorate over time can also be maximised.

During the sale of assets by the way of online bidding, an average of the value estimated by the registered valuers is taken as the base price. Instead of the average value, there is no harm in taking the base price as the fair value of the asset. This is due to the fact that there already are provisions which provide for reduction in base price in case the bidding process fails. Hence, starting from a higher base can actually fetch a higher price to the assets.

Also, if the non-disclosure of the highest bid is made the go-to format during an online bidding process, instead of it being used in exceptional circumstances, the uncertainity amongst the bidders can lead to a higher bid, and serve the principle of asset maximisation better.

Lastly, another reform which can have a positive impact on the aspiration of “value maximisation” is by introducing strict timelines with respect to Section 52 of the Code. Section 52 provides for a choice to the secured creditor as to either enforce his secured interest or to relinquish it and get his money’s worth through the liquidation process. The Code does not provide for the time within which this choice has to be made. It might happen that the asset on which the interest of the secured creditor lies is the kind that diminishes in value with the passage of time.

If the secured creditor informs of his choice to the liquidator weeks after the liquidation process has begun and by that time, a substantial value of the asset has evaporated, the Preamble of the Code will not be satisfied. Hence, the provision should be amended to include a strict timeline within which such choice is to be made, and also, a presumption that the creditor has relinquished his interest in case he fails to convey his choice.


†  IVth Year B.A. LLB (H) Student NUALS, Kochi, e-mail: puruv31@gmail.com.

[1]  2018 SCC Online NCLAT 521

[2]  Ibid

[3]  1920 SCC OnLine Mad 166

[4]  2009 SCC OnLine Mad 1481 : (20 09) 4 LW 681.

[5]  Regn. 36, Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.


Image credits: economictimes.com

Op EdsOP. ED.

On 05.06.2020, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“the Ordinance”)[1]. The Ordinance has been brought in to suspend the insolvency proceedings under the Insolvency and Bankruptcy Code, 2016[2] (“the Code”) for a period of 6 months. The Ordinance has inserted a new section under the code i.e. Section 10-A[3]. Section 10-A states that no application can be filed under Sections 7, 9 and  10 for a default committed on or after 25.03.2020 for a period of six months. It also provides that the same can be extended for another period of six months as and when notified at a later date.

The Ordinance was part of the Atamnirbhar package which was announced[4] by the Finance Minister on 17.05.2020 to provide relief to the companies who are on the verge of insolvency[5]. The Finance Minister had announced that the fresh insolvency filings period will be suspended for a period of one year. However, the Ordinance has only suspended the fresh insolvency filings for a period of six months. It may extend for another period of six months or for further period not extending beyond a period of one year from a date as and when notified by the Government.

There are various reasons which have been cited by the Government for the promulgation of the Ordinance which are as follows;

  • COVID-19 pandemic has impacted business, financial markets across the world including India and created uncertainty and stress for business beyond their control.
  • The nationwide lockdown since 25.04.2020 has added disruption to the normal business operations.
  • It is difficult to find adequate number of resolution applicants to rescue the corporate person
  • It is expedient to exclude the defaults arising on account of unprecedented situation.

The Ordinance has effectively provided a breather, at least for now, to the companies who may commit default on their debt obligation on or after 25.03.2020 till 25.09.2020. Interestingly since Section 9 is also suspended, many big retailers and small retailers who have committed default in the payment of rents and also defaulted in the payment obligations during  COVID-19 period of six months from 25.3.2020 are equally protected. It means that the fast track mechanism to recover the debts of financial creditors and operational creditors under the IBC, during the period of six months from 25.3.2020 has been given a decent burial.

With the new Ordinance in place, the suspension can also be extended for another period of six months i.e. till 25.03.2021. It is also clarified under the newly inserted Section 10-A that it will not apply to any default which occurred before 25.03.2020. Therefore, corporate insolvency resolution process (CIRP) can be initiated for any account which was declared a non-performing account (NPA) or a default committed before 25.03.2020.

Prima facie, there is an apparent conflict in the Ordinance. Section 10-A states that the proceedings cannot be filed for the default that occurred on or after 25.03.2020, for a period of six months. Ordinarily it could have meant that the insolvency proceedings for these defaults can be filed after the period of six months. However, the proviso to the section states that no application shall ever be filed for the default committed during this period of six months. This proviso is in the form an amnesty clause. It provides that the insolvency proceedings cannot ever be initiated against the company for the default that occurred during this period.

On one hand, the Ordinance is suspending the filing of the proceedings under Sections 7,   9 and 10 for a period of six months whereas on the other hand, it is stating that the same will remain suspended in perpetuity. If the intention of the Ordinance is to suspend the insolvency proceedings temporarily, then there is no requirement for providing the perpetual suspension in the proviso. It appears that there is no possible harmonious interpretation of the section and the proviso attached to it. A tweet[6] by the Insolvency and Bankruptcy Board of India, regulator under the Code also stated that the default during COVID-19 shall not be the basis for initiation of Insolvency at any time. This intention runs counter to what is stated in the main section.  The Supreme Court in  J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers[7],  held that;

35. Indeed, in some cases, a proviso, may be an exception to the main provision though it cannot be inconsistent with what is expressed in the main provision and if it is so, it would be ultra vires of the main provision and struck down. As a general rule in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justify its necessity.”

(emphasis supplied)

The apparent conflict between the main section and the proviso is required to be resolved immediately to avoid any further confusion.

