Insolvency

IBBI
Legislation UpdatesRules & Regulations

   

The Insolvency and Bankruptcy Board of India has notified Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Second Amendment) Regulations, 2022 to futher amend the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.

The amendment inserts a new clause 26A in the First Schedule in IBBI (Insolvency Professionals) Regulations, 2016 providing that an insolvency professional must not accept /share any fees or charges from any professional and/or support service provider who are appointed under the processes.

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Hyderabad: While deciding the instant appeal in the backdrop of Corporate Insolvency Resolution Proceedings (CIRP) pending against the assessee before the National Company Law Appellate Tribunal (NCLAT), the Bench of Rama Kanta Panda (Accountant Member) and K. Narasimha Chary (Judicial Member), held that once the proceedings have commenced by institution of application under Sections 7 or 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC or the Code), the continuance of pending proceedings in any Court of law or Tribunal is prohibited.

The Tribunal observed the issue in the light of Sections 13 and 14 IBC 2016 and stated that under Section 13 of IBC, 2016, the adjudicating authority after admission of the application under Sections 7 or 9 or 10 of the Code, shall declare a moratorium which shall include the prohibition of the institution of suits or continuation of pending suits or proceedings against the corporate debtor in any court of law or tribunal

The Tribunal relied upon Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 wherein it was held that once a resolution plan is duly approved by the Adjudicating Authority under Section 31 (1) of the Code, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors including the Central Government, any State Government or any local authority, guarantors and other stakeholders. All the dues including the statutory dues owed to the Central or any State Government, local authority (if not part of the resolution plan), shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

Decision:With the afore-stated observations and noting that there is an ongoing proceeding before the NCLAT instituted under the IBC, 2016, the Tribunal dismissed the appeals in limine.

The parties were granted leave to seek restoration of the appeals only if it is necessitated by the orders of the Corporate Insolvency Resolution Proceedings.[Deccan Chronicle Holdings Ltd. v. ACIT, 2022 SCC OnLine ITAT 474, decided on 22-07-2022]

Advocates who appeared in this case :

Assessee: S.Rama Rao, AR

Revenue: Y.V.S.T.Sai, CIT-DR

*Sucheta Sarkar, Editorial Assistant has reported this brief.

Insolvency Law
OP. ED.SCC Journal Section Archives

INTRODUCTION

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

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

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

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

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

DECISION IN BARGE MADHWA8

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

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

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

BATTENING DOWN THE HATCHES

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

(a) Vessels as independent juristic persons.

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

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

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

Vessels as Independent Juristic Persons

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

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

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

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

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

Treatment of Admiralty Act plaintiffs in an Insolvency Resolution

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

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

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

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

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

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

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

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

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

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

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

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

The Code: A General Law or Special Law?

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

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

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

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

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

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

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

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

† Advocates, Bombay High Court.

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

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

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

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

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

9 Id, para 72.

10 Id, paras 78 to 131.

11 Id, para 112.

12 Id, para 123.

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

15 Id, para 125.

16 Id, para 104.

17 Id, para 106.

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

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

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

18 Id, para 90.

19 Id, para 92.

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

23 Id, para 98.

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

24 Id, para 102.

9 Id, para 72.

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

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

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

28 Id, p. 266.

29 Id, pp. 260-61.

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

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

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

Background of the case

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

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

Analysis and decision

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

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

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

Advocates who appeared in this case :

Pulkit Deora, Advocate, for the Appellant;

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

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

IBBI
Legislation UpdatesRules & Regulations

On 14th June, 2022, Insolvency and Bankruptcy Board of India notifies Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2022. This regulation seeks to amend the procedure of recording evidences, and applications made to ‘resolution professional’ by the creditors. 

 

Key Points: 

  • For the purpose of resolving the process of insolvency, creditors may furnish the relevant records of transaction/debt/default by operational creditor. 
  • For making such applications, copies of Form GSTR-1 and GSTR-3B under GST and e-way bill will have to be provided. For the successful submission of these applications the Operational creditors will require their PAN and e-mail. 
  • Documents of debtors are part of major evaluation while assessing their insolvency, while doing so the resolution professional may go through his documents under Regulation 4(1). 
  • With newly added provision Regulation 4 (2) and (3), the debtors are bound by law to provide relevant information for such evaluation. Along with the management personnel of debtors, creditors will have to provide records of assets and liabilities stock statements, valuation reports, etc., of the debtor. 
  • In the process of preparing information memorandum of the corporate debtor, the resolution professional with require from the creditors, under Regulation 35-A, the financial health for auditing his assets and liabilities.  
  • To find out the fair value/liquidation value two valuers are allotted to evaluate the inventories and fixed assets of the debtor. Under the Resolution Plan of these Regulation, Regulation 35 (1)(b) has been modified. 
  • After this evaluation, when two ‘significantly different’ [defined under Explanation (ii)] estimates are submitted from valuers, third valuer for ‘asset class’ [defined under Explanation (i)] is appointed. Both the terms are clearly defined by this amendment. 

 

*Shubhi Srivastava, Editorial Assistant has reported this brief. 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, the territorial jurisdiction of NCLT to decide a case under Insolvency and Bankruptcy Code, 2016 cannot be taken away by the Facility Agreement between the parties.

Instant appeal was filed against the order passed by the National Company Law Tribunal, New Delhi, by which the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 had been admitted.

The Appellant’s counsel submitted that there was no jurisdiction with the Principal Bench, Delhi to entertain Section 7 Application. He referred to a Clause from the Facility Agreement, as per which Courts at Mumbai had jurisdiction in respect of any matter of the Facility Agreement.

Analysis, Law and Decision

First, the Tribunal referred to Section 60(1) of the Code provides for Adjudicating Authority for Corporate Persons. Section 60(1) is as follows:

  1. (1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

Coram expressed that, Adjudicating Authority in relation to Insolvency Resolution shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons is located.

Tribunal stated that, the appellant cannot rely on clause 24.12 of the Facility Agreement which provides jurisdiction to the Mumbai Courts.

Noting the above, Coram held that, for filing an Application under Section 7 of the Code, the provisions of Section 60(1) read with Section 238 of the Code shall be overriding clause 24.12 of the Facility Agreement.

