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
In case of any query please feel free to contact us:
Subham Jain: +91-9523819962
Rohan Singh: +91-8972523836
Venkat Nilay: +91-8521338789
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]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench: This Bench comprising Mr V.P. Singh and Mr Ravikumar Duraisamy as members dismissed a petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 for initiation of corporate insolvency resolution process (CIRP), holding that the same had been filed on wrong facts by giving false information.

Petitioner approached the respondent to render certain services at its manufacturing plant in Tamil Nadu, for which it made an advance payment of Rs 44, 00,000. However, despite repeated reminders, respondent failed in the scheduled delivery. Petitioner, vide a legal notice, called upon the respondent to return advance payment and also compensate it for the financial loss suffered. Thus, the present petition was filed for initiation of against the respondent.

Petitioner submitted particulars of claim, records of respondent’s bank account, bank certificate and demand notice. Respondent filed counter affidavit highlighting irregularities in the instant petition. It was also submitted that delay was on account of the modification instructions given by the employees of petitioner and that the petitioner was not really interested in getting his work done but only interested in making a claim against respondent.

The Tribunal opined that Operational Debt as defined under Section 5(21) of the Act means “a claim in respect of the provision of goods or services including employment or debt in respect of the repayment of dues arising under any law.” Refund of advance money was not in connection with the goods/services including employment or a debt in respect of repayment of dues.

Further, the petitioner ought to have crystallized the damages then only, it could have claimed the amount of compensation. The alleged compensation amount had not even been quantified by the petitioner. Since petitioner’s claim had not been adjudicated by any competent authority in law, hence, it could not be described as operational debt.

In view of the above, it was held that petition had been filed with an ulterior motive to get insolvency petition admitted. Thus, the petition was dismissed imposing a cost of Rs 10 lakhs on the petitioner.[TATA Chemicals Ltd. v. Raj Process Equipments and Systems (P) Ltd., CP 21/I&BP/NCLT/MAH/2018, Order dated 30-11-2018]

Case BriefsSupreme Court

Supreme Court: The bench of RF Nariman and Navin Sinha, JJ has, in a landmark verdict, upheld the validity of the Insolvency and Bankruptcy Code, 2016 in it’s entirety as the provisions contained therin pass the constitutional muster.

Noticing that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid, the bench said:

“The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.”

Object of the Code

The primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management.

Classification between ‘Financial Creditor’ and ‘Operational Creditor’, if discriminatory

The Court elaborated on the distinction between the two and held that:

“preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.”

Below are the differences between ‘Financial Creditor’ and ‘Operational Creditor’ as elaborated by the Court:

Financial Creditor

Operational Creditor

most financial creditors, particularly banks and financial institutions, are secured creditors

most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like

financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business

contracts with operational creditors are relatable to supply of goods and services in the operation of business.

 

financial contracts generally involve large sums of money

operational contracts have dues whose quantum is generally less.

 

financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality

Contracts with operational creditors do not have any such stipulations.

financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganization of the corporate debtor‘s business when there is financial stress

operational creditors do not and cannot do any of these things

Validity of Section 29A providing ineligibility of a person to be resolution applicant

“If the blind lead the blind, both shall fall into the ditch”

A person who is unable to service its own debt beyond the grace period, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with.

Section 53 dealing with distribution of assets not discriminatory

The reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Insolvency Code. Repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts, which are unsecured, which is directly related to the object sought to be achieved by the Code.

Constitution of Circuit Benches of the National Company Law Appellate Tribunal (NCLAT)

The Court noticed that since the NCLAT, as an appellate court, has a seat only at New Delhi, it has rendered the remedy inefficacious inasmuch as persons would have to travel from Tamil Nadu, Calcutta, and Bombay to New Delhi, whereas earlier, they could have approached the respective High Courts in their States. It, hence, directed the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months from the date of the order.

Conclusion

Noticing that the Insolvency Code is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole, the bench said:

“The experiment contained in the Code, judged by the generality of its provisions and not by so called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.”

