Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

The issue to be decided on

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

Analysis and decision

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

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

At this juncture, the Bench relied on the judgment of the Supreme Court in Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, wherein it was held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditor is an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.

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

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

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


Advocates who appeared in this case :

Shri. Amir Bavani, Advocate, for the Petitioner;

Shri. Varun Ambati, Advocate, for the Respondent;

Resolution Professional in person, for Resolution Professional.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: In a case where a Resolution Professional (RP) had submitted a report even prior to the order by the Adjudicating Authority that had appointed him, the bench of of H. V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member, has asked him to submit a fresh report.

The petition was filed by Bank of Baroda for initiation of Insolvency Resolution Process under Section 95(1) of Insolvency and Bankruptcy Code, 2016. It was passed against Mr. Pawan V Kikavat, Personal Guarantor of Mahavir Roads and Infrastructure Pvt. Ltd.

The counsel for the Bank of Baroda mentioned the demand notice dated 06-11-2020 invoking the Guarantee against the Personal Guarantor. He also gave proof of delivery of the demand notice. The deed of Guarantee dated 26-04-2012 executed by Bank of Baroda was also brought to the notice of the Bench. The petitioner also suggested the name of RP, Mr. Kairav Anil Trivedi, to conduct the Insolvency Resolution Process.

The counsel for the Personal Guarantor opposed the maintainability of the Petition pointing out that the RP has already filed his report without there being any order passed by the Adjudicating Authority appointing him and directing him to do so.

The issue was whether the report filed by RP without him receiving directions can be taken on record or a separate order should be filed by RP on the directions given.

The Bench appointed Kairav Anil Trivedi to submit a fresh report after examining the petition within 10 days of the date of this order.


[Bank of Baroda Limited v Pawan V Kikavat, 20 C.P. (IB)-140(MB)/2022, decided on 29-06-2022]


Counsels:

For Petitioner: Kairav Trivedi, PCA

For Personal Guarantor: Advocate Nausher Kohli


Akaant MittalExperts Corner

In this three – part series, I shall be discussing the if a decree or an arbitral award or a settlement deed can form the basis of a financial or operational debt under the IB Code.

 

The Insolvency and Bankruptcy Code, 2016 took effect on 1-12-2016, and the Government of India has since enforced most of the sections of the Code pertaining to corporate insolvency through numerous notifications. The Code has resulted in a paradigm shift in India’s insolvency and bankruptcy law, both for corporate entities and for individuals.

 

The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1] In order to seeking a resolution process against a corporate debtor, therefore, a creditor must either have a claim of a financial debt or an operational debt against such debtor.

 

Now issues have arisen when such creditors have sought to base their claims on

(i) a decree by a court; or an arbitral award; or

(ii) settlement agreement between the creditor(s) and the corporate debtor.

The first part of the series shall deal with whether a decree constitutes a financial debt.

 

The jurisprudence on this issue generally has held that it is essential that the claim of a financial creditor must be based on the transaction between the debtor and creditor and not on the decree issued by a court or tribunal in any other case between the debtor and creditor.

 

A decree-holder cannot initiate a corporate insolvency resolution process by using the decree or recovery certificate issued by the Debts Recovery Tribunal or Real Estate Regulatory Authority (RERA) or any other authority under any other law.[2] The rationale is that an “amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money”[3]. Resultantly, the same cannot be termed to fall within the ambit of any of the clauses enumerated under Section 5(8), IB Code.[4]

 

The NCLAT has maintained that the proceedings under the IB Code are not recovery proceedings. Therefore, when a creditor seeks indirect execution of such decrees or recovery certificates by filing an application under Section 7, IB Code, the same can tantamount to “fraudulent or malicious initiation of insolvency proceedings for a purpose other than for the resolution of insolvency” and hence, actionable under Section 65, IB Code.[5]

 

In other words, the underlying idea is that the adjudicating authority does not become an executing court wherein any petitioner who obtains a decree instead of getting the same executed before the appropriate civil courts, circumvents and seeks such execution indirectly through the proceedings under Section 7 of the IB Code.

 

Similar opinion was maintained in the matter of Akram Khan v. Bank of India Ltd.,[6] wherein the NCLAT opined that the application under Section 7 of the IB Code seems to be made for the purposes of execution of a decree passed by the Debts Recovery Tribunal in favour of the “financial creditor”. Hence, the creditor approached the adjudicating authority, for the purpose other than for the resolution of insolvency, or liquidation and resultantly falls foul of Section 65 of the IB Code. Similar view was taken in C. Shivakumar Reddy v. Dena Bank.[7]

 

One query that could certainly be posed is that why does a creditor rely on a decree or an arbitral award to establish a financial or an operational debt. One particular reason for that could be to prevent the claim being hit by the law of limitation. According to Section 238-A of the IB Code, the Limitation Act, 1963 applies to the IB Code and therefore, an application under Sections 7 or 9 or Section 10 of the IB Code has to be filed within 3 years of the date of default. Therefore, when the date of default predated the year 2013 but the creditor filed the application under Section 7 of the IB Code on 7-1-2019; the creditor sought to place reliance on the decree by the Debts Recovery Tribunal which was passed on 22-10-2016 to argue that their claim was within limitation.[8] However, the same was still rejected by the NCLAT holding that the limitation will start from the date of default and not the date when the recovery certificate was issued by the Debts Recovery Tribunal.[9]

 

However, a diverging stance was taken in Ugro Capital Ltd. v. Bangalore Dehydration and Drying Equipment Co. (P) Ltd.,[10] where specific argument was taken that the creditor had not prosecuted the judgment and decree obtained in 2015 before a civil court and instead has come before the adjudicating authority by filing an application under Section 7 of the IB Code. The NCLAT setting aside the order of the adjudicating authority, had directed the latter to admit the application under Section 7 of the IB Code. The NCLAT referring to the definition of the term “creditor” in the IB Code, in categorical terms, stated:

 

“[i]t is important to point out that the definition of creditor provided in Section 5(10) of the IB Code provides that “creditor means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

 

Based on the decree of the court this petition was filed under Section 7 of the Code. Since the definition of word creditor in IB Code includes decree-holder, therefore if a petition is filed for the realisation of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in civil court.”

 

In fact, in the above-mentioned case, the NCLAT calculated the limitation for filing the application under Section 7 from the date of the decree.