Further, not denying that Corporate Debtor’s registered office was situated in New Delhi where the territorial jurisdiction to entertain such application was with NCLT, Delhi, Coram did not accept the submissions of Counsel for the appellant.

In view of the above, the appeal was dismissed. [Anil Kumar Malhotra v. Mahindra & Mahindra Financial Services Ltd., 2022 SCC OnLine NCLAT 200, decided on 19-4-2022]

Advocates before the Tribunal:

For Appellant:  Mr. Yajur Bhalla, Mr. Siddharth Srivastava, Sumeir Ahuja, Advocates

Advocate Gunjan Chauvey, for R-1

For Respondent: Mr. Rajesh Kumar Mittal, Advocate for IRP, R-2.

High Court Round UpLegal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

Interesting picks from this week’s legal stories from High Courts to District Courts

Alimony

Whether husband is entitled to claim alimony under Section 25 of the Hindu Marriage Act, 1955? Bom HC decides

A conjoint reading of Sections 24 and 25 of the Hindu Marriage Act, 1955 would reveal that both the sections in the Act of 1955 are enabling provisions and confer a right on the indigent spouse to claim maintenance either pendente lite or in the nature of permanent alimony and maintenance.

Read full report here…

 Karta

 Daughters and widow of a deceased would inherit properties of deceased as tenants in common or joint tenants? Bom HC explains 

Mangesh S. Patil, J., expressed that, by virtue of Section 19 of the Hindu Succession Act, it has been explicitly made clear that if two and more heirs succeed together to the property and in the estate, they take the property as tenants in common and not as joint tenants.

Read full report here…

Compassionate Appointment

Illegitimate child’s right to be considered for Compassionate appointment: Read what Chh HC says

Sanjay K. Agarwal, J., held that an illegitimate son would be entitled to consideration on compassionate ground and cannot be denied consideration on the ground that he is the illegitimate son of the deceased Government servant.

Read full report here…

Marriage Expenses

Can unmarried daughters claim expenses of marriage from their parents under the Hindu Adoptions and Maintenance Act, 1956? Chh HC addresses

While stating that, in Indian society, normally expenses are required to be incurred for pre-marriage and also at the time of marriage, the Division Bench of Goutam Bhaduri and Sanjay S. Agrawal, JJ., held that unmarried daughters have a right to claim expenses of marriage from their parents under the Hindu Adoptions & Maintenance Act, 1956.

Read full report here…

Maternity Leave

Can maternity leave benefits extend beyond the period when contractual period of an ad hoc employee comes to an end? Del HC analyses

In a claim of maternity benefit by a contractual employee, the Division Bench of Rajiv Shakdher and Talwant Singh, JJ., expressed that, The Maternity Benefit Act, 1961 Act is a social legislation that should be worked in a manner that progresses not only the best interest of the women-employee but also of the child, both at the pre-natal and post-natal stage.

Read full report here…

Strikes

Bar on Government servants to engage in strikes? Ker HC elaborates

While expressing that, it is the duty of the welfare Government to protect not only the citizens but to continue with, all the Government work as expected, the Division Bench of S. Manikumar, CJ and Shaji P. Chaly, J., directed that Government servants should be prevented from engaging in a strike.

Read full report here…

Evidentiary Value of Newspaper Reports

Newspaper reports are of no evidentiary value and Courts would be transgressing their well-settled limitation if cognizance were to be taken of such unsubstantiated and unverified reports

In a matter wherein, details were sought with regard to Supreme Court Collegium meeting held on 12-12-2018, Yashwant Varma, J., expressed that, newspaper reports are of no evidentiary value and Courts would be clearly transgressing their well-settled limitation if cognizance were to be taken of such unsubstantiated and unverified reports.

Read full report here…

Anand Marriage Act

State directed to take steps to frame and notify Rules for Registration of Sikh Marriages

The Division Bench of Sanjaya Kumar Mishra, ACJ. and Ramesh Chandra Khulbe, J. took up a PIL filed by the petitioner commanding the respondent State to notify the Rules under Anand Marriage Act, 1909 and also to issue guidelines to register the marriage of people of Sikh Community under the Anand Marriage Act, 1909.

Read full report here…

Bribes

Every Advocate is a Court officer and part & parcel of the justice delivery system: Madras HC found a Govt. Advocate demanding bribes at the cost of justice

The Division Bench of K. Kalyanasundaram and R. Hemalatha, JJ., expressed that, the Government advocate being the representative of the Government has to act in an honest manner. If he/she goes around with the intention to make money at the cost of justice, only chaos will prevail.

Read full report here…

Insolvency

Logix Insolvent? NCLT initiates insolvency proceedings against Logix City Developers

The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

Read full report here…

Custody Parole

Merely because an accused is a Muslim, governed by personal laws, can be debarred from availing rights under Juvenile Justice (Care and Protection of Children) Act, 2000? Delhi Court answers

In a matter for grant of custody parole, Dharmender Rana, ASJ-02, held that, merely because the accused is Muslim and governed by personal laws, he cannot be debarred from availing rights conferred upon him by Juvenile Justice (Care and Protection of Children) Act, 2000.

Read full report here…

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal: The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

The Operational Creditors, Colliers International (India) Property Services Private Limited sought an order to initiate the Corporate Insolvency Resolution Process of the Corporate Debtor viz., Logix City Developers Private Limited, declare  moratorium and appoint Interim Resolution Professional.

Background

The Operational Creditor’s case was that the parties entered into an agreement for providing construction for Bloom Zest Project at Noida and appointed the operational creditor as its project manager. On providing various services, the Operational Creditor raised various invoices and against some of the invoices raised, the Corporate Debtor being unable to pay its obligations allotted a residential unit to the Operational Creditor.

Vide an email, the Corporate Debtor was requested to pay the Operational Debt. However, he failed to do so. Hence, a demand notice was issued to him.

Corporate Debtor acknowledged and admitted its liability to pay the Operational Debt. Therefore, the present petition was filed.

Corporate Debtor on realizing the prevalent real estate conditions caused due to COVID-19 pandemic, failed in paying the amounts as claimed by the Operational Creditor under Demand Notice. Further, it stated that the delay in payment of installment amounts was due to the fact that the construction of the said project was stopped due to various EPCAJ NGT Orders and thereafter unprecedented conditions created due to COVID-19 Pandemic.