[Swiss Ribbons Pvt. Lmt. V. Union of India, 2019 SCC OnLine SC 73, decided on 25.01.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed by the Corporate Debtor against the initiation of Insolvency Resolution Process.

The Financial Creditor had granted a loan of Rs 1.02 crores to the Corporate Debtor which they were unable to repay. The Financial Creditor took recourse to arbitration and an award was passed favouring the Financial Creditor. The Corporate Debtor failed to comply with the award. Consequently, the Financial Creditor triggered the Insolvency Resolution Process. The appellant – a shareholder of Corporate Debtor – assailed the initiation of the process on the ground that there was an internal dispute among the directors which was pending adjudication under Section 241 and 242 of the Companies Act, 2013 before National Company Law Tribunal, New Delhi.

The Appellate Tribunal perused the entire scheme of the Insolvency and Bankruptcy Code regarding the Insolvency Resolution Process. It was observed that internal dispute among directors of the Corporate Debtors does not construe a valid defence to triggering of the process. Furthermore, it could not be defeated by taking resort to pendency of matter before the NCLT under Companies Act. The Code is a special law having an overriding effect on any other law as mandated by Section 238. The factum of default and non-compliance with arbitral award was not disputed by the Corporate Debtor; and thus, the Financial Creditor was well within its right to initiate the process. The appeal was held to be frivilous and costs amounting to Rs 1 lakh were imposed. The appeal was, thus, dismissed. [Jagmohan Bajaj v. Shivam Fragrances (P) Ltd.,2018 SCC OnLine NCLAT 413, dated 14-08-2018]

Conference/Seminars/LecturesLaw School News

Introduction: The Insolvency and Bankruptcy Code though provides for faster and definitive resolution to deal with distressed or failed businesses compare to erstwhile Sick Industrial and Companies Act, 1985 and the Companies Act, 1956 (now stands repealed), it does not address potential tax issues that may arise as a result of resolution plan*. (Rekha Bagry, Neelu Jalan, ‘Insolvency and the Tax Conundrum’, Tax Guru)  In other words, the transactions undertaken as a part of the resolution process under Insolvency and Bankruptcy Code, 2016 could result in taxes, and it may derange the deal financials, thus making the resolution process less efficient and effective. (Vishal Agarwal, Yashesh Asher, Sohail Manjiramani, ‘The Insolvency Code: Will Tax be a Problem’).

To know and understand these intricacies and bring ease to business, Symbiosis Law School, NOIDA in collaboration with Vaish Associates Advocates has organised Seminar on Insolvency and Bankruptcy Code, 2016 and Tax Implications upon Insolvency on July 28, 2018.

Resource Person: Ms. Kavita Jha, Partner, Vaish Associates, Advocates

Ms. Kavita Jha is a senior member of the Tax Group and has and has been associated with the Firm since 2003 when she moved her practice from the High Court of Calcutta to the High Court of Delhi. She has also been an Advocate-on-Record in the Supreme Court of India since June 2007 and specializes in tax litigation: income tax, VAT and sales tax as well as criminal law and arbitration.

Ms. Kavita has been an empanelled Advocate before the Supreme Court for the Union of India, the State of Maharashtra and other government agencies, in which capacity she has handled a multitude of tax, civil and criminal matters. She has also handled arbitration matters for various joint ventures and domestic companies in the energy and infrastructure sectors. She has also successfully facilitated dispute resolution through conciliation for other clients. Ms. Jha has also been appointed as Sole Arbitrator by Justice Dr. S. Muralidhar of the Delhi High Court in a dispute arising out of a property development agreement.

Ms. Kavita has participated in various legal seminars, workshops/seminars, conferences and lectures of national and inter-national repute on, inter alia, International Tax – International Fiscal Association, Arbitration and Alternate Dispute Resolution, Adoption law, Muslim Personal Law and Refugee Law. She has also been visiting Faculty in IMT, Ghaziabad for Corporate and Business Law in Calcutta and Delhi as well as honorary visiting Faculty in Symbiosis Law School, NOIDA.