However, there can be a possible reason for providing the perpetual suspension. The Finance Minister also announced that  COVID-19 induced defaults will be kept outside the purview of the Code. The proviso to Section 10-A may be inserted for that purpose but the same nowhere refers to any COVID-19 induced default. Also, there is no definition provided under the Ordinance for any COVID-19 induced default. On the contrary, since the proviso has used the term “said default”, it is referring to the same defaults which are mentioned under Section 10-A. Therefore, the perpetual suspension of the default cannot be justified by any stretch of imagination.

It is also pertinent to mention that the Ordinance has also suspended fresh insolvency under Section 10 of the Code. Section 10 allowed for voluntary insolvency proceedings i.e. if a company is unable to meet its debt obligation then it can on its own file for insolvency. It is beyond any comprehension as to why force an insolvent company to continue its business. It will only lead to the reduction in the value of the company. The same will act as an impediment for the resolution of the same as a going concern.

The Ordinance has also amended Section 66 of the Code which provides right to the Resolution Professional (RP) to file an application for against any business of corporate debtor which is being carried with the intent to defraud the creditors. A new sub-section is being added to exempt the RP from filing any application under Section 66 for the defaults for which CIRP is being suspended under Section 10-A. This particular amendment was necessary as lot of changes in the loan structure of the corporate debtor will be done in order to mitigate the disruption caused by the pandemic which may change the priority of creditors under Section 53 of the Code.

The Ordinance has provided a much-needed relief to the companies. It has provided at least a period of six months to the companies to get back on their feet and continue fulfilling their repayment of debt obligations. The Ordinance has also taken into consideration the  interest of the financial institutions by not providing a blanket suspension of any proceedings to recover a debt, which was floated earlier. It needs to be seen how well the debtors would take this opportunity to streamline their businesses. Otherwise it will go the same way as the defaults committed in MUDRA loans. This small dose of help by the Government should not be misused by the defaulters. However, the apparent conflict between the main section and the proviso needs to be resolved on an immediate basis.


*Delhi based Advocate

** Student, National University of Study and Research in Law

[1] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [No. 9 of 2020]

[2] Insolvency and Bankruptcy Code, 2016 

[3] Section 10-A, Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020   

[4] Economic Times, FM provides Covid-19 relief, no fresh insolvency proceeding against MSMEs for 1 year

[5] Press Information Bureau, Finance Minister announces Government Reforms and Enablers across Seven Sectors under AatmaNirbhar Bharat Abhiyaan, 17.05.2020. Available at: https://pib.gov.in/PressReleasePage.aspx?PRID=1624661

[6] https://twitter.com/IBBIlive/status/1268932122519060480

[7] (1996) 6 SCC 665  

COVID 19Op EdsOP. ED.

The Finance Minister while addressing the media on several financial decisions and schemes undertaken by the Government for the benefit of the common masses due to the sudden outbreak of novel COVID-19, which has brought the entire country to a grinding halt, announced that the threshold limit for triggering a Corporate Insolvency Resolution Process under the Insolvency Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) shall stand increased to INR 1 crore.

The Gazette Notification dated 24-03-2020 [MCA Notification S.O. 1205(E)] categorically states that, by virtue of the power conferred by Parliament on the Central Government, vide the proviso to Section 4 of the Insolvency and Bankruptcy Code, 2016, may, by notification, increase the amount of default to a maximum amount of INR 1 crore. However, the said notification does not have any clarification as to the cut-off date with respect to the effective date, or, in the alternative if the notification comes into force immediately then what happens to the pending matters where notices have been issued but the National Company Law Tribunal (“the Adjudicating Authority”) is yet to admit the same. There is lack of clarity with respect to the aforesaid scenario, which will be creating confusion and will result in an ouster of cases which could not have been taken up due to this pandemic. A noble cause will get buried in this act of haste which will result in loss of forum, class-based differential treatment and confusion in the minds of the mass which are all attributes to the test of arbitrariness under Article 14 of the Constitution of India. In this article, we have tried to test the viability of the Notification dated 24-03-2020 as it is and whether the lack of clarification will create more confusion than already existing, which will result in multifarious litigation.

While answering a policy decision, the first question that needs to be addressed is whether there is a power or is a colourable exercise of power or, a case of excessive delegation of powers?

The answer in this case is that, the power of the executive Government to increase the amount of default is beyond question, however, it should be examined on the bedrock and touchstone of reasonability and also whether it satisfies the test of objectivity for the purpose the  executive seeks to achieve through this notification.

For better understanding, Section 4 of the Code is reproduced:

“PART II

Insolvency Resolution and Liquidation for Corporate Persons

CHAPTER I

Preliminary & Definitions

4. Application of this Part.— (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.

The proviso to the aforesaid section empowers the executive to increase the threshold limit up to INR 1 crore and the minimum amount for triggering is mentioned as INR 1 lakh.

While testing a policy decision on the anvil of Article 14 of the Constitution needs more scrutiny than otherwise as the scope for judicial review is very limited. We need to apply the settled parameters as laid down by the Supreme Court from time to time starting from Budhan Choudhry v. State of Bihar.[1]

The principles are the following:

  1. The policy decision should not be class based which is strictly forbidden.
  2. It should not be manifestly arbitrary causing confusion and prejudice so as to negate statutory rights as well fundamental rights.
  3. It should satisfy the object and the rationale test.

To understand the purpose of the executive in enacting the aforesaid Notification dated 24.03.2020, one needs to scrutinise the object with the purpose the notification seeks to achieve.