Additionally, the Corporate Debtor stated that it is an indisputable fact that the Real Estate Business is going through slump whereby all the builders and promoters of the real estate projects are experiencing heavy economic losses.

Analysis and Decision

Tribunal found that the Corporate Debtor failed to discharge its liability as the admitted amount remained unpaid as on date.

“…this authority has to only satisfy itself regarding default in payment by the corporate debtor towards the operational creditor and there is no pre-existing dispute”

In the present matter, the above two conditions are fulfilled, hence it deserves to be admitted. Therefore, the Tribunal initiated the CIR Process of Corporate Debtor.

Tribunal appointed Insolvency Resolution Professional Yogesh Kumar Gupta as Interim Resolution Professional as proposed by the Operational Creditor.

Further, Moratorium was declared which shall have effect from this Order till the completion of CIRP for the purposes referred to in Section 14 of the IBC, 2016. [Colliers International (India) Property Services (P) Ltd. v. Logix City Developers (P) Ltd., 2022 SCC OnLine NCLT 37, decided on 22-3-2022]

Advocates before the Tribunal:

Operational Creditor: Adv. S. Sriranga, Adv. Balaji Srinivasan, Adv. Garima Jain and Adv. Gayatri Mohite

Corporate Debtor: Adv. Vijay Kaundal

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

An application was filed to initiate the Corporate Insolvency Resolution Process against Supertech Limited under Section 7 of the Insolvency and Bankruptcy Code 2016 for the alleged default by the respondent in settling an amount of Rs 431,92,53,302.

Counsel for the Corporate Debtor had admitted the debt and default.

“In order to initiate CIRP under Section 7 the applicant is required to establish that there is a financial debt and that a default has been committed in respect of that financial debt.”

Tribunal on perusal of the documents found that the Corporate Debtor had indebted and defaulted the repayment of loan amount.

Therefore, Coram admitted the present petition and initiated CIRP on the Corporate Debtor with immediate effect.

Mr Hitesh Goel was appointed as Interim Resolution Professional.

Material on record clearly depicted that the respondent had availed the credit facilities and committed default in repayment of the outstanding loan amount.

Tribunal on being satisfied that the present application was held that the applicant financial creditor was entitled to claim its outstanding financial debt from the corporate debtor and that there had been default in payment of the financial debt.

Further, the Coram directed that in terms of Section 13(2) of the Code, public announcement shall be made by the Interim Resolution Professional immediately with regard to the admission of this application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Moratorium in terms of Section 14 of IBC was declared. Thus following prohibitions are imposed:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

It was made clear that the provisions of the moratorium shall not apply to transactions which might be notified by the Centre or supply of essential goods or services to the Corporate Debtor are not to be terminated or suspended or interrupted during the moratorium period. As per IBC, the provisions of the moratorium shall not apply to the surety in a contract of guarantee.

Registrar of Companies shall update its website by updating the status of ‘Corporate Debtor’. [Union Bank of India v. Supertech Ltd., 2022 SCC OnLine NCLT 40, decided on 25-3-2022]

Advocates before the Tribunal:

Counsel for the Petitioner: Alok Kumar, Advocate

Counsel for the Respondent: Kanishk Khetan, Advocate

Akaant MittalExperts Corner

The Insolvency and Bankruptcy Board of India (IBBI) recently amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 vide IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021. The same is enacted pursuant to the discussion paper (“IBBI discussion paper”) circulated by the IBBI soliciting feedback on its proposals. The latest set of amendments[1] to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) proposes some very critical changes with respect to the flow of a CIRP and its regulation. Most importantly, it proposes a code of conduct regulating the Committee of Creditors (CoC).[2] Further, it introduces challenge method as an option for the resolution professional to call resolution plans.[3] Amongst these, there are alterations that seek to ensure strict adherence to the timeline of the CIRP to ensure time boundedness.

 

A. Deconstructing the Amendments

The first amendment has been made in Regulation 17 by inserting the sub-regulation (1-A) after sub-regulation (1) to it.

The said Amendment read as follows:

Regulation 17(1-A) The committee and members of the committee shall discharge functions and exercise powers under the Code and these regulations in respect of the corporate insolvency resolution process in compliance with the guidelines as may be issued by the Board.[4]

 

The IBBI is yet to issue any recommendations. However, the guidelines that could be released by the IBBI are expected to lay out the principles provided in the annexure of the IBBI discussion paper[5] which are as follows:

  1. A member of the Committee of Creditors, while discharging its duties shall abide by the following code of conduct, as an individual and jointly with other members of the committee.
  2. A member of the committee shall, amongst other guidelines:

(a) Maintain integrity in performing its roles and functions under the Code.

(b) Must not misrepresent any facts or situations and should refrain from being involved in any  action that is detrimental to the objectives of the Code.

(c) Must maintain objectivity in exercising decisions on the subject-matter bestowed to the  committee under the Code.

(d) Must disclose the details of any conflict of interests to the stakeholders, whenever it comes across such conflict of interest during a process.

(e) Not acquire, directly or indirectly, any of the assets of the debtor, nor knowingly permit any relative of the committee member to do so, without making a disclosure to the stakeholders.

(f) Not adopt any illegal or improper means to achieve any objective.

(g) Cooperate with the insolvency professional in discharging his duties under the Code.

(h) Not influence the decision or the work of committee so as to make undue gain or advantage for itself or its related parties.

(i) Disclose the existence of any pecuniary or personal relationship with any stakeholders entitled to distribution, as soon as it becomes aware of it.

(j) Ensure that decisions are made without any bias, favour, fear, coercion, undue influence or conflict of interest.

(k) Maintain transparency in all activities and decision making.[6]

 

In order to understand why IBBI brought these guidelines, one may look to the Parliamentary Standing Committee Report which made recommendations to have a professional code of conduct for CoC, which will define and circumscribe their decisions and also recommended the IBBI to frame guidelines for the selection of RPs by the CoC in a more transparent manner.[7]

 

The 2nd amendment is to ensure that the process of resolution is timely executed. Prior to the amendment, Regulation 36-A of the CIRP Regulations contained provision regarding the invitation for expression of interest (EoI). The said invitation is to contain details regarding the criteria for prospective resolution applicants and also provide such basic information about the corporate debtor as may be required by a prospective resolution applicant for expression of interest, amongst other guidelines. However, there is no stipulation on how many times this invitation could be amended.