Date & Time July 28, 2018: 09:00am – 12:00 noon

Venue: Seminar Hall, Third Floor, Academic Block, Symbiosis Law School, NOIDA

Contact Persons:

Dr. Meenakshi Kaul, Assistant Professor & Head, Training & Placement

Mr. Siddharth Kanojia, Assistant Professor & Head – Placement, Training and Placement

Ms. Pallavi Mishra, Assistant Professor & Head – Internship, Training and Placement

Email: hr@symlaw.edu.in

Amendments to existing lawsLegislation Updates

The President gave his assent on 06-06-2018, to promulgate the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.

The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors. This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers. Another major beneficiary would be Micro, Small and Medium Sector Enterprises (MSME), which form the backbone of the Indian economy as the biggest employer, next only to the agriculture sector. Recognizing the importance of MSME Sector in terms of employment generation and economic growth, the Ordinance empowers the Government to provide them with a special dispensation under the Code. The immediate benefit it provides is that, it does not disqualify the promoter to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP) provided he is not a willful defaulter and does not attract other disqualifications not related to default. It also empowers the Central Government to allow further exemptions or modifications with respect to the MSME sector, if required, in public interest.

In order to protect the sanctity of the CIRP, the Ordinance lays down a strict procedure if an applicant wants to withdraw a case after its admission under IBC 2016.  Henceforth, such withdrawal would be permissible only with the approval of the Committee of Creditors with 90 percent of the voting share.  Furthermore, such withdrawal will only be permissible before publication of notice inviting Expressions of Interest (EoI).  In other words, there can be no withdrawal once the commercial process of EoIs and bids commences. Separately, the Regulations will bring in further clarity by laying down mandatory timelines, processes and procedures for corporate insolvency resolution process.  Some of the specific issues that would be addressed include non-entertainment of late bids, no negotiation with the late bidders and a well laid down procedure for maximizing value  of assets.

With a view to encouraging resolution as opposed to liquidation, the voting threshold has been brought down to 66 percent from 75 % for all major decisions such as approval of resolution plan, extension of CIRP period, etc.  Further, in order to facilitate the corporate debtor to continue as a going concern during the CIRP, the voting threshold for routine decisions has been reduced to 51 %.

The Ordinance also provides for a mechanism to allow participation of security holders, deposit holders and all other classes of financial creditors that exceed a certain number, in meetings of the Committee of Creditors, through the authorized representation.

The existing Section 29 (A) of the IBC, 2016 has also been fine-tuned to exempt pure play financial entities from being disqualified on account of NPA.  Similarly, a resolution application holding an NPA by virtue of acquiring  it  in the past under the IBC, 2016, has been provided with a three-year cooling-off period, from the date of such acquisition.  In other words, such NPA shall not disqualify the resolution application during the currency of the three-year grace period.

Taking into account the wide range of disqualifications contained in Section 29 (A) of the Code, the Ordinance provides that the Resolution Applicant shall submit an affidavit certifying its eligibility to bid.  This places the primary onus on the resolution applicant to certify its eligibility.

The Ordinance provides for a minimum one-year grace period for the successful resolution applicant to fulfill various statutory obligations required under different laws.  This would go a long way in enabling the new management to successfully implement the resolution plan.

The other changes brought about by the Ordinance include non-applicability of moratorium period to enforcement of guarantee; introducing the requirement of special resolution for corporate debtors  to themselves trigger insolvency resolution under the Code; liberalizing terms and conditions of interim finance to facilitate financing of corporate debtor during CIRP period; and giving the IBBI a specific development role along with  powers to levy fee in respect of services rendered.

The above mentioned changes are expected to further strengthen the Insolvency Resolution Framework in the country and produce better outcomes in terms ofresolution as opposed to liquidation, time taken, cost incurred and recovery rate.