The Government, as an aid to provide boost to the micro, small & medium enterprises industrial sector (hereinafter referred to as the “MSME”) during this period of worldwide lock-down raised the threshold and ordered immediate implementation of the same. However, the intent although shown in the press conference does not find place in the notification, as the notification has raised the threshold limit en bloc irrespective of sectors and category. However, the possible justification which could be inferred from the press conference is that, unless the threshold is increased, the MSME sector might default in payments and the creditors may send the industries into Corporate Insolvency Resolution Process and subsequently into liquidation.

As an illustration, if an MSME industry causes default in payments, then the financial creditor or the operational creditor might drag the company to the National Company Law Tribunal under Section 7 or Section 9 of the Code.

The aforesaid object and reasoning seems plausible, if we look at it with the object to save medium and small-scale industries as they also feature as the backbone of the Indian industrial economy.

On the other hand, while backing the aforesaid object with the rationale; the intention of executive militates against the very object behind framing of the Code which are:

  • The small-scale industries and medium scale, workmen, employees, distributors who basically come within the framework of operational creditors do not have to run from pillar to post to recover their money.
  • Clear demarcation of financial creditors and operational creditors and their stakes along with disbursement procedure.
  • Faster resolution process and time bound court process.
  • Cost-effective.
  • Easy accessibility.

The recent notification, in the absence of any clarification with respect to the date of commencement or the “effective date” and also, with respect to the cases where demand notices have been sent under Section 8 of the Code by an operational creditor, the cases which have been filed but could not be taken up because of this pandemic coupled with the cases which are yet to be admitted.

The notification in the absence of any clarification will be creating problem for the Courts with respect to the application of the same, as going by prior experience, the matters are likely to be shown the door due to lack of pecuniary jurisdiction. It will create a void as well as havoc as to the transition or transfer of those matters.

For example, if a default had arisen in January 2019, it cannot be simply  shown the door under the Code of 2016 by giving the justification of a pandemic in March 2020 by virtue of this notification, as the limitation to trigger insolvency under this Code stays live for a period of 3 years from the date of default[2]. Normally, by applying the canons of statutory interpretation and by invoking Section 6(e) of the General Clauses Act, 1897, all amendments or notifications are prospective unless specified to be retrospective; for which the power must be delegated to the executive by the legislature in the statute itself. However, none of the provisions in the Code, delegate that power to the executive.

When we think about the application of the upgraded threshold limit on the fresh cases which have been filed but could not be taken up due to limited functioning of the Courts and also the cases where defaults range from 2018-till date and the demand notices have been issued, the doors of the National Company Law Tribunal are likely to be shut on their faces because without there being any clarificatory note, the notification has come into application and might impact such pending cases also. Hence, by necessary implication this notification could become retrospective which is not only illegal but also perverse because the Supreme Court in the judgment of S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India[3] while considering a retrospective notification under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 had laid down the following: (SCC p. 746)

“18. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation.(See Keshavan Madhava Memon v. State of Bombay[4]). But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the legislature to affect existing rights, it is deemed to be prospective only ‘nova constitutio futuris formam imponere debet, non praeteritis’. In the words of Lord Blanesburgh,

“provisions which touch a right in existence at the passing of the statute are not to be applied retrospectively in the absence of express enactment or necessary intendment.”

It is an accepted position that this notification is an executive act and not an amendment. Hence, this can be safely termed as a delegated piece of legislation. It is trite in law that a delegated piece of legislation cannot be made to be retrospective by the executive unless and until the statute gives the executive such power[5]. It is an accepted norm since the age of Rai Sahib Ram Jawaya Kapur v. State of Punjab[6] that, the executive can do such acts under a statute as far as permitted and as far as the power of the legislature extends.

Whenever the Government had decided on issues relating to raising the  pecuniary limit or enacting a separate law, which would cause loss of jurisdiction, the executive and the legislature in its wisdom on earlier occasions had taken care of such transition by issuing a clarification or by enacting a provision.

For example, when the Administrative Tribunals Act, 1985 was enacted, cases were transferred to the Central Administrative Tribunals (CAT) vide Section 29 of the Act of 1985. Similar situation and enactment had taken place when the Company Law Board was abolished and the jurisdiction got transferred to the National Company Law Tribunal vide Section 466 of the Companies Act, 2013.

However, there is no such provision in the Insolvency and Bankruptcy Code, 2016. The amendment of March 2020[7] is also silent on this aspect. The notification is also silent on the aspect of pending cases or where demand notices have been issued within the period of limitation prescribed under Section 238-A of the Code, 2016, which is three years.

As a recent example, we would like to cite the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019  dated 28-12-2019 whereby vide Section 3 of the said Ordinance, the criteria for home-buyers for approaching the NCLT under Section 7 of the Code was amended and the criteria was modified to 10% or 100 home-buyers from the same real estate project. The proviso to such an amendment laid down that for pending applications which were yet to be admitted, they must be amended within 30 days.

The said proviso was taking away the right of the people which had already accrued and was made to operative retrospectively by giving a time period of 30 days to amend the petition. Such an exercise of power in the absence of a provision expressly granting such retrospective enactments was prima facie arbitrary and called for a scrutiny by the  Court.

The said provision was challenged by way of a writ petition before the Supreme Court of India, wherein the Supreme Court vide order dated 13-01-2020 was pleased to order status quo with respect to the petitions already filed[8]. The matter is sub judice before the Supreme Court and we shall await the decision of the Supreme Court on this aspect which will be critical to the analysis of delegated powers to the executive under the Code, 2016.