 

In conclusion, it can be said that majorly the courts had taken an adverse view when an application seeking initiation of a resolution process is supported by a decree or an arbitral award[11]. The impression that the same seems to be communicated to the courts is that the creditor has approached it with a mala fide motive, which is why the provision of Section 65 IB Code[12] is referred to it.[13]

 

However, the same must now be revisited on account of the ruling of the Supreme Court in Dena Bank v. C. Shivakumar Reddy[14]. One of the issues in this case was the financial creditor had relied on the recovery certificate issued by the Debts Recovery Tribunal to establish the claim of a financial debt and to contend that the application under Section 7 was filed in the period of limitation. Setting aside the ruling of the NCLAT, the Supreme Court accepted the submission of the financial creditor, holding:

126… In this case, the appellant financial creditor had, amongst other documents, also relied upon the final judgment and order dated 27-3-2017 passed by the Debts Recovery Tribunal and the subsequent recovery certificate dated 25-5-2017 which constituted cause of action for initiation of proceedings under Section 7 of the IB Code.

Clearly, therefore, a decree can now constitute a financial debt.

Conclusion

From the foregoing discussion, it is clear that the jurisprudence of the NCLAT wherein claim based on a decree was look with skepticism as to whether the same amounts to misuse of the provision of the IB Code, needs revisiting. In light of the ruling of the Supreme Court in Dena Bank[15], a claim can most certainly be based on a decree. However, it must be mentioned here that the claim upon which a decree is rendered must satisfy the fundamental ingredients of a financial debt, since in Dena Bank[16], it was a financial creditor that had secured the decree.

 


† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice”.

The author gratefully acknowledges the research and assistance of Sh. Mahesh Kumar, 4th Year, B.A.LLB. (Hons.), student at Sharda University, Greater Noida, Uttar Pradesh, in writing this series.

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1

[2] See, Sushil Ansal v. Ashok Tripathi, 2020 SCC OnLine NCLAT 680.

[3] 2020 SCC OnLine NCLAT 680, para 20.

[4] 2020 SCC OnLine NCLAT 680.

[5] See, G. Eswara Rao v. Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT 416; Sushil Ansal v. Ashok Tripathi, 2020 SCC OnLine NCLAT 680.

[6] 2019 SCC OnLine NCLAT 1427.

[7] 2019 SCC OnLine NCLAT 907.

[8] Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd., 2020 SCC OnLine NCLAT 399.

[9] Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd., 2020 SCC OnLine NCLAT 399, para 18.

[10] 2020 SCC OnLine NCLAT 149.

[11] See HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., 2019 SCC OnLine NCLAT 1338.

[12] IB Code, S. 65(1) states:

“65. Fraudulent or malicious initiation of proceedings.— (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.”

[13] See HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., 2019 SCC OnLine NCLAT 1338; G. Eswara Rao v. Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT 416.

[14] 2021 SCC OnLine SC 330.

[15] (2021) 10 SCC 330.

[16] (2021) 10 SCC 330.

Case BriefsSupreme Court

Supreme Court: A Division Bench of Indira Banerjee and V. Ramasubramanian, JJ. held that there is no bar in law to amendment of pleadings in an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 or to filing of additional documents apart from those initially filed, at any time until a final order either admitting or dismissing the application has been passed.

The Court also held that an application under Section 7 for imitation of corporate insolvency resolution process against a corporate debtor is not be barred by limitation if there is an acknowledgement of the debt by the corporate debtor before expiry of the limitation period. Such acknowledgment can be by way of statement of accounts, balance sheets, financial statements and offer of one time settlement.

Moreover, a final judgment and/or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7.

Factual Matrix and Timeline

In 2011, Dena Bank sanctioned a term loan of to the Corporate Debtor, which was to be repaid in 24 quarterly installments. The Corporate Debtor defaulted in repayment and their account was declared Non Performing Asset (“NPA”) in December 2013. In 2014, the Bank sent a letter to the Corporate Debtor to repay the outstanding dues. However, no payment was made.

In 2015, the Bank initiated proceedings before the Debts Recovery Tribunal (“DRT”) for recovery of outstanding dues from the Corporate Debtor. By a letter dated 5 January 2015, the Corporate Debtor requested the Bank to restructure the loan. Again, on 3 March 2017, while proceedings were pending before DRT, the Corporate Debtor gave an offer for one time settlement of the term loan account, which  was rejected by the Bank. On 27 March 2017, DRT passed an order against the Corporate Debtor for recovery of outstanding dues to the Bank. In May 2017, DRT issued a Recovery Certificate in favour of the Bank. Thereafter in June 2017, the Corporate Debtor once again gave the Bank a proposal for one time settlement to mutually settle the loan amount.

In October 2018, the Bank sought initiation of corporate insolvency resolution process against the Corporate Debtor. It filed a petition under Section 7 of the Insolvency and Bankruptcy Code (“IBC”) before the National Company Law Tribunal, Bengaluru. Thereafter, twice in 2019, the Bank filed applications for permission to place additional documents on record. Both these applications were allowed by NCLT. In March 2019, NCLT passed an order to admit the Section 7 petition filed by the Bank.

Appeal

The Corporate Debtor challenged the order of NCLT in an appeal under Section 61 IBC before the National Company Law Appellate Tribunal. The NCLAT allowed the appeal reversed the order of NCLT. Aggrieved, the Bank approached the Supreme Court.

Issues

Three questions arose for consideration of the Court:

(i) Whether a petition under Section 7 IBC would be barred by limitation, on the sole ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability to the appellant Bank, within a period of three years prior to the date of filing of the Section 7 petition, by making a proposal for a one time settlement, or by acknowledging the debt in its statutory balance sheets and books of accounts.

(ii) Whether a final judgment and decree of DRT in favour of financial creditor, or the issuance of a Certificate of Recovery in favour of financial creditor, would give rise to a fresh cause of action to financial creditor to initiate proceedings under Section 7 IBC within three years from the date of the final judgment and decree, and/or within three years from the date of issuance of the Certificate of Recovery.

(iii) Whether there is any bar in law to the amendment of pleadings, in a petition under Section 7 IBC, or to the filing of additional documents, apart from those filed initially, along with the Section 7 petition in Form-1 given in the Annexure to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“2016 Adjudicating Authority Rules”).