[Press Release no. 1534497]

Ministry of Corporate Affairs

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The NCLAT heard an appeal against the order passed by the National Company Law Tribunal, Mumbai Bench (“NCLT”) regarding time period allotted for completing Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 and certain observations made by the NCLT against the Resolution Professional (“RP”).

With regard to the expire of the time limit for the CIRP proceedings, the NCLAT referred to a recent decision of its own in Quinn Logistics India Pvt. Ltd. v. Mack Soft Tech Pvt. Ltd., 2017 SCC OnLine NCLAT 474 where the NCLAT held:

“[I]t is always open to the Adjudicating Authority/Appellate Tribunal to ‘exclude certain period’ for the purpose of counting the total period of 270 days if the facts and circumstances justify exclusion.

10. For example, for following good grounds and unforeseen circumstances, the intervening period can be excluded for counting of the total period of 270 days of resolution process:

(i)- (ii)                     *                         *                                     *

(iii) The period between the date of order of admission/moratorium is passed and the actual date on which the ‘Resolution Professional’ takes charge for completing the corporate insolvency resolution process.

(iv) – (vi)                *                          *                                   *

However, after exclusion of the period, if further period is allowed the total number of days cannot exceed 270 days which is the maximum time limit prescribed under the Code.”

In the present case, the case was admitted for CIRP on 16.08.2017, and the RP assumed charge on 14.09.2017, that is 30 days. Therefore the NCLAT directed the NCLT, Mumbai Bench to exclude the said period of 30 days from the limit set to complete the CIRP proceedings and modified the impugned order to that extent. [Velamur Varadan Anand v. Union Bank of India,2018 SCC OnLine NCLAT 258, decided on 16-05-2018]

Legislation UpdatesRules & Regulations

The Insolvency and Bankruptcy Code, 2016 (Code) is a modern economic legislation. Section 240 of the Code empowers the Insolvency and Bankruptcy Board of India (IBBI) to make regulations subject to the conditions that the regulations: (a) carry out the provisions of the Code, (b) are consistent with the Code and the rules made thereunder; (c) are made by a notification published in the official gazette; and (d) are laid, as soon as possible, before each House of Parliament for 30 days.

The IBBI has evolved a transparent and consultative process to make regulations. It has been endeavour of the IBBI to effectively engage stakeholders in the regulation making process. The process generally starts with a working group making draft regulations. The IBBI puts these draft regulations out in public domain seeking comments thereon. It holds a few round tables to discuss draft regulations with the stakeholders. It takes advice of its Advisory Committee. The process culminates with the Governing Board of the IBBI finalising regulations and the IBBI notifies them. This process endeavours to factor in ground reality, secures ownership of regulations, imparts democratic legitimacy and makes regulations robust and precise, relevant to the time and for the purpose.

Public consultation enables collective choice and hence plays an important role in evolution of regulatory framework. The participation of the public, particularly the stakeholders and the regulated, in the regulatory process ensures that the regulations are informed by the legitimate needs of those interested in and affected by regulations.

Given the importance of subordinate legislations for the processes under the Code, it is essential that the IBBI has a structured, robust mechanism, which includes effective engagement with the stakeholders, for making regulations. In fact, Section 196(1)(s) of the Code requires the IBBI to specify mechanisms for issuing regulations, including the conduct of public consultation processes, before notification of regulations.

In sync with this philosophy and the statutory requirement, the IBBI proposes to make regulations to govern the process of making regulations and consulting the public. The IBBI invites comments from public, including the stakeholders and the regulated, on the draft Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations), Regulations, 2018 which is annexed to this press release and also available at www.ibbi.gov.in. A cost benefit analysis of the draft regulations is appended at the end of the draft regulations. The comments may be e-mailed at feedback@ibbi.gov.in by 31st March, 2018, with subject line “Mechanism for Issuing Regulations”.