However, despite the pendency of the said writ petition and the Ordinance being subject-matter of challenge, the Government went ahead and passed the aforesaid Ordinance as an Amendment Act on 13.03.2020. The passage of the ordinance as an Amendment Act on 13.03.2020 by retaining the same provision which was stayed by the Supreme Court, nullifies the writ petition pending adjudication and the order of the Supreme Court. However, that is a separate matter to be examined by the Court.

The Notification dated 24.03.2020 does not have such a proviso also as that of the Amendment Act of 2020, which makes things worse, as in both the litigants and the Courts will be clueless with respect to its applicability and the effect it would have on the pending petitions which are yet to be admitted. Hence, on this aspect also, the notification fails to satisfy the test of objectivity.

Thereafter, coming to the question of class-based legislation, the Notification dated 24.03.2020, completely ignores many aspects, namely, as far as the workmen are concerned, they must now rely on the trade unions to initiate or trigger insolvency, but again small trade unions with limited number of members will not be able to match the threshold. The Government by this way has pushed them to the already pre-existing alternative remedy under the Industrial Disputes Act, 1947. On the other hand, if there is no trade union then the option under the Insolvency and Bankruptcy Code, 2016 fizzles out, even though both workmen and employees are covered under the definition of “operational creditors.” However, such remedy does not seem plausible for employees, as they cannot be a part of a trade union under the Trade Unions Act, 1926. Hence, the employees who were in the process to approach the National Company Law Tribunal, now must take the alternate routes, as available under law even though they are time consuming and expensive.

Hence, here also it results in class-based distinction. For example, trade unions having a membership of over 200 will be able to achieve the threshold limit and other unions having a membership of 25 or 50 workmen cannot fulfil the threshold limit. The Trade Unions Act, 1926, however, prescribes the number of workmen required to register a trade union as seven. Hence, by default, there will be a sub-classification within a class; if a trade union is taken to be a class by itself.

Secondly, the small-scale distributors who supply goods, raw materials etc, but suffer from defaults in the hands of debtors, will have to fall back to the civil courts and file recovery suit or summary suit or a suit for specific performance, as the case may be.

The object of the Code to save the Indian economy from the backlash of bad debts and bringing the perpetrators to justice by tightening the noose of insolvency ends with this notification, as it will suit a particular class, which therefore turns out to be manifestly arbitrary.

For example, a small distributor of cotton yarn whose yearly billing with one manufacturer who takes supply of cotton yarn is around INR 20 lakhs, has to wait for 5 years from the date of default to reach the INR 1 crore mark but again will fail under the Limitation Act, 1963 read with Section 238-A of the Code, 2016 which says that the aggrieved must approach the court within 3 years of default, else it becomes time barred.

The Government prior to raising the threshold under the Code, had already issued an Office Memorandum dated 19.02.2020 with a clarificatory Office Memorandum dated 20.03.2020 covering the current situation of the country wide lockdown due to the pandemic under the “force majeure” clause (act of God) of the subsisting contracts.[9] Hence, the default on payments during this time could not have been considered as intentional defaults. The office memorandum could still be clarified further, saying, that the aforesaid force majeure clause shall apply to any transaction with effect from 19.2.2020 for a period of one year.

Neither the notification of increase of threshold under the Code, 2016 nor the office memorandums referred above have a retrospective effect whereby, the rights of the operational as well as the financial creditors which have accrued for the past one year or two years cannot suddenly be shut out by this action, which will result in manifest arbitrariness.

The ungazetted Notification dated 29.03.2020 published by the Insolvency and Bankruptcy Board of India (IBBI) with respect to the third amendment sought to be effected in the Insolvency and Bankruptcy  Board  of  India  (Insolvency  Resolution  Process  for Corporate Persons) Regulations, 2016 vide Clause 40-C, is that, the period of lock-down as notified by the Government will not counted for the purposes of limitation or for the purposes of cause of action/defaults in payment. Therefore, the proposed Clause 40-C should have been enough to tackle the present situation rather than arbitrary action of the Executive by raising the threshold limit for triggering insolvency process, as it clearly says that the present period of lockdown shall not be counted for any purpose including defaults.

On the other hand, Reserve Bank of India, vide press statement dated 27.03.2020 granted a three-month moratorium to all term loans, outstanding as on 01.03.2020 from payment of equated monthly instalments (EMIs), which would cover the working capital loans, cash credit/overdraft loans, housing loans, etc. It has further been clarified that this moratorium will not affect the classification of the assets which are under hypothecation or mortgage.

On the legal aspect, we should examine the aforesaid Notification dated 24.03.2020 on the touchstone of Article 14 and see whether the notification passes the muster for the test of manifest arbitrariness as laid down by the  Supreme Court recently in the judgment of Hindustan Construction Company Ltd. v. Union of India[10]. The test of “manifest arbitrariness” involves a determination as to whether something is done capriciously, irrationally and/or without adequate determining principle by the legislature. Particularly, while applying this doctrine to a piece of legislation, the Court must examine whether that legislation is unfair, unreasonable, discriminatory, non-transparent, capricious, biased with favoritism or nepotism, and not in pursuit of promotion of healthy competition and equitable treatment.

Now, the aforesaid notification of increase of threshold is unreasonable and discriminatory qua financial creditors and operational creditors as financial creditors as a class gets to stay within framework and there is a sub-classification with the class of operational creditors wherein small and medium scale players lose out while on the contrary, the habitual defaulters who are within the definition of small scale industries to medium scale industries stand to benefit. Next, on the issue of equitable treatment, the notification as explained above creates a sub-class within the class of financial as well as operational creditors which the legislature in its wisdom chose not to do.