Analysis and Observations

Interpretation of the Code

Discussing the object of IBC, the Court observed that it is imperative that provisions of IBC and Rules and Regulations framed thereunder be construed liberally, in a purposive manner to further the objects of enactment of the statute, and not be given a narrow, pedantic interpretation which defeats its purposes.

Permissibility of amending Section 7 petition for filing additional documents

On a careful reading of IBC provisions and in particular the provisions of Section 7(2) to (5) read with the 2016 Adjudicating Authority Rules, the Court reached a conclusion that there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed.

The Court noted that under Section 7(2) IBC, a financial creditor is required to apply for initiation of corporate insolvency resolution process against a corporate debtor in the prescribed Form-1 under the 2016 Adjudicating Authority Rules. Since a financial creditor is required to apply under Section 7 IBC in statutory Form-1, the financial creditor can only fill in particulars as specified in the various columns of the Form. There is no scope for elaborate pleadings. The Court observed:

An application to the Adjudicating Authority (NCLT) under Section 7 of the IBC in the prescribed form, cannot therefore, be compared with the plaint in a suit. Such application cannot be judged by the same standards, as a plaint in a suit, or any other pleadings in a Court of law.

The Court summed up the discussion on this point by mentioning that there is no bar in law to amendment of pleadings in an application under Section 7 IBC, or to filing of additional documents, apart from those initially filed along with application under Section 7 in Form-1. It was observed:

In the absence of any express provision which either prohibits or sets a time limit for filing of additional documents, it cannot be said that NCLT committed any illegality or error in permitting the Bank to file additional documents.

However, the Court added that depending on the facts and circumstances of the case, when there is inordinate delay, the adjudicating authority might, at its discretion, decline the request of an applicant to file additional pleadings and/or documents, and proceed to pass a final order.

Lastly, it was clarified that Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 is not an authority for the proposition that there can be no amendment of pleadings at the fag end of NCLT proceedings. Moreover, in the instant case, the amendments were not made at the fag end of the proceedings but within 2/3 months of their initiation, before admission of the petition under Section 7 IBC.

Limitation and effect of acknowledgment of debt

Under the scheme of IBC, the insolvency resolution process begins when a default takes place, in the sense that a debt becomes due and is not paid. Before considering the main point, the Court noted that there can be no dispute with the proposition that in terms of Article 137 of Limitation Act, 1963, the period of limitation for making an application under Section 7 IBC is three years from the date of accrual of the right to sue, that is, the date of default.

However, as per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. The acknowledgement must be made before the relevant period of limitation has expired. Relying on Sesh Nath Singh v. Baidyabati Sheoraphuli Coop. Bank Ltd., 2021 SCC Online SC 244 and Laxmi Pat Surana v. Union Bank of India, 2021 SCC Online SC 267, the Court reiterated that there is no reason to exclude the effect of Section 18 of the Limitation Act to proceedings initiated under IBC.

Relying further on Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, 2021 SCC Online SC 321, the Court noted that:

It is well settled that entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18 of the Limitation Act.

In view of such law, the Court concluded that NCLAT’s finding that there was nothing on record to suggest that the Corporate Debtor acknowledged the debt within three years and agreed to pay debt, was not sustainable in law in view of the statement of accounts/balance sheets/financial statements for the years 2016-2017 and 2017-2018 and the offer of one time settlement including in particular the offer of one time settlement made on 3 March 2017.

In the instant case, Rs 1.11 crore had been paid towards outstanding interest on 28 March 2014 and the offer of one time settlement was within three years thereafter. In any case, NCLAT overlooked the fact that a Certificate of Recovery was issued by DRT in favour of the Bank on 25 May 2017. The Corporate Debtor did not pay dues in terms of the Certificate of Recovery. The Court held:

The Certificate of Recovery in itself gives a fresh cause of action to the Appellant Bank to institute a petition under Section 7 of IBC. The petition under Section 7 IBC was well within three years from 28th March 2014.

The Court relied on Jignesh Shah v. Union of India, (2019) 10 SCC 750 for concluding that a final judgment and/or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 IBC.

Before concluding, the Court considered that when the petition under Section 7 IBC was filed, the date of default was mentioned as 30 September 2013 and the date of declaration of term loan account of the Corporate Debtor as NPA was stated as 31 December 2013. However, according to the Court, it was not correct to say that there was no averment in the petition of any acknowledgment of debt. Such averments were duly incorporated by way of amendment, and NCLT rightly looked into the amended pleadings to admit the petition of Bank. The Court reiterated:

Even assuming that documents were brought on record at a later stage … the Adjudicating Authority was not precluded from considering the same. The documents were brought on record before any final decision was taken in the petition under Section 7 of IBC.

Decision

For the reasons discussed above, the Supreme Court held that the Section 7 IBC petition filed by Dena Bank was admissible. The impugned judgment of NCLAT was unsustainable which was set aside. [Dena Bank v. C. Shivakumar Reddy, 2021 SCC OnLine SC 543, decided on 4-8-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT), New Delhi: The Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Justice Venugopal M. (Judicial Member), Justice Anant Bijay Singh (Judicial Member), Kanthi Narahari (Technical Member) and Shreesha Merla (Technical member), while addressing the present matter observed that:

“…for purpose of computing the period of limitation under Section 7 of I&B Code, the date of default is NPA.”

Background

The three-member Bench of this Appellate Tribunal had opined that the decision rendered by the 5-member Bench of this Appellate Tribunal in V. Padmakumar v. Stressed Assets Stabilization Fund (SASF),2020 SCC OnLine NCLAT 417required reconsideration.

Issue formulated by the three-member Referral Bench, as noticed in the reference order was as follows:

“Hon’ble Supreme Court and various Hon’ble High Courts have consistently held that an entry made in the Company’s Balance Sheet amounts to an acknowledgement of debt under Section 18 of the Limitation Act, 1963, in view of the settled law, V. Padmakumar’s Case requires reconsideration.”