 

Similarly, Regulation 36-B of the CIRP Regulations contained provision regarding the request for resolution plans. It provided for a minimum of 30 days for prospective resolution applicants to submit the plans and allows for revision/modification of the request for resolution plan (RFRP) subject to the 30 days timeline but there was no cap on the number of revisions that may be allowed in a resolution plan.

The same was found by the IBBI to afflict the resolution process with delay.

Resultantly, the amendment adds clause (4-A) to Regulation 36-A and a proviso to Regulation 36-B(5), which stipulate:

 

Regulation 36-A (4-A)— Any modification in the invitation for expression of interest may be made in the manner as the initial invitation for expression of interest was made:

Provided that such modification shall not be made more than once.

Regulation 36-B (5)— Any modification in the request for resolution plan or the evaluation matrix issued under sub-regulation (1), shall be deemed to be a fresh issue and shall be subject to timeline under sub-regulation (3).

Provided that such modifications shall not be made more than once.

The 3rd amendment was with respect to the instances where the resolution applicants revise the resolution plans multiple times, with or without the consent of the CoC, leading to delays in completing the process.

 

To this, the Committee suggested a Swiss challenge method, wherein once a bid from one bidder is received and approved, then the floor is opened to the challenger. If the original bidder agrees to match the offer given by the challenging bidder in its own proposal, then bid is awarded to him, else it is awarded to the challenging bidder.

 

To this effect, sub-clause (1-A) is added to Regulation 39, which stipulates:

39A (1-A) – The resolution professional may, if envisaged in the request for resolution plan

(a) allow modification of the resolution plan received under sub-regulation (1), but not more than once; or

(b) use a challenge mechanism to enable resolution applicants to improve their plans.

(1-B) The Committee shall not consider any resolution plan—

(a) received after the time as specified by the committee under Regulation 36-B; or

(b) received from a person who does not appear in the final list of prospective resolution applicants; or

(c) does not comply with the provisions of sub-section (2) of Section 30 and sub-regulation (1).

 

Regulation 39-A(1-A)(b) expressly crystallises the swiss challenge mechanism into the resolution process under the IB Code. It must be noted here that Regulation 39-A earlier did not contain any prohibition on the usage of swiss challenge method during the CIRP process.[8]

 

Furthermore, the amendment also put an embargo on the CoC from considering resolution plans that are: (1) received after a certain time; or (2) received from persons who are not part of the final list of prospective resolution applicants; and (3) not compliant with Section 30 of the Insolvency and Bankruptcy Code, 2016.

B. Broader Issues with the Amendment

Now that the salient features of the amendment are discussed, and before we proceed with the brief analysis, it is important to understand what powers does the CoC enjoy and why there is a need felt for bringing a code of conduct.

Need to balance the “commercial wisdom of the CoC” with the absoluteness of power

 

The IB Code is designed so that those stakeholders who have the biggest stake, at the same time possess the financial expertise to resolve insolvency resolution, play the prominent role. It is in furtherance of this objective that the judicial interference of the NCLT, NCLAT and the Supreme Court is sought to be minimum and majority of the decisions taken by the CoC are held to be non-justiciable.

 

For instance, the CoC enjoys complete autonomy in the following matters:

(i) who to appoint as the RP;

(ii) replace the RP;

(iii) direct liquidation of the corporate debtor whenever it wants;

(iv) negotiate with the bidders and seek revisions of the bids;

(v) specify the criteria for prospective resolution applicants when inviting expression of interests; and

(vi) seek extension of the time period of resolution process.

In such matters, the decision of the CoC is beyond the purview of judicial interference.

 

The Supreme Court through various judicial pronouncements have clarified the role and responsibilities of the CoC and established the primacy of “commercial wisdom of CoC” in deciding the fate of the corporate debtor undergoing CIRP.[9] As a result, the Supreme Court has consistently acknowledged the relevance of the CoC and relies on the commercial wisdom of the CoC.

 

Now with the adoption of a code of conduct, the expansive scope of power available to the CoC stands to get circumscribed. The avoidable experiences borne during the working of the IB Code, such as the following, are the reasons why the code of conduct was felt necessary:

(i) When the CoC, usurping the role of the RP, on its own, adjudicated on if a creditor is a financial or an operational creditor.

(ii) When the decision-making by the CoC members is riddled with red tapism, so much so that in an instance the CoC did not approve appointment of IRP as RP since two of the four financial creditors, having aggregate voting rights of 77.97% required internal approvals from their competent authorities.

(iii) When a financial creditor decided to engage an entity for services during CIRP. It proposed the name of an IP for appointment as IRP in the application, after having an understanding with him that on his appointment as the IRP, he shall appoint that entity. The IRP appointed the said entity on the date of commencement of CIRP. The fee of entity was 20 times of the fee of the IRP/RP.

(iv) When the lead FC recovered debt during moratorium from the company’s account it was maintaining. In liquidation, even when the company was a going concern and a scheme under Section 230 of the Companies Act, 2013 was under consideration, and despite instruction to contrary from the NCLT, the liquidator distributed Rs 26 crore to FCs under their pressure.

 

Clearly, the above-mentioned instances are outside the ambit of the IB Code and could not be saved from the broad ambit of the commercial wisdom of the CoC.

 

Now the fundamental concerns with respect to these amendments seem to not stem from the objective sought to be achieved, but they seem rather focused on the effect that these amendments could directly (or indirectly) end up bringing about to the insolvency process.

 

(a) Lack of enforcement mechanism

It is unclear on how the breach of the guidelines by any member of the CoC would be addressed. The well-known latin maxim ubi jus, ibi remedium encapsulates the dilemma, which essentially means that where there is a right, there is a remedy. In other words, it postulates that where the law has established a right there should be a corresponding remedy for its breach.