It is trite in law that there cannot be a sub-class within a class. Operational creditors taken as a class cannot be further segregated on the pre-emption that the defaults below INR 1 crore are suddenly not worth adjudicating under the IBC regime.

While the action of the executive may look fantastic at first brush, the same is definitely not backed up by reasons while the settled law is that class specific legislation is not supported by jurisprudence and we have settled precedents under Article 14 of the Constitution of India.

Further, the Government has issued a press statement specifying that they are contemplating suspension of the operation of Sections 7 to 10 of the Code, 2016 which provide for the mechanism for petitions by the Financial Creditors (Section 7) and by the operational creditors (under Sections 8 and 9 of IBC, 2016). The aforesaid notification of increase of threshold amount has already made the operation of Sections 7 to 9 of IBC, 2016, redundant as it will suit only a handful of big businessman/corporate houses, which fall within the ambit of operational creditors and big financial institutions who fall within the ambit of financial creditors. It will also suit home-buyers who have invested in big projects of worth more than a crore, while the small scale home buyers whose flats are worth INR 40-50 lakhs stand to lose out.

While Section 4 of IBC, 2016 gives the Government a prerogative to issue policy directions, but those policy directions must not be manifestly arbitrary and cannot result in sub-classification which ultimately runs contrary to the object and purpose of the legislature and of the statute itself.[11]

However, the notification for the reasons mentioned above if at all is put to test, in our opinion will have slim chances of getting approved, as it fails to stand on legs and pass the muster of manifest arbitrariness.

Going by the logic of the executive that is to safeguard the small scale and medium scale industries from getting doomed under the present scenario, militates against itself considering the invocation of force majeure clause which includes the present scenario and the moratorium announced by Reserve Bank of India for a period of three months. Therefore, the defaulter of less than INR 1 crore shall stand to benefit from all the three notifications while the small scale/medium scale companies stands to huge pecuniary loss who cannot resort to any remedy for realisation of its debts/losses. The statement issued by RBI  and the force majeure clause would have saved the defaulters for 3-6 months, whereas by this notification, the perpetual defaulters are saved from the rigours of the Insolvency and Bankruptcy Code, 2016 for eternity.

CONCLUSION

As it is said, an act of haste is not always advisable and good. The proper act of the Government should be to come out with a proper clarification of the notification as to its applicability with a proper provision dealing with pending matters.

In the alternative, the Government can altogether withdraw the notification and issue a notification as indicated by suspending Sections 7 to 10 of IBC, 2016 for a period of 6 months, as it will support the cause as intended by the Government through its Notification dated 19.2.2020 (force majeure) and the press statement issued by Reserve Bank of India on 27.03.2020.

If the aforesaid is not done, in all probability the noble cause might face difficulty if challenged before a court of law.


*This article has been co-authored by Mr Wasim Beg, Partner; L&L Partners Litigation, New Delhi and;

**Mr Swarnendu Chatterjee, Advocate-On-Record, Supreme Court of India and Senior Associate, L&L Partners, Litigation, New Delhi.

[1] (1955) 1 SCR 1045

[2] Section 238-A, Insolvency and Bankruptcy Code, 2016 and the Limitation Act, 1963.

[3] (2006) 2 SCC 740

[4] 1951 SCR 228

[5] Director General of Foreign Trade v. Kanak Exports, (2016) 2 SCC 226

[6] (1955) 2 SCR 225 .

[7] Insolvency and Bankruptcy Code (Amendment) Act, 2020

[8] Manish Kumar v. Union of India, WP (Civil) No. 26 of 2020, order dated 13.01.2020

[9] OM No. 283/18/2020 and OM No. F/18/4/2020-PPD, Ministry of Finance, Department of Expenditure.

[10] 2019 SCC OnLine SC 1520.

[11] Rashbihari Panda v. Union of India, (1969) 1 SCC 414


Image Credits: ETRealty.com

Op EdsOP. ED.

Introduction

On 24-03-2020, the Government of India (‘the Government’) released a Notification[1] in exercise of its powers under Section 4 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) wherein the minimum amount of default for the initiation of Corporate Insolvency Resolution Process (‘CIRP’) is increased multifold from the previously existing threshold of Rupees one lakh to Rupees one crore .The notification has effectually amended Section 4 of the IBC which earlier stood 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.”

Henceforth, the minimum amount of default under the IBC will now be one crore rupees by the implication of the above mentioned notification.

Notification and its intricacies

It is noteworthy, that the Hon’ble Finance Minister, Mrs Nirmala Sitharaman indicated that the notification forms part of the several important relief measures taken by the Government because of COVID-19 outbreak[2]. The Government stated that the threshold is being increased to protect the Micro Small and Medium Enterprises (‘MSME’) that are facing the threat of insolvency in the wake of this outbreak. However, the subsequently released Gazette Notification reflects no such objective.

More so, there have been reports[3], in the media that the Government is mulling plans to ramp up the threshold for initiating CIRP under IBC. The 3rd Annual Insolvency Law Committee Report[4] which was released on 20-02-2020 also recommends increasing the threshold from the existing Rupees one lakh to Rupees fifty lakhs. The primary reason which was put forth by the Committee to increase the threshold was to reduce the pressure upon the judicial infrastructure i.e. the National Company Law Tribunal (‘NCLT’).

Ramifications on the stakeholders

The nature of the notification calls for a threefold analysis that would categorically concern all the stakeholders, namely, NCLT, companies, and the creditors.