Facts and Contentions

Corporate Debtor had defaulted in repaying the dues availed as a loan from the Consortium Lenders leading to recalling of the loan facility by the Financial Creditor — State Bank of India and the Consortium Lenders issuing notices under Section 13(2) of the SARFAESI Act, 2002 demanding total amount of Rs 59,97,80,02,973. 
Corporate Debtor failed to discharge its liability.
When the Financial Creditor initiated CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor, Lenders had assigned the debt in favour of ‘Asset Reconstruction Company (India) Ltd. NCLT, Kolkata Bench on being satisfied that debt and default were established, admitted the application. Further on being aggrieved with the same, Ex-Director of Corporate Debtor filed an appeal against the admission order in light of Corporate Debtor’s account being declared as NPA in 2014 and application under Section 7 was filed in 2018 after a delay of around 5 years, hence the same was barred by limitation.
Financial Creditor contended that the right to sue for the first time accrued to it upon the classification of the accounts as NPA in 2013 but thereafter, Corporate Debtor had admitted time and again and unequivocally acknowledged its debt in the Balance Sheets for the years ending 31st March, 2015, 31st March, 2016 and 31st March, 2017.
Hence, the right to sue stood extended in terms of Section 18 of the Limitation Act, 1963.
Referral Bench had declined to accept the argument that Section 18 of the Limitation Act, 1963 is not applicable Insolvency Cases and proceeded to record the reasons for reconsideration of V. Padmakumar’s Judgment.

Analysis, Law and Decision

Bench noted that in ‘V. Padmakumar’s Case’, IDBI had advanced financial assistance of Rs 600 Lakhs by way of Term Loan Agreement dated 02-03-2000 to the Corporate Debtor and the loan was duly secured.
Further, the Corporate Debtor’s account was classified as NPA in 2002, later IDBI initiated recovery proceedings in 2007. Recovery Certification was issued in 2009 which was reflected in the Balance Sheet dated 31-03-2012.
Limitation Period
This Appellate Tribunal noted the decisions delivered by Supreme Court in Jignesh Shah v. Union of India(2019) 10 SCC 750, Gaurav Hargovindbhai Dave v. Asset Reconstructions Company (India) Ltd.  – (2019) 10 SCC 572, Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd.(2019) 9 SCC 158, and the decision of this Appellate Tribunal in V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd.– Company Appeal (AT) (Insolvency) No. 525 of 2019, decided on 11-12-2019, was of the view that for the purpose of computing the limitation period for application under Section 7 the date of default was NPA and hence a crucial date.
5-Member Bench further dealt with the acknowledgement of claim in audited Balance Sheet of Corporate Debtor to arrive at a finding as to whether such acknowledgement would fall within the ambit of Section 18 of Limitation Act, 1963.
Bench expressed that the Referral bench failed to take note of the fact that the 5-Member Bench Judgment rendered in ‘V. Padmakumar’s Case’ with a majority of 4:1 was delivered to remove uncertainty arising out of the conflicting verdicts of Benches of co-equal strength in ‘V. Hotel’s Case’ and ‘ Ugro Capital Ltd.’s Case’.

Once a Larger Bench of this Appellate Tribunal came to be constituted in the wake of two conflicting judgments rendered by Benches of co-equal strength on the issue, one of the two Benches having failed to notice the judgment of the Supreme Court on the subject, the issue raised by the Referral Bench can no more be said to be res integra, in so far as the jurisdiction exercised by this Appellate Tribunal under I&B Code is concerned.

Observations:

  • For purpose of computing, the period of limitation under Section 7, the date of default is NPA.
  • In Supreme Court’s decision of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Ltd., Civil Appeal No. 6347 of 2019, it was observed that Section 18 of the Limitation Act, 1963 would have no application to proceedings under the I&B Code. Therefore the issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/Annual Return would be irrelevant.
  • The remedy available under the I&B Code is a remedy distinct from remedy available in civil jurisdiction/ recovery mechanism and since the I&B Code is not a complete Code, provisions of Limitation Act are attracted to proceedings under it before NCLT and NCLAT as far as applicable i.e. in regard to matters not specifically provided for in I&B Code.
  • The whole mechanism of triggering of Corporate Insolvency Resolution Process revolves around the concept of ‘debt’ and ‘default’.
  • There is no room for doubt that the date of default in regard to an application under Section 7 of I&B Code is the date of classification of the account of Corporate Debtor as NPA.
  • The date of default is extendable within the ambit of Section 18 of Limitation Act on the basis of an acknowledgement in writing made by the Corporate Debtor before the expiry of the limitation period.

Whether a reflection of debt in the Balance Sheet/ Annual Return of a Corporate Debtor would amount to acknowledgement under Section 18 of the Limitation Act?

“…the finding has been recorded by the five Member Bench in the context of a judgment or a decree passed for recovery of money by Civil Court/ Debt Recovery Tribunal which cannot shift forward the date of default for purposes of computing limitation for filing of an application under Section 7 of the I&B Code and the fact that filing of Balance Sheet/ Annual Report being mandatory under Section 92(4) of Companies Act, failing of which attracts penal action under Section 92(5) & (6).”

Tribunal also added to its observations that Referral Bench failed to draw a distinction between the ‘recovery proceedings’ and the ‘insolvency resolution process’.

I&B Code provides timelines for resolution of insolvency issues and proceedings thereunder cannot be equated with the ‘recovery proceedings’.

Hence, in view fo the above discussions, Bench opined that :

the order of reference which, in letter and spirit, is more akin to a judgment of an Appellate Court appreciating the findings and judgment in ‘V. Padmakumar’s Case’ is incompetent and deserves to be rejected.

Judicial Indiscipline

Tribunal went on to express that ‘Judicial indiscipline’ creates uncertainty and impairs public faith in the Rule of Law.

Crossing the red line by disregarding the binding precedent results in making the legal proposition uncertain. Such misadventure creates uncertainty as regards the settled position of law.

Cases referred by the Tribunal for the above-stated:

  • Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673: It was held that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.

A Bench of co-equal strength can only express an opinion doubting the correctness of the view taken by the earlier Bench of co-equal strength.

  • Keshav Mills Co. Ltd. v. CIT, (1965) 2 SCR 908: It was held that the nature of infirmity or error would be one of the factors in making a reference. Whether patent aspects of question remained unnoticed or was the attention of Court not drawn to any relevant and material statutory provision or was any previous decision of the Supreme Court not noticed would be the relevant factors.
  • In Supreme Court Advocates on Record Association v. Union of India, (2016) 5 SCC 1, it was held that the Court should not, except when it is demonstrated beyond all reasonable doubt that its previous ruling given after due deliberation and a full hearing was erroneous, revisit earlier decision so that the law remains certain.