 

In a situation, if any member of the Committee of breaches any of the guidelines, it is unclear that what would be the impact of such breach. In other words, the grey area is whether such breach will just impact that particular member of the CoC or the CoC (and the resolution process) as a whole.

 

The same is to be kept in juxtaposition with one of the primary objectives behind the present amendment, which is a speedy and timely conduct of the resolution process. If the breach of the guidelines results in more judicial intervention and justiciability, then the model timelines in the conduct of a CIRP may become more difficult to achieve.

 

It must also be noted that the CoC has been given a long rope by the judicial authorities, so much so that even when the CoC entertains late bids,[10] or approves a resolution plan while being aware of the fact that the workers were seeking for the revival of certain production units of the debtor but the plan itself stipulates the closure of these units; in such instances the judicial authorities had held that the adjudicating authority would still have to go by the commercial wisdom of Committee of Creditors.[11]

 

Therefore, the Board would have to work out these aspects in consultation with the stakeholders before issuing any guidelines and the accompanying mechanism for its enforcement.

 

(b) Vague and open-ended provisions.

A provision must not be so vague, and overbroad that no reasonable standards are laid down and no clear guidance could be gauged.

 

The Supreme Court in Shreya Singhal v. Union of India,[12] applied the doctrines of vagueness, overbreadth, and chilling effect to strike down Section 66-A of the IT Act, reasoning that the impugned provision of Section 66-A “is cast so widely that virtually any opinion on any subject would be covered by it, as any serious opinion dissenting with the mores of the day would be caught within its net. Such is the reach of the section and if it is to withstand the test of constitutionality, the chilling effect on free speech would be total … therefore, [it would] have to be struck down on the ground of overbreadth”.

 

The proposed Code of Conduct in the discussion paper contains some very vague and open-ended obligations for the members of the CoC. For instance, it requires the CoC (i) to cooperate with the insolvency professional in discharging his duties under the Code; or (ii) maintain objectivity in exercising decisions on the subject-matter bestowed to the Committee under the Code; or (iii) ensure that decisions are made without any bias, favour, fear, coercion, undue influence or conflict of interest; or (iv) bear the collective interest of all stakeholders in mind in all activities and decision-making.

 

Such generic provisions may become a cause for major concern, where the conflict between the commercial wisdom of the CoC with these guidelines could give rise to challenges against an approved resolution plan. Currently, there are instances where objections have been raised against the approved resolution plan on the grounds that

 

(a) the approved plan had reserved a portion of the assets of the corporate debtor (in the present case, the same were the preference shares held by subsidiary of the corporate debtor) for distribution amongst the financial creditors alone;[13] or

(b) while the CoC had persuaded the successful resolution applicant to increase the worth of the resolution plan to the extent of Rs 235.86 crores (from the previous amount of Rs 217.98 crores) but in the process, it had allowed the portion of the claim payable to the operational creditors to be reduced from Rs 1.64 crores to Rs 0.50 crores.[14]

 

In such instances, the courts have at the altar of commercial wisdom of the CoC and quantitative; still refused to intervene.

 

The past experience tells us that most of the unsuccessful resolution applicants challenge the validity of the CIRP on one ground or the other. Thus, if a guideline with such broad obligations is issued by the IBBI, then it will provide the unsuccessful resolution applicants, or even other creditors with additional causes of action for challenging the approved resolution plans. The biggest concern with respect to this is that it will cause further delay in the completion of CIRP, in turn causing further deterioration of the value of assets of the corporate debtors.

 

(c)The limited opportunities to revise plans

In a scenario post COVID, successful resolution applicants may not be financially as sound as they used to, the limit on the applicants in modifying the plans. Furthermore, the amendment disallows the CoC from considering resolution plans that are received after a certain time. There are instances, where late bids have been considered,[15] and even approved[16] by the CoC in the interests of maximising the assets of the corporate debtor, which has even been upheld by the Supreme Court.

 

It remains to be seen on whether the same will be directory or mandatory.

Conclusion

The amendments certainly are based out of the pressing need to address the loopholes in a resolution process and learn from the avoidable experiences borne during these many years of the operation of the IB Code. However, despite the well-intended objective of checking the arbitrary powers of the CoC and promote a quicker resolution mechanism, the guidelines may require certain tailoring and at certain places, an enforceable mechanism.

 

 

† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and 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, BA LLB (Hons.), student at Sharda University, Greater Noida, Uttar Pradesh; Ms Jyotshna Yashaswi and Prince Chandak in writing this article.

[1] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, Notification No. IBBI/2021-22/GN/REG078, dated 30-9-2021 (w.e.f. 30-09-2021) Read HERE.

[2] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, S. 2, HERE.

[3] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2021, S. 5, HERE.

[4] Id., Regn. 17(1-A).

[5] Insolvency and Bankruptcy Board of India Discussion paper published on 27-8-2021, accessible HERE.

[6] Id., Annexure.

[7] 32nd Report of the Parliamentary Standing Committee on Finance in 17th Lok Sabha, titled “Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions”, published in August 2021, Part II, para 3, accessible HERE .

[8] Ngaitlang Dhar v. Panna Pragati Infrastructure (P) Ltd., 2021 SCC OnLine SC 1276.

[9]  See K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150 : (2019) 4 SCC (Civ) 222; Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 : 2019 SCC OnLine SC 1478.

[10] See Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401.

[11] Santosh Wasantrao Walokar v. Vijay Kumar V. Iyer,  2020 SCC OnLine NCLAT 128.

[12] (2015) 5 SCC 1.

[13] Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd., (2021) 10 SCC 623 : 2021 SCC OnLine SC 569.

[14] Power2SME (P) Ltd. v. Allied Strips Ltd., 2020 SCC OnLine NCLAT 1056.

[15] See IMR Metallurgical Resources AG v. Ferro Alloys Corpn. Ltd., (2020) 220 Comp Cas 528.

[16] See Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401.

Case BriefsHigh Courts

Meghalaya High Court: Sanjib Banerjee, CJ, addressed a petition wherein a creditor’s winding-up petition was instituted under Section 433 of the Companies Act, 1956 and the same was not yet advertised.