Firstly, the move may be welcomed if we adopt the perspective that the change in the threshold would substantially reduce the number of cases before the NCLT and will effectively increase the efficiency of the Tribunal in speedy disposal of the matters as time is of the essence in the IBC proceedings[5]. Also, it is pertinent to mention that initially NCLT was established to deal with company law matters. However, with the introduction of the IBC, the forum now seems to be dominated by proceedings related to it and therefore it is functioning far beyond its capacity[6].

Be that as it may, altering the threshold never appeared to be the only viable alternative for addressing the issue of burden upon NCLTs. The same could be improved by providing better infrastructures, expediting and increasing the appointment of members, and increasing the number of Benches of the NCLTs rather than increasing the threshold under IBC.

Secondly, while the change in the IBC is hailed by the Government as a supportive measure for the MSME, the same may attack it  back with greater intensity. The operational creditors of corporate debtors in most of the cases are companies themselves. Ergo, they become susceptible to becoming prospective corporate debtors if their existing dues are not recovered due to the increased threshold. The amendment, therefore, will run counter to the objectives of the IBC.

Thirdly, the entities that are affected most are the operational creditors. The operational debt is more often than not, low in figures and unsecured at the same time[7]. Therefore, the operational creditors would largely be barred to proceed under the IBC and will have to resort to the previously setup mechanisms of debt recovery which were time taking and ineffective. Such mechanisms may further be stalled by way of moratorium if a CIRP is initiated against the corporate debtor by virtue of an application filed by any other creditor. The Supreme Court in Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta[8], has emphasised the role of operational creditors. In such circumstances, eliminating them from the scope and protection of the IBC without any requisite consultation and reasoning in that regard is not appreciable.

Also, the notification would have a detrimental effect on the cases of employees and workmen, who are allowed to make an application to the NCLTs in  cases of default[9]. But now the threshold stands modified at Rupees one crore, a large segment of employees would have no option for recovery other than going through the tedious and elongated court processes.

Possible alternative solution

Rather than altering the threshold for every class of creditors, the Government could have provided different thresholds for financial and operational creditors respectively. The said practice also has the approval of the judiciary[10], as the Supreme Court unequivocally held that there is an ”intelligible differentia” in the classification of financial and operational creditors.

Also, as the purpose of the amendment is to protect the companies from the economic slowdown due to the outbreak of COVID-19, the Government could have increased the threshold for a company having a relatively low annual turnover. It could have also prescribed similar qualifications as provided under the Micro Small and Medium Enterprises Development Act, 2006 for the classification of enterprises[11].

Alternatively, if the objective of the Government was to protect the MSME, it could have simply notified a different threshold for MSME as it has already done in the case of the particular type of creditors like the creditors of real estate companies[12].

Conclusion

The notification, as discussed above, is a significant change under the IBC regime. More so, there are ongoing proceedings wherein the amount of default is less than Rupees one crore  and therefore, the notification requires a clarification concerning pending applications for initiation of a CIRP. Moreover, the amendment can unsettle the scheme and object of the Code which was to promote entrepreneurship and availability of credit in the commercial fora. There is also no clarity as to the duration of operation of the notification. While the Government has stated that it’s a temporary measure[13], the same was not reflected in the Amendment Notification and thus it is yet to be seen if it gets rolled back in future or gains permanence.


*Akshay Sharma and Kunwar Surya Pratap, 5th and 3rd year law students respectively at National University of Study & Research in Law, Ranchi.

[1]. Notification No. REGD. NO. D. L – 33004/99, Ministry of Corporate Affairs, The Gazette of India, 24-3-2020. Source: <https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf>

[2]  Govt raises default threshold to Rs 1 crore for invoking insolvency proceedings against firms, Economic Times, 24-3-2020. Source:https://economictimes.indiatimes.com/news/economy/policy/govt-raises-default-threshold-to-rs-1-cr-for-invoking-insolvency-proceedings-against-firms/articleshow/74796076.cms?from=mdr

[3] Govt. ramps up capacity of NCLT Benches to boost decision-making, Business Standard, 16-3-2020.

Source:<https://www.business-standard.com/article/economy-policy/govt-ramps-up-capacity-of-the-nclt-benches-to-boost-decision-making-120031601566_1.html>

[4]  3rd  Report of The Insolvency Law Committee, Ministry of Corporate Affairs, Government of India, 20-2-2020. Source: http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf>

[5] Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Co. Ltd., (2017) 16 SCC 143.

[6] Gavel to the block: An overburdened NCLT is a drag on the new Bankruptcy Code, Economic Times, 12-2-2019. Source: <https://prime.economictimes.indiatimes.com/news/67951567/corporate-governance/gavel-to-the-block-an-overburdened-nclt-is-a-drag-on-the-new-bankruptcy-code>

[7] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, para 50.

[8] 2019 SCC Online SC 1478.

[9] Sections 5(21) & 9, Insolvency and Bankruptcy Code, 2016.

[10] Swiss Ribbons Pvt. Ltd. v. Union of India, 2019 SCC OnLine SC 73.

[11] S. 7, The Micro Small and Medium Enterprises Development Act, 2006.