In CCE v. Matador Foam, (2005) 2 SCC 59, the following was observed:

“….. These being judgments of coordinate benches were binding on the Tribunal. Judicial discipline required that the Tribunal follow those judgments. If the Tribunal felt that those judgments were not correct, it should have referred the case to a larger bench.”

Hence, in light of the above, Tribunal held that:

Following of the judicial precedent of a Bench of equal strength and of a Larger Bench as in the instant case, is a matter of judicial discipline.

While parting with the decision, Bench recorded that

It is not open to the Referral Bench to appreciate the judgment rendered by the earlier Bench as if sitting in appeal to hold that the view is erroneous. Escaping of attention of the earlier Bench as regards a binding judicial precedent or a patent error is of relevance but not an evaluation of earlier judgment as if sitting in appeal.

Referral Bench overlooked all legal considerations. Company Appeal (AT) (Insolvency) No. 385 of 2020 be listed for regular hearing on 11-01-2021.[Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., Reference made by Three Member Bench in Company Appeal (AT) (Insolvency) No. 385 of 2020, decided on 22-12-2020]

Legislation UpdatesRules & Regulations

The Insolvency and Bankruptcy Board of India (IBBI) notified the following Amendment Regulations, 2020:

(a) the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fifth Amendment) Regulations, 2016

(b) the Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020

(c) the Insolvency and Bankruptcy Board of India (Information Utilities) (Amendment) Regulations, 2020

2. The Insolvency and Bankruptcy Code, 2016 (Code) enables a financial creditor (FC), among others, to initiate corporate insolvency resolution process (CIRP) against a corporate debtor (CD). The FC, along with the application, is required to furnish “record of the default recorded with the information utility or such other record or evidence of default as may be specified”. In exercise of this power, the IBBI amended the Regulations to specify two ‘other record or evidence of default’, namely, (a) certified copy of entries in the relevant account in the bankers’ book, and (b) order of a court or tribunal that has adjudicated upon the non-payment of a debt.

3. The Code defines financial information to mean certain records and ‘such other information as may be specified’. In exercise of this power, the IBBI amended the Regulations to specify public announcement made under the Code as financial information. It mandated the Information Utilities to disseminate the public announcement to its registered users, who are creditors of the CD undergoing insolvency proceeding. This is in addition to publishing the public announcement in the newspapers and websites as required in the Regulations.

4. The Regulations provide that the Interim Resolution Professional (IRP) / Resolution Professional (RP) shall verify every claim and thereupon maintain a list of creditors and update it. He is required to file the list of creditors with the Adjudicating Authority (AA) and display it on the website, if any, of the CD. The IBBI amended the Regulations to require the IRP/RP to submit the list of creditors on an electronic platform for dissemination on its website. This will improve transparency and enable stakeholders to ascertain the details of their claims at a central place.

5. The resolution plan usually provides payment of debts to the creditors of the CD. In the interest of transparency, the IBBI amended the Regulations to require the RP to intimate each claimant the principle or formulae for payment of debts under a resolution plan, within 15 days of the order of the AA approving such resolution plan.

6. The Code envisages early closure of the liquidation process so that the assets of the CD are released for alternate uses expeditiously. However, the process takes longer where the liquidation estate includes a ‘not readily realisable asset’. To facilitate quick closure of the liquidation process, the IBBI amended the Regulations to enable the liquidator to assign or transfer a ‘not readily realisable asset’ to any person in consultation with the stakeholders’ consultation committee. For this purpose, “not readily realisable asset” means any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions. Thus, a liquidator shall attempt to sell the assets at the first instance, failing which he may assign or transfer an asset to any person, in consultation with the stakeholders’ consultation committee, and failing which he may distribute the undisposed of assets amongst stakeholders, with the approval of the AA.

7. There may be a creditor who may not be willing to wait for the completion of the liquidation process for realisation of his debt. The IBBI amended the Regulations to enable a creditor to assign or transfer the debt due to it to any other person in accordance with the laws for the time being in force dealing with such assignment or transfer.


Insolvency and Bankruptcy Board of India

[Press Release dt. 13-11-2020]

COVID 19Op EdsOP. ED.

The Finance Minister – in her speech announcing fiscal relief to mitigate the economic shockwaves resulting from the COVID-19 virus outbreak – declared that the minimum amount of default incurred by a company in order for it’s creditors to take recourse to the IBC, would be increased from Rs 1 lakh to Rs 1 crore. This has caused a stir in the industry circles, eliciting mixed reactions – with some lauding the move and others criticising it.

There is no question that a temporary respite was needed for the courts, tribunals and industry in these uncertain and unprecedented times. However, given that there were already hints of pre-COVID speculation regarding the Ministry’s plans to increase the default limit, this author fears that this increase may not be just a temporary fix and may indicate a much more permanent shift in policy.  This would be a travesty, as this 100-fold unqualified increase in the threshold requirement has effectively excluded one of the key stakeholders in the IBC from access to recourse – namely, the unpaid workman and employee. In a country where, according to 2011–12 figures from an  ILO Report[1], the average wage was about Rs 7410 per month (the average wage of casual workers being a mere Rs 4290 per month for a 30-day work month), the previous threshold limit of Rs 1 lakh was already an unrealistic and onerous condition for workmen to meet. Increasing the threshold to Rs 1 crore seems to have made it almost impossible for any employee to meet the conditions to seek recourse under the provisions of the IBC. This article seeks to focus on the right of employees and workmen to file applications under this code as operational creditors, and analyse whether there are any circumstances wherein the employees can still continue to seek recourse under the IBC.

  •  Legislative Intent – IBC as a settlement mechanism for employees

The position of the employee/workman was always central to the resolution framework within the IBC. It is for this reason that the legislature, in its wisdom, included employees and workmen within the class of operational creditors. Whenever a company finds itself in financial distress, it usually translates into employees and workmen not being paid their dues on time. This is because of the asymmetrical power relationship between the company and its employees. The employees have little to no bargaining power with respect to the company, and therefore failure to pay salaries has been oft considered an acceptable risk by companies, since an employee would seldom, if ever, pursue a legal battle against the might of the company.