Section 433 of the Companies Act, 1956

  1. Circumstances in which company may be wound up by Court. A company may be wound up by the Court,-

(a) if the company has, by special resolution, resolved that the company be wound up by the Court;

(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;

(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;

(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;

(e) if the company is unable to pay its debts;

(f) if the Court is of opinion that it is just and equitable that the company should be wound up.

High Court expressed that there was a divergence in the practice followed in different High Courts since the inception of the Companies Act, 1956. Some High Courts required the immediate publication of an advertisement upon the creditor’s winding-up petition being filed; whereas others, including Calcutta and Gauhati, required the Company Court to first be satisfied as to the existence of the indisputable debt before directing the publication of the advertisement.

Invariably, when the Court was satisfied that the debt was indisputably due, an option would be given to the company to pay off the same, failing which, the advertisement would ensue.

With respect to the present matter, the advertisement had not yet been published.

Though the petition was filed before the relevant provisions of the Companies Act, 2013 were notified and the Insolvency and Bankruptcy Code, 2016 came into effect, the law, as it stands now, permitted only matter that has been advertised to be retained by the Court and requires all other matters to be transferred to appropriate Company Law Tribunal since the entire regime as to insolvency had been recognized and parked with such authority.

Hence, the entire matter stood transferred to the National Company Law Tribunal, Guwahati.[Walchandnagar Industries Ltd. v. Green Valley Ind. Ltd., 2022 SCC OnLine Megh 44, decided on 23-2-2022]

Advocates before the Court:

For the Petitioner/Appellant (s)

: Mr. K.K. Mahanta, Sr. Adv. With Mr. K.M. Mahanta, Adv.

Mr. S. Gautam, Adv.

For the Respondent (s)

: Mr. K. Paul, Sr. Adv.

Mr. JM Thangkhiew, Adv.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

 If CIRP or Liquidation Proceeding of a Corporate Debtor is pending before a NCLT, application relating to Insolvency Process of Corporate or Personal Guarantor should be filed before same NCLT.

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) expressed that, Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed will be maintainable and cannot be rejected on the ground that no CIRP or Liquidation Proceedings were pending before the NCLT.

“…when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before ‘a’ NCLT the application relating to Insolvency Process of a Corporate Guarantor or Personal Guarantor should be filed before the same NCLT.”

An appeal was filed against the order of the National Company Law Tribunal, Kolkata. The State Bank of India had filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 to seek initiation of Corporate Insolvency and Resolution Process against the Guarantor. The said application was rejected by the Adjudicating Authority as premature.

Appellant’s Counsel submitted that NCLT did not correctly interpret Section 60(2) of the Code and the application was fully maintainable under Section 60(1) of the Code despite there being no pendency of any Corporate Insolvency Resolution Process in NCLT.

Let’s have a look at Section 60 (2) and (2) of the IBC:

Section 60: Adjudicating Authority for corporate persons.

*60.(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or[liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before such National Company Law Tribunal.

Section 60(2) of the IBC does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceeding are pending before the NCLT.

“…Section 60(2) was applicable only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT.”

Coram added that Section 60(2) is applicable only when CIRP or Liquidation Proceeding of a Corporate Debtor is pending, when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability of Section 60(2).

Further, it was elaborated that Section 60(1) provides that Adjudicating Authority in relation to Insolvency or Liquidation for Corporate Debtor including Corporate Guarantor or Personal Guarantor shall be the NCLT having territorial jurisdiction over the place where the Registered Office of the Corporate Person was located.

“…substantive provision for an Adjudicating Authority is Section 60, sub-Section (1), when a particular case is not covered under Section 60(2) the Application as referred to in sub-section (1) of Section 60 can be very well filed in the NCLT having territorial jurisdiction over the place where the Registered Office of corporate Person is located.”

Hence, in the present matter, the Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor were pending the application under Section 95(1) was not maintainable.

“…Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT.”

[SBI v. Mahendra Kumar Jajodia, 2022 SCC OnLine NCLAT 58, decided on 27-1-2022]

Advocates before the tribunal:

For Appellant: Malvika Trivedi, Sr. Advocate with Mr. Akash Tandon, Mr. Ashish Chudhury, Santosh Kumar, Bhargavi Kannar, Akanksha Tripathi, Rituparna Sanyal, Mansi Chaudhary, Advocates

For Respondent: Advocate Supriyo Gole

Op EdsOP. ED.

Background

The Indian insolvency regime had very fragmented, time-consuming, and archaic personal insolvency laws. Two major laws on personal insolvency before the enactment of the Insolvency and Bankruptcy Code, 20161 (IBC or Code) were: (i) The Presidency-Towns Insolvency Act, 19092 dealing with insolvency cases in Presidency Towns (Bombay, Madras, Calcutta), and (ii) the Provincial Insolvency Act, 19203 which was applicable elsewhere. Due to persistent and continuing issues with the provisions of this Act, the need for a more structured and updated insolvency framework was felt. Acting upon it, the enactment of IBC in 2016 came into the picture. The provisions dealing with personal insolvency are provided under Part III of the Code. The Code comprehends three categories of individuals under Part III i.e.

(i) personal guarantors to corporate debtors;

(ii) individuals with partnership firms or sole proprietorships; and

(iii) other individuals.

However, the Code notified the insolvency resolution process in respect of companies initially and up until recently, the insolvency resolution process of the personal guarantors came into the existence on the recommendations of the Report of Reconstituted Working Group on Individual Insolvency (RWG).4

Further, the RWG suggested that the phase implementation of Part III is essential as the market dynamics, stakeholders, transactions, and nature of the proceedings may not adjust under a single umbrella procedure. Thus following the suggestion, the piecemeal approach was preferred and the rules and regulations thereof for the insolvency resolution process of personal guarantors were brought into existence.

Understanding personal guarantor to corporate debtor insolvency process

Before moving on to the jurisdictional dilemma on the personal guarantor to corporate debtor, the understanding of the concept of personal guarantor as envisaged under the Code is imperative. Personal guarantor as defined under Section 5(22)5 of the Code states that a personal guarantor is an individual who is the surety in a contract of guarantee to a corporate debtor. To put it simply, any person who promises to pay a borrower’s debt in the event that the borrower defaults in respect of their obligation. Under the mechanism of the Code, the personal guarantors provide guarantees for the loan or any other type of facility availed by the corporate debtor from the principal borrower. Consequently, when a corporate debtor defaults on the payment of such facilities, the liability of the personal guarantor comes into existence.