[12] The Insolvency and Bankruptcy Code (Amendment) Ordinance, Ministry of Law and Justice, The Gazette of India, 28-12-2019. Source:<https://www.ibbi.gov.in/uploads/legalframwork/d6b171ec9b9ea5c54f7423bc36f92977.pdf>

[13] IBC: Increase in threshold to trigger insolvency may not be a temporary measure, Experts say, Payaswini Upadhyay, BloombergQuint, 24-3-2020. Source: <https://www.bloombergquint.com/law-and-policy/ibc-increase-in-threshold-to-trigger-insolvency-may-not-be-a-temporary-measure-experts-say>

Case BriefsTribunals/Commissions/Regulatory Bodies

Telecom Disputes Settlement and Appellate Tribunal: Justice S.K Singh (Chairperson), while hearing a petition regarding the dispute relating to the procedures to be followed by the telecom companies for obtaining the Unified License (UL), ordered in the favour of the petitioner, Aircel Ltd.

The issue in the present case arose when the Department of Telecommunications (DoT), Ministry of Communications, perpetually rejected the application of the petitioner for migration of its Cellular Mobile Telephone Service (CMTS) license to Unified License (UL) without properly considering the application of the petitioner.

The petitioner had filed for Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016. By virtue of the provisions of IBC, a Resolution Professional (RP) was appointed and he was supposed to take over the charge of the debtor company so as to preserve the value of the property of the debtor company and manage its operation, suspending all the powers of the Directors of the petitioner company.

Under the broad guidelines laid down by the DoT for obtaining UL, Para 8 of which required the applicant company was required to submit an application which should be certified by the Company Secretary and authorized directors of the company. The petitioner company applied for the license with the respondents where the team of the appointed RP of the company had authorized the director of the petitioner company, Sandeep Vats, to be the authorised signatory.

The counsel for the respondents, Apoorv Kurup justified the decision of the respondents to reject the migration application of the petitioner company twice on the grounds of misrepresentation of the authorised signatory and non- compliance with the full procedure at the time of making the application on both the occasions.

The counsel for the petitioners, Salman Khurshid, contended that the power of attorney was transferred to Mr Vats by the team of the authorised RP and an email intimating the DoT was sent accordingly and hence the procedure was met with. Reliance was placed on the case of United Bank of India v. Naresh Kumar, (1996) 6 SCC 660  where it was held the even in the absence of an earlier Resolution of Board of Directors authorizing a person to sign the pleadings by an officer can be later ratified by a corporation later.

The Appellate Tribunal accepted the arguments of the petitioner and hence declared the order passed by the DoT on two previous occasions as bad in law and set it aside accordingly on the grounds of peculiar approach of the respondent in passing the orders.

The petition was allowed and the Tribunal held that the CTMS licence of the petitioner should be migrated to UL as a temporary arrangement till it is considered and made permanent by the DoT. [Aircel Ltd. v. Union of India, 2020 SCC OnLine TDSAT 1, decided on 10-01-2020]

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, Sanjiv Khanna and Surya Kant, JJ has held the Amendment Act to Insolvency and Bankruptcy Code, 2016 made pursuant to a report prepared by the Insolvency Law Committee dated 26th March, 2018 does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

The amendments so made deem allottees of real estate projects to be “financial creditors” so that they may trigger the Code, under Section 7 thereof, against the real estate developer. In addition, being financial creditors, they are entitled to be represented in the Committee of Creditors by authorised representatives.

HOMEBUYERS AS FINANCIAL CREDITORS

The Amendment was challenged on ground that the treatment of allottees as financial creditors violates two facets of Article 14. One, that the amendment is discriminatory inasmuch as it treats unequals equally, and equals unequally, having no intelligible differentia; and two, that there is no nexus with the objects sought to be achieved by the Code.

On this the Court said that like other financial creditors, be they banks and financial institutions, or other individuals, all persons who have advanced monies to the corporate debtor should have the right to be on the Committee of Creditors.

“True, allottees are unsecured creditors, but they have a vital interest in amounts that are advanced for completion of the project, maybe to the extent of 100% of the project being funded by them alone.”

The Court further said that given the fact that allottees may not be a homogenous group, yet there are only two ways in which they can vote on the Committee of Creditors – either to approve or to disapprove of a proposed resolution plan.

“Sub-section (3A) goes a long way to ironing out any creases that may have been felt in the working of Section 25A in that the authorised representative now casts his vote on behalf of all financial creditors that he represents. If a decision taken by a vote of more than 50% of the voting share of the financial creditors that he represents is that a particular plan be either 145 accepted or rejected, it is clear that the minority of those who vote, and all others, will now be bound by this decision.”

DEEMING PROVISION

The Court noticed that although a deeming provision is to deem what is not there in reality, thereby requiring the subject matter to be treated as if it were real, yet several authorities and judgments show that a deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain. It held,

“the deeming fiction that is used by the explanation is to put beyond doubt the fact that allottees are to be regarded as financial creditors within the enacting part contained in Section 5(8)(f) of the Code.”

EXPLANATION ADDED TO SECTION 5(8)(f)

The Court further noticed that an explanation does not ordinarily enlarge the scope of the original Section. But if it does, effect must be given to the legislative intent notwithstanding the fact that the legislature has named a provision as an explanation. It, hence, held,

“the explanation was added by the Amendment Act only to clarify doubts that had arisen as to whether home buyers/allottees were subsumed within Section 5(8)(f). The explanation added to Section 5(8)(f) of the Code by the Amendment Act does not in fact enlarge the scope of the original Section as home buyers/allottees would be subsumed within Section 5(8)(f) as it originally stood.”

RULING

  • The Amendment Act to Insolvency and Bankruptcy Code, 2016 made pursuant to a report prepared by the Insolvency Law Committee dated 26th March, 2018 does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.
  • The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.
  • Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.