The asymmetrical nature of this relationship was one of the key concerns for the Bankruptcy Law Reforms Committee (BLRC) Report, 2015[2]. The BLRC in its recommendations with regard to the IBC, laid considerable focus on the empowerment of workmen and employees, in order to enable them to settle their dues in a timely manner. The Report, in its introduction to the Insolvency Resolution Process, categorically stated that

“…any creditor, whether financial or operational, should be able to initiate the insolvency resolution process (IRP) under the proposed Code. It may be noted that operational creditors will include workmen and employees whose past payments are due.The Committee also recommends that a resolution plan must necessarily provide for certain protections for operational creditors. This will empower the workmen and employees to initiate insolvency proceedings, settle their dues fast and move on to some other job instead of waiting for their dues for years together as is the case under the existing regime.”                                                                                                                              

(emphasis supplied)

Furthermore, the Joint Committee on Insolvency and Bankruptcy Code further observed that workers “were the nerve centre of any company” and that in the event of any company becoming insolvent or bankrupt, the workmen would always be adversely affected. In view of this the Joint Committee Report explicitly stated, in respect of employees and workmen, that ‘priority has to be given to their outstanding dues’. Following this, the workmen and employees have been given priority in claims under the waterfall mechanism enshrined under Section 53 of the Code. Under the mechanism, the dues of the workmen for the preceding 24 months are placed second on the priority list, only after the cost of the Insolvency Resolution Process, and are pari passu with debts owed to secured creditors in the event the creditor has relinquished its security. The dues of employees, other than the workmen, for the preceding 12 months is ranked third above even the unsecured creditors.

The centrality of the workman within the Code is very interestingly illustrated in the noting of the Joint Committee, which decided that ‘Notwithstanding debts owed to secured creditors being pari passu with the workmen’s dues and wages and unpaid dues to workmen of an insolvent company’, the wages and unpaid dues ‘may be placed under Item 1 and debts owed to secured creditor at Item 2 under Clause 53(1)(b)’ in order to reflect the centrality of the workman within the scheme of the Act. Thus, while it was always clear that the IBC was primarily a legislation for the resolution of sick companies, it was also supposed to operate as a Code to protect the interest of workmen and employees against a mightier company.

  • How can an employee file an application under the IBC?

 An employee, being an operational creditor under Section 5(20) r/w Section 5(21), can deliver a demand notice in terms of Section 8 and call upon the corporate debtor to satisfy its debts ‘on the occurrence of a default’. If after 10 days of receipt of such demand notice the corporate debtor fails to satisfy the debt or fails to raise any notice of dispute, then the operational creditor is entitled to file an application for the initiation of Corporate Insolvency Resolution Process against such a corporate debtor, under Section 9 of the IBC.

This right to file an application is subject to Section 4 which provides, that the IBC insofar as it relates to a corporate person, ‘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.’ (It is through the proviso contained in this section that the minimum amount of default has been specified by the Central Government to be Rs 1 crore  vide Notification dated 24.03.2020). Such an application for initiation of CIRP is made in terms of Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In terms of Rule 6(1) the operational creditor presents its application in the prescribed ‘Form 5’.

Crucially, the ‘Note’ to Form 5 asserts, ‘Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorised for the purpose.’ Thus, a special category of operational creditors is created under the IBC regime for the purposes of filing an application before the Adjudicating Authority whereby employees/workmen are entitled to present a claim in their joint capacity.

  •  What does it mean to file a claim jointly?

The question of what it means to file an application in a joint capacity has been a contentious one. The dispute boils down to whether employees – who do not meet the threshold requirement of Rs 1 lakh/crore under Section 4 in an individual capacity – can satisfy the onerous requirement by combining and jointly bringing their claims.

In Suresh Narayan Singh v. Tayo Rolls Ltd.,[3] the NCLAT set aside the judgment of the NCLT which had held that no application could be presented under Section 9 in a joint/ representational capacity. The NCLAT opined that (SCC OnLine para 4)

‘4. …where workmen/employees are ‘operational creditors’, the application may be made either by an ‘operational creditor’ in an individual capacity or in a joint capacity by one of them who is duly authorised for such purpose.                                                                             

(emphasis supplied)

However, the NCLAT went further to hold that: (SCC OnLine para 7)

‘7. …Only if in an individual claim of ‘operational creditor’ the amount of debt is less than one lakh rupees, it can be rejected being not maintainable.                                  

(emphasis supplied)

Thus while upholding the principle of representational applications, the NCLAT opined that the claims of each individual workman/employee needed to meet Section 4 threshold requirement.

This understanding of the NCLAT was followed by Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd.[4] where, rejecting the right of a trade union to file on behalf of the workers, the NCLAT had further observed: (SCC OnLine para 23)

‘23. This apart, members of a trade union/workmen association, who are workman or employee of a ‘corporate debtor’, some amount may be due to such individual workman/employee from a ‘corporate debtor’ including salary, gratuity, provident fund etc., in view of services rendered by them, but in such cases, in respect of each workman there will be separate cause of action, separate claim and separate date of default of debt.’

(emphasis supplied)

The Supreme Court setting aside the judgment of the NCLAT in J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.[5], affirmed the right of a union to file on behalf of workers/employees in a representational capacity, and further went on to observe: (SCC p. 340)

 “17. …Equally, 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.

Thus, the Supreme Court rejected the view of the NCLAT and held that in terms of the Note in Form 5, there was no need for individual claim/cause of action/date of default to be separately set out.

While the Supreme Court did not explicitly address the observations in Tayo Rolls[6] (supra), it is this author’s submission that Tayo Rolls has been implicitly overruled by the Supreme Court when it held that a joint application need not require each individual workman to state its individual claim separately, and that the joint application under Form 5 was on behalf of all workmen.

  • Conclusion

The legislature is not inclined to waste words, and every word employed by the legislative authorities must be given its due import and significance.[7] The legislative intent behind the inclusion of employees and workmen as operational creditors, was always to enable these persons to utilise the provisions of the IBC to settle their dues.

Workmen, as have been referred to in Form 5, are permitted to file an application under Section 9 of the IBC. The definition of workmen in the IBC under Section 3(36) has the same meaning as that assigned to workmen under the Industrial Disputes Act, 1947. The Industrial Disputes Act in turn defines a workman under Section 2(s)(iv) to exclude a person who, employed in a supervisory capacity, draws a wage exceeding Rs. 10,000 per month. Given this definition, it is hard to imagine a workman’s individual wage ever being sufficient to meet the threshold under Section 4, unless the legislature envisioned workmen working without pay for at least 1000 months (or 10 months pre notification) before they could become eligible to file an application under the IBC! It is therefore evident that the provision permitting workmen to file a joint petition, intended for them to be permitted to combine their claims and present a consolidated default.