Parallel proceedings against the personal guarantor — A distinct category

The rationale of parallel proceeding against the personal guarantors has its genesis in the fundamental principle of co-extensive liability of the surety (personal guarantor) against the creditor or principal borrower.6 As far as the applicability of this principle under the Insolvency and Bankruptcy Code, 2016 is concerned, the Supreme Court in Lalit Kumar Jain v. Union of India7 held that the approval of a resolution plan for the resolution of corporate debtor does not ipso facto discharge a personal guarantor (of a corporate debtor) of her/his liabilities under the contract of guarantee.

The scheme of the Code for the designated adjudicating authority to adjudicate matters is clear and unambiguous. For the insolvency processes under Part II of the Code which deals with the insolvency resolution and liquidation process for the corporate persons, the adjudicating authority shall be the National Company Law Tribunal8 (NCLT). Whereas, the insolvency resolution and bankruptcy process for individual and partnerships firms which includes personal guarantors will have Debts Recovery Tribunal (DRT)9 as their designated adjudicating authority.

Therefore, on a bare perusal of the statutory provisions, the distinction is discrete without any ambiguity. However, with the introduction of the Insolvency and Bankruptcy Code (Second Amendment) Act, 201810 the conflict and overlapping of the jurisdiction in the case of personal guarantor arose.

Personal guarantor by nature is classified as individual insolvency and hence is a subject- matter of Part III of the Code. However, in this amendment, a distinct category was created for personal guarantors which does not align with the scheme of the Code and their insolvency resolution plan shall be dealt with under Part II of the Code. The constitutionality of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 201911 (the 2019 Rules) were challenged which enabled this provision was challenged in Lalit Kumar Jain v. Union of India12. The Supreme Court upheld the 2019 Rules and thus a distinct category for personal guarantor is now firmly established.

The jurisdictional anomaly on personal guarantor’s process

Therefore, the said Amendment and the Rules inter alia enabled the provisions of Section 6013 of the Code which envisaged four situations under which the exclusive jurisdiction in personal guarantor applications rests with the NCLT—

  1. The adjudicating authority in relation to insolvency and resolution for personal guarantors shall be NCLT having territorial jurisdiction.
  2. Instances where the corporate insolvency resolution process (CIRP) against the corporate debtor is pending.
  3. In an instance where the CIRP is in the process against the corporate debtor, the application against the personal guarantor shall be transferred before such NCLT.
  4. The powers provided to DRT in matters of the personal guarantor shall be vested with NCLT.

Here, we have a situation where an application against the corporate debtor is either initiated, pending, or in the process (admitted) in such a case the application for initiation of insolvency resolution process against the personal guarantor shall be the NCLT.

On a harmonious construction of Sections 9414, 9515 and Section 60 of the Code, it can be construed that special provisions have been provided to vest NCLT with the jurisdiction in personal guarantors to corporate debtors’ cases. The intent of these provisions of the Code is manifested to allow for the creditor to initiate and maintain proceedings against both the corporate debtor and the guarantor simultaneously and before the same forum.

However, different NCLTs have taken a different view on this aspect. For instance, the NCLT, New Delhi in PNB Housing Finance Ltd. v. Mohit Arora16 discussed the scope of the amendment enabling Section 60 of the Code. The NCLT stated that whenever Section 60 is attracted, the provision of Section 179(1)17 IBC, 2016 shall not be applicable and the jurisdiction shall vest with NCLT.

Further, the Tribunal held that in a situation where application(s) in relation to the corporate debtor for initiation of CIRP is pending before NCLT then, initiation of CIRP of the corporate debtor is not a prerequisite for maintainability of an application under Section 95  IBC filed for initiating insolvency resolution process against the personal guarantor of that corporate debtor before the NCLT.

The NCLT in PNB Housing Finance Ltd. v. Goldy Gupta18 held that the commencement of CIRP against the corporate debtor is not a condition precedent for maintaining an application under Section 95 of the Code filed for initiating insolvency resolution process against the personal guarantor of the corporate debtor before the NCLT.

This rationale was not taken by the NCLT, Mumbai in Insta Capital (P) Ltd. v. Ketan Vinod Kumar Shah19 where the issue for consideration is whether a financial creditor can initiate CIRP against the personal guarantor in the absence of any resolution process/liquidation process against the corporate debtor.  The Tribunal held an application for insolvency for a resolution against the personal guarantor is not maintainable unless that CIRP or liquidation application is ongoing against the corporate debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the corporate debtor undergoing CIRP, would tantamount to the vesting of jurisdiction on two courses, one is NCLT and another is the Debts Recovery Tribunal.

The NCLTs have a diverse opinion on the initiation of the insolvency resolution process against the personal guarantor during the initiation or pendency of CIRP application against the corporate debtor. Such a situation has not been resolved as the NCLAT (Appellate Tribunal) has not yet dealt with this anomaly.

Concurrent jurisdiction with Debts Recovery Tribunals

As pointed, the Debts Recovery Tribunals are the designed adjudicating authority in proceedings related to insolvency matters of individuals and firms, which also includes personal guarantors and having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain20. It can be stated that the original jurisdiction for personal guarantors rests with the DRTs.

However, a peculiar situation which Section 60 of the Code does not comprehend is that where an application for initiation of CIRP against the corporate debtor is neither initiated, pending nor admitted in such cases who shall have the jurisdiction. This situation further builds up to the existing dilemma.

Following the strict interpretation of the provisions of the Code, in such situations, the DRTs are best suited to entertain the application. The reason being, they have the original jurisdiction to deal with personal guarantors under the Code. Further, the Amendment of 2018 and Rules thereof are the enabling provisions that created a special case for Section 60 provision. However, the amendment and rules are silent on the deprivation of jurisdiction with the DRTs.