[Pioneer Urban Land and Infrastructure Ltd. v. Union of India, 2019 SCC OnLine SC 1005, decided on 09.08.2019]

Case BriefsSupreme Court

Supreme Court: Holding that the trade union represents its members who are workers, to whom dues may be owed by the employer, which are certainly debts owed for services rendered by each individual workman, who are collectively represented by the trade union, the bench of RF Nariman and Vineet Saran, JJ said,

“to state that for each workman there will be a separate cause of action, a separate claim, and a separate date of default would ignore the fact that a joint petition could be filed under Rule 6 read with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with authority from several workmen to one of them to file such petition on behalf of all.”

The Court was deciding the question whether a trade union could be said to be an operational creditor for the purpose of the Insolvency and Bankruptcy Code, 2016.

The Court noticed that a trade union is certainly an entity established under a statute – namely, the Trade Unions Act, and would therefore fall within the definition of “person” under Sections 3(23) of the Code. This being so, it is clear that an “operational debt”, meaning a claim in respect of employment, could certainly be made by a person duly authorised to make such claim on behalf of a workman. Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognises the fact that claims may be made not only in an individual capacity, but also conjointly.

It was further noticed that a registered trade union recognised by Section 8 of the Trade Unions Act, makes it clear that it can sue and be sued as a body corporate under Section 13 of that Act. Equally, the general fund of the trade union, which inter alia is from collections from workmen who are its members, can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party, and which is undertaken for the purpose of protecting the rights arising out of the relation of its members with their employer, which would include wages and other sums due from the employer to workmen.

The Court, hence, said,

“Looked at from any angle, there is no doubt that a registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members. We must never forget that procedure is the handmaid of justice and is meant to serve justice.”

[JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills, 2019 SCC OnLine SC 619, decided on 30.04.2019]

Call For PapersLaw School News

Chanakya National Law University is organizing a One-Day UGC Sponsored National Seminar on “INSOLVENCY AND BANKRUPTCY CODE: A PARADIGM SHIFT” which focuses on creating a nation-wide conversation providing an opportunity to students, academicians, law professionals and all other stakeholders to put forward their research and share their knowledge on wide range of topics relating to Insolvency and Bankruptcy Code and related subjects.
The purpose of the Seminar is to provoke discussion and debate on a range of topics and including subjects like Bankruptcy for Corporate, Insolvency Professional, traditional knowledge protection, amongst others. The agenda is
kept deliberately broad and the discussions are intended to be accessible to a general audience. The Seminar program offers high-level content relevant not only to students pursuing law or any other academic degree but also to young innovators from different fields; advocates, policy advisors, academicians, judicial officers and a range of government and non-government organizations to engage in a dialogue on Insolvency and Bankruptcy Code.
Through this initiative, we want our students and faculty to develop a broader perspective of their responsibility to
society and to give them an opportunity to listen to experiences, researches and findings of our esteemed panel of speakers, guests, academicians as well as students.
The Seminar will also provide a unique opportunity for lawyers and associated professional members in the region to exchange insights, explore current policy and practice issues, and exposure to a professional network of colleagues with shared interests and expertise.
We cordially invite articles, case notes and research papers on the theme from all academicians, researchers, advocates, social activists and students pursuing law or any other academic degree. Interested participants may submit their abstracts and full papers for the Seminar on the following e-mail ID: ibc.cnlu2019@gmail.com
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For more details, refer IBC Seminar Brochure
Case BriefsSupreme Court

Supreme Court: The Bench of RF Nariman and Navin Sinha, JJ, yet again dealing with an issue relating to the Insolvency and Bankruptcy Code, 2016, held that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of “documents” that have to be furnished along with the notice of such committee of creditor (CoC) meetings.

The Court was hearing the appeal arising out of an Appellate Tribunal’s judgment rejecting the appellant’s prayer for directions to the resolution professional to provide all relevant documents including the insolvency resolution plans in question to members of the suspended Board of Directors of the corporate debtor in each case so that they may meaningfully participate in meetings held by the CoC.

Holding that the expression “documents” is a wide expression which would certainly include resolution plans, the Bench said:

“every participant is entitled to a notice of every meeting of the committee of creditors. Such notice of meeting must contain an agenda of the meeting, together with the copies of all documents relevant for matters to be discussed and the issues to be voted upon at the meeting vide Regulation 21(3)(iii). Obviously, resolution plans are “matters to be discussed” at such meetings, and the erstwhile Board of Directors are “participants” who will discuss these issues.”

The Court also noticed that under Regulation 38(1)(a), a resolution plan shall include a statement as to how it has dealt with the interest of all stakeholders, and under sub-clause 3(a), a resolution plan shall demonstrate that it addresses the cause of default. It, hence, said:

“This Regulation also, therefore, recognizes the vital interest of the erstwhile Board of Directors in a resolution plan together with the cause of default. It is here that the erstwhile directors can represent to the committee of creditors that the cause of default is not due to the erstwhile management, but due to other factors which may be beyond their control, which have led to non-payment of the debt.”

The Court also rejected the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor. It explained:

“The proviso to Section 21(2) clarifies that a director who is also a financial creditor who is a related party of the corporate debtor shall not have any right of representation, participation, or voting in a meeting of the committee of creditors. Directors, simplicitor, are not the subject matter of the proviso to Section 21(2), but only directors who are related parties of the corporate debtor. It is only such persons who do not have any right of representation, participation, or voting in a meeting of the committee of creditors.”

The Court, hence, directed that the appellants be given copies of all resolution plans submitted to the CoC within a period of two weeks.

[Vijay Kumar Jain v. Standard Chartered Bank, 2019 SCC OnLine SC 103, decided on 31.01.2019]