The author’s understanding of the implication of J.K Jute Mills become all the more relevant now, given the recent increase of the threshold requirement to Rs 1 crore. In this context, it is crucial to give an expansive interpretation to joint applications by employees and workmen, lest they be left without recourse and the provisions of the IBC rendered merely salutary. Employees and workmen are among the most vulnerable amidst the present pandemic and denying them access to justice would only exacerbate their precariousness. Given the dire strait companies find themselves in, they may no longer feel obliged to pay their workers on time if there are no legal repercussions for the same.

It is also the recommendation of this author that the threshold raise must be qualified, and potentially be limited to only financial creditors. Financial creditors such as banks are better equipped to deal with the impact of COVID-19 than small-scale operational creditors. Denying smaller operational creditors – especially workmen and employees – a remedy under the IBC would have reverberations for the entire supply chain and industry as well.

Therefore, while the COVID-19 outbreak undoubtedly requires immediate and radical action by the Government to ameliorate the tremendous economic impact of the crisis, it is incumbent upon us to keep in mind the impact on the most vulnerable. Daily wagers and employees are already beginning to feel the brunt of the economic crisis due to salary cuts and delays. In these times, it is crucial for the worker to have access to invoke every possible legal mechanism in their arsenal, to secure their wages. In our quest to tackle this grave crisis, we must ensure that the solutions we come up with do not deny access to justice for those that need it most.


 *Ramchandra Madan is an Advocate, based in New Delhi. He holds a Master in Laws from The London School of Economics & Political Science. He currently practices the law in the courts of Delhi. He can be reached at Ramchandramadan@gmail.com

[1] https://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—sro-new_delhi/documents/publication/wcms_638305.pdf

[2] Report of the Bankruptcy Law Reforms Committee, Vol. I: Rationale and Design 

[3] 2018 SCC OnLine NCLAT 557 

[4] 2017 SCC OnLine NCLAT 257

[5] (2019) 11 SCC 332

[6] Suresh Narayan Singh v. Tayo Rolls Ltd., 2018 SCC OnLine NCLAT 557.

[7] Sonia Bhatia v. State of U.P., (1981) 2 SCC 585

Legislation UpdatesStatutes/Bills/Ordinances

The Union Cabinet has approved the proposal to make amendments in the Insolvency and Bankruptcy Code, 2016 (code), through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019.

The amendments aim to remove certain difficulties being faced during the insolvency resolution process to realise the objects of the code and to further ease doing of business.

Details of the Proposal

The Amendment Bill seeks to amend Sections 5(12), 5(15), 7, 11, 14, 16(1), 21(2), 23(1), 29A, 227, 239, 240 and insert new Section 32A in the Insolvency and Bankruptcy Code, 2016 (Code).

Impact

  1. Amendments to the Code to remove bottlenecks, streamline the CIRP and protection of last-mile funding will boost investment in financially distressed sectors.
  2. Additional thresholds introduced for Financial Creditors represented by an authorized representative due to large numbers in order to prevent frivolous triggering of the Corporate Insolvency Resolution Process (CIRP).
  3. Ensuring that the substratum of the business of the corporate debtor is not lost, and it can continue as a going concern by clarifying that the licenses, permits, concessions, clearances, etc. cannot be terminated or suspended or not renewed during the moratorium period.
  4. Ring-fencing corporate debtor resolved under the IBC in favour of a successful resolution applicant from criminal proceedings against offences committed by previous management/promoters.

Cabinet

[Press Release dt. 11-12-2019]

[Source: PIB]

Reserve Bank of India
Hot Off The PressNews

It may be recalled that in exercise of powers under Section 45-IE (5) (a) of the Reserve Bank of India Act, 1934, the Reserve Bank had, on November 22, 2019, constituted a three-member Advisory Committee to assist the Administrator of DHFL in the discharge of his duties. The members of the Committee are:

  1. Dr Rajiv Lall, Non-Executive Chairman, IDFC First Bank Ltd.
  2. Shri N.S. Kannan, MD & CEO, ICICI Prudential Life Insurance Company Ltd.
  3. Shri N.S. Venkatesh, Chief Executive, Association of Mutual Funds in India.

2. Upon admission of the petition for insolvency resolution process by the NCLT in respect of DHFL vide order dated December 3, 2019, the Reserve Bank has decided that the above mentioned three-member Committee shall continue as the Advisory Committee constituted under Rule 5 (c) of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. The Advisory Committee shall advise the Administrator in the operations of the DHFL during the corporate insolvency resolution process.


Reserve Bank of India

[Press Release dt. 04-12-2019]

Foreign LegislationLegislation Updates

As reported by ANI, Parliament has approved the Insolvency and Bankruptcy (Amendment) Bill, 2019 which will amend the Insolvency and Bankruptcy Code, 2016.

To fill the critical gaps in the corporate insolvency framework, Insolvency and Bankruptcy Code (Amendment) Bill, 2019 has been introduced.

The critically analysed 7 seven amendments that will be incorporated are as follows:

(a) to amend clause (26) of Section 5 of the Code so as to insert an Explanation in the definition of “resolution plan” to clarify that a resolution plan proposing the insolvency resolution of corporate debtor as a going concern may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger to enable the market to come up with dynamic resolution plans in the interest of value maximisation;

(b) to amend sub-section (4) of Section 7 of the Code to provide that if an application has not been admitted or rejected within fourteen days by the Adjudicating Authority, it shall provide the reasons in writing for the same;

(c) to amend sub-section (3) of Section 12 of the Code to mandate that the insolvency resolution process of a corporate debtor shall not extend beyond three hundred and thirty days from the insolvency commencement date, which will include the time taken in legal proceedings, in order to prevent undue delays in the completion of the Corporate Insolvency Resolution Process. However, if the process, including time taken in legal proceedings, is not completed within the said period of three hundred and thirty days, an order requiring the corporate debtor to be liquidated under clause (a) of sub-section (1) of Section 33 shall be passed. It is clarified that the time taken for the completion of the corporate insolvency resolution process shall include the time taken in legal proceedings;