Ministry of Corporate Affairs

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: Canara Bank, the appellant-financial creditor, challenged the impugned order passed by National Company Law Tribunal, Hyderabad Bench whereby while admitting the application preferred by Appellant under Section 7 of the Insolvency and Bankruptcy Code, 2016 passed an order of moratorium thereby prohibiting the institution of suits or continuation of pending suits or proceedings except before the High Courts and Supreme Court of India, against the Corporate Debtor including execution of any judgment, decree or order in any court of law, Tribunal, arbitration panel or other authority.

The counsel appearing on behalf of the appellant contended that the Adjudicating Authority cannot exclude any court from the purview of moratorium for the purpose of recovery of amount or execution of any judgment or decree, including the proceeding, if any, pending before the High Courts and Supreme Court of India against a ‘corporate debtor’. NCLAT while adjudicating the matter opined that Section 14 relates to ‘Moratorium’ which the Adjudicating Authority is required to declare at the time of admission of the application for ‘corporate insolvency resolution The NCLAT stated that,

“from Section 14(1) (a), it was clear that institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order by any court of law, tribunal, arbitration panel or other authority come within the purview of ‘moratorium’ and that the said provision specifically did not exclude any Court, including the Hon’ble High Courts or Hon’ble Supreme Court of India.”

The NCLAT, dismissing the appeal, and further clarifying the impugned order passed by Tribunal relating to ‘moratorium’ held in clear terms that,

“The Hon’ble Supreme Court has power under Article 32 of the Constitution of India and Hon’ble High Court under Article 226 of Constitution of India which power cannot be curtailed by any provision of an Act or a Court. In view of the aforesaid provision of law, we make it clear that ‘moratorium’ will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. ‘Moratorium’ will also not affect the power of the High Court under Article 226 of Constitution of India. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the ‘corporate debtor’ such suit cannot proceed after declaration of ‘moratorium’, under Section 14 of the I&B Code.”

 [Canara Bank v. Deccan Chronicle Holdings Limited, 2017 SCC OnLine NCLAT 255, decided on 14.9.2017]

 

Case BriefsSupreme Court

Supreme Court: Dealing with the question relating to applicability of the Maharashtra Relief Undertakings (Special Provisions Act), 1958 vis-a-vis the Insolvency and Bankruptcy Code of 2016, the bench of RF Nariman and SK Kaul, JJ held that the State law is repugnant to the Parliamentary enactment as under the said State law, the moratorium imposed under Section 4 of the Maharashtra Act directly clashes with the moratorium to be issued under Sections 13 and 14 of the Code.

Explaining the scheme of both the Laws, the Court said that the moment initiation of the corporate insolvency resolution process takes place, a moratorium is announced by the adjudicating authority vide Sections 13 and 14 of the Code, by which institution of suits and pending proceedings etc. cannot be proceeded with. This continues until the approval of a resolution plan under Section 31 of the said Code. In the interim, an interim resolution professional is appointed under Section 16 to manage the affairs of corporate debtors under Section 17 of the Code.

It was further explained that whereas the moratorium imposed under the Maharashtra Act is discretionary and may relate to one or more of the matters contained in Section 4(1), the moratorium imposed under the Code relates to all matters listed in Section 14 and follows as a matter of course. Hence, unless the Maharashtra Act is out of the way, the Parliamentary enactment will be hindered and obstructed in such a manner that it will not be possible to go ahead with the insolvency resolution process outlined in the Code. Further, the non-obstante clause contained in Section 4 of the Maharashtra Act cannot possibly be held to apply to the Central enactment, inasmuch as a matter of constitutional law, the later Central enactment being repugnant to the earlier State enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-à-vis action taken under the later Central enactment

It was, hence, held that by giving effect to the State law, the aforesaid plan or scheme which may be adopted under the Parliamentary statute will directly be hindered and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional. Hence, the Code would prevail against the Maharashtra Act in view of the non-obstante clause in Section 238 of the Code. [Innoventive Industries Ltd. v. ICICI Bank, 2017 SCC OnLine SC 1025, decided on 31.08.2017]