(d) to insert sub-section (3A) in Section 25A of the Code to provide that an authorised representative under sub-section (6A) of Section 21 will cast the vote for all financial creditors he represents in accordance with the decision taken by a vote of more than fifty per cent. of the voting share of the financial creditors he represents, who have cast their vote, in order to facilitate decision making in the committee of creditors, especially when financial creditors are large and heterogeneous group;

(e) to amend sub-section (2) of Section 30 of the Code to provide that–

(i) the operational creditors shall receive an amount that is not less than the liquidation value of their debt or the amount that would have been received if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priorities in Section 53 of the Code, whichever is higher;

(ii) the financial creditors who do not vote in favour of the resolution plan shall receive an amount that is not less than the liquidation value of their debt;

(iii) the provisions shall apply to the corporate insolvency resolution process of a corporate debtor–
(A) where a resolution plan has not been approved or rejected by the Adjudicating Authority; or
(B) an appeal is preferred under Sections 61 or 62 or such appeal is not time-barred under any provision of law for the time being in force; or
(C) where a legal proceeding has been initiated in any court against the decision of the Adjudicating Authority in respect of a resolution plan;

(f) to amend sub-section (1) of Section 31 of the Code to clarify that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government or any local authority to whom a debt in respect of payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, including tax authorities;

(g) to amend sub-section (2) of Section 33 of the Code to clarify that the committee of creditors may take the decision to liquidate the corporate debtor, in accordance with the requirements provided in sub-section (2) of Section 33, any time after the constitution of the committee of creditors under sub-section (1) of Section 21 until the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

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]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal: Order of the Adjudicating Authority rejecting the application filed by the petitioners under Section 7 of the Insolvency and Bankruptcy Code 2016, was set aside by a two-member bench comprising of S.J. Mukhopadhaya, Chairperson and Bansi Lal Bhat, Judicial Member.

The petitioners were financial creditors of the respondent company. They filed an application under Section 7 for initiating the insolvency resolution process. However, such an application was rejected by the Adjudicating Authority observing that the application did not disclose ‘dates of default’. The petitioners were in appeal against the said order of the Adjudicating Authority.

The NCLAT after considering the record held that the impugned order was not sustainable. The application was rejected on technical grounds. As stated by the petitioners, there was only a typographical defect as to the dates mentioned in the application, which could have easily been corrected. The Tribunal held that before rejecting petitioners’ application, the Authority must give opportunity to the applicants to rectify defect. In absence of such an opportunity, the impugned order was set aside. Appeal was accordingly disposed of. [Satyaprakash Aggarwal v. Vistar Metal Industries (P) Ltd., 2018 SCC OnLine NCLAT 264, dated 21-05-2018]

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: In the order passed by INA Malohtra (Judicial Member), S.K. Mohapatra (Technical Member), for the petition filed under Section 9 of Insolvency and Bankruptcy Code, 2016 in regards to seek the payment of his fee for services rendered by him towards the respondent stands allowed. The plaintiff mentioned that despite his repeated demands for payment, for the services rendered in the course of May 2016 and July 2016, the respondent failed to liquidate his liability. Satisfied by the claims of petitioner, the Tribunal held that the petitioner is entitled to initiate the ‘Insolvency Resolution Process’ against the respondent for payment of his dues.

The Tribunal issued a moratorium, to come into effect as per Section 14 of the Code, with the following directions-

1. Prohibition of institution of suits against respondent in any court of law, tribunal, arbitration panel or authority

2. Prohibition of transferring any of the assets of the respondent

3. Prohibition of recovery through security interest created by the respondent

4. Recovery of property owned or in possession of the respondent

Also, the Tribunal further directed that the services being rendered to the respondent shall not be terminated during the moratorium period, and that the Interim Resolution Professional should take necessary steps as per Sections 15, 17 and 18 of the Code. Furthermore, on account of the petitioner, the Tribunal observed that, documents submitted including the certification that proves that there is no disciplinary proceeding against him, is admissible, hence concluding to allow the petition, since it fulfilled all the required criterion for invoking the Resolution Process. [Toll Global Forwarding Private Ltd. v. Sarash Exports Services Private Ltd., 2017 SCC OnLine NCLT 2000, decided on 22-11-2017]

Legislation UpdatesStatutes/Bills/Ordinances

The promulgation of the Banking Regulation (Amendment) Ordinance, 2017 inserting two new Sections (viz. 35AA and 35AB) after Section 35A of the Banking Regulation Act, 1949 enables the Union Government to authorize the Reserve Bank of India (RBI) to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process, where required. The RBI has also been empowered to issue other directions for resolution, and appoint or approve for appointment, authorities or committees to advise banking companies for stressed asset resolution.

This action of the Union Government will have a direct impact on effective resolution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be empowered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite conclusion.

The Government is committed to expeditious resolution of stressed assets in the banking system. The recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new possibilities for time bound resolution of stressed assets. The SARFAESI and Debt Recovery Acts have been amended to facilitate recoveries. A comprehensive approach is being adopted for effective implementation of various schemes for timely resolution of stressed assets.

Ministry of Finance

THE BANKING REGULATION (AMENDMENT) ORDINANCE, 2017

No. 1 of 2017

Promulgated by the President in the Sixty-eighth Year of the Republic of India.

An Ordinance further to amend the Banking Regulation Act, 1949.

Whereas the stressed assets in the banking system have reached unacceptably high levels and urgent measures are required for their resolution;

AND WHEREAS the Insolvency and Bankruptcy Code, 2016 has been enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders;

AND WHEREAS the provisions of Insolvency and Bankruptcy Code, 2016 can be effectively used for the resolution of stressed assets by empowering the banking regulator to issue directions in specific cases;

And WHEREAS Parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action;

NOW, THEREFORE, in exercise of the powers conferred by clause (7) of Article 123 of the Constitution, the President is pleased to promulgate the following Ordinance:—

1. Short title and commencement.– (i) This Ordinance may be called the Banking Regulation (Amendment) Ordinance, 2017.

(2) It shall come into force at once.

2. Insertion of new Sections 35AA and 35AB.–In the Banking Regulation Act, 1949, after Section 35A, the following sections shall be inserted, namely:—

35AA. Power of Central Government to authorise Reserve Bank for issuing directions to banking companies to initiate insolvency resolution process.– The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation.—For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

35AB. Power of Reserve Bank to issue directions in respect of stressed assets.– (1) Without prejudice to the provisions of Section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets.

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.’.

PRANAB MUKHERJEE,

President.