In addition to that the RWG stated that “In cases where there a corporate insolvency process is not pending against the corporate debtor, the jurisdiction in respect of insolvency and bankruptcy of personal guarantor is Debts Recovery Tribunal.”21

DRT taking up the jurisdiction in personal guarantors insolvency proceedings

The Debts Recovery Tribunal, Chennai in KEB Hana Bank v. Rohit Nath22 has taken a step further and entertained an application under Section 95 of the Code wherein the CIRP against the corporate debtor is already initiated. The Tribunal in reply to the contention of the respondent on non-applicability of the application on grounds of lack of jurisdiction stated:

 “in our view that this contention is unfounded as Section 60 deals with proceedings initiated against the corporate debtor whereas having a separate forum is clothed with the power to adjudicate. The present proceedings are against the guarantor to the corporate debtor alone. As far as the proceedings before this Tribunal is concerned under Section 60 IBC have no application.”

Conclusion

On a concurrent reading of the provisions under Sections 60 and 95 of the Code, even NCLT has concurrent jurisdiction. Therefore, the provisions here clearly outlined the anomaly where two different forums have assumed jurisdiction for overlapping matters. Unfortunately, the concrete answer and resolution to this problem are not yet provided as the higher courts or tribunals have not yet entertained this anomaly. The assumptive rationale behind that could be that both NCLT and DRT have assumed jurisdiction as per their interpretations and hence they have been filed on an appeal.

Although, it is clear from the provisions, amendments, and the Supreme Court ruling in Lalit Kumar case23 that DRT has original jurisdiction along with a special situation where CIRP is not even initiated against the corporate debtor or principal borrower. Whereas NCLT is vested with jurisdiction through an enabling Amendment. Such a jurisdiction can be termed as “exceptional jurisdiction” to streamline the CIRP process against the personal guarantor and the corporate debtors.

IBC is still in its nascent stages and its jurisprudence is evolving throughout. The anomaly highlighted in this article shall sooner be knocking on the doors of the higher courts for interpretation. Hence, a ruling with the Appellate Tribunal and ultimately the Supreme Court will settle this jurisdictional challenge.

†Graduate Insolvency Programme, Indian Institute of Corporate Affairs (2021-2023); LLM in Corporate and Financial Law and Policy, Jindal Global Law School, Sonipat; BA LLB, Hidayatullah National Law University, Raipur. Author can be reached at shivamsinghal020@gmail.com.

1 Insolvency and Bankruptcy Code, 2016.

2 Presidency-Towns Insolvency Act, 1909.

3 Provincial Insolvency Act, 1920.

4 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016 to deal with the insolvency of guarantors to corporate debtors and individuals having business).

5 Insolvency and Bankruptcy Code, 2016, S. 5(22).

6 Contract Act, 1872, S. 128.

7 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

8 Insolvency and Bankruptcy Code, 2016, S. 5(1).

9 Insolvency and Bankruptcy Code, 2016, S. 79(1).

10 Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.

11 Insolvency and Bankruptcy  (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

12 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

13 Insolvency and Bankruptcy Code, 2016, S. 60.

14 Insolvency and Bankruptcy Code, 2016, S. 90.

15 Insolvency and Bankruptcy Code, 2016, S. 95.

16 2021 SCC OnLine NCLT 488.

17 Insolvency and Bankruptcy Code, 2016, S. 179(1).

18 2021 SCC OnLine NCLT 487.

19 2021 SCC OnLine NCLT 486.

20 Insolvency and Bankruptcy Code, 2016, S. 179(2).

21 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency & Bankruptcy Code, 2016 to deal with the insolvency of Guarantors to Corporate Debtors and Individuals having business).

22 2020 SCC OnLine DRT 1.

23 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

Op EdsOP. ED.

Introduction

Prior to the introduction of the Insolvency and Bankruptcy Code, 20161 the economic insolvency structure was a blend of various statutes comprising of the Companies Act, 19562, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20023, the Sick Industrial Companies (Special Provisions) Act, 19854, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 etc., with no balanced outcome or a formula to resolve the situation. The Government of India had to act upon the predicament, as the surviving framework was insufficient to safeguard the interest of the promoter, creditor, stakeholders and shareholders. Likewise, the judicial designation was with the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) (in case of appeal), the High Courts and the Supreme Court. After the 2016 Insolvency Act, the floodgates of petition knocked the NCLT. The purpose behind the introduction of this legislature was to induce a consolidated opinion of recovery proceedings with a structured format, so as to have a consistency in the approach system while in default. However, the IBC, 2016 focused mainly on the multinational corporations (MNCs), corporate body, partnership, etc., while completely neglecting the major fund contributing part of the economy, the micro, small and medium enterprises. The notification by the Ministry of Micro, Small and Medium Enterprises on 26-6-2020 inserted the provisions under the Micro, Small and Medium Enterprises Development Act, 20065 (the MSME Act) to be classified as “MSME”. The notification lays down the revised financial threshold limit and investment plans as – (a) the investment in plant and machinery under the micro enterprises, shall not exceed Rs1 crore while the turnover amount shall not exceed Rs 5 crores; (b) the investment in plant and machinery for the small enterprises shall not exceed Rs10 crores while the turnover amount shall not exceed Rs 50 crores. The investment in plant and machinery under the medium enterprises shall not exceed Rs 50 crores while the turnover amount shall not exceed Rs 250 crores.

 On 3-8-2021, the Rajya Sabha passed the amendment to the Insolvency and Bankruptcy Code, 2016 shielding the MSME sector in case of default. Although the House of Representatives turned a blind eye without discussing the Ordinance promulgated, the Bill yet received the presidential assent on 11-8-2021. Amidst the ruckus which surfaced in the lower house by the opposing alliance and the pandemic hit disruptions, the urge for an effective recovery mechanism became crucial. Prior to the Amendment, the Code highlighted its views on proposing a “feasible resolution plan” by the financial/operational creditors with other requirements suggested by the Insolvency and Bankruptcy Board of India (IBBI). The Insolvency and Bankruptcy Code (Amendment) Ordinance, 20216 promulgated by the President on 4-4-2021 was inter alia added to the Chapter III-A of the earlier Code (2016). With the initiation of corporate insolvency resolution process (CIRP), the debtor control regime swaps to become the creditor control business with the subsequent proposition of 66% of the voting rights by the committee of creditors. The rationale was to encompass all those companies with Rs 1 lakh of budget preposition for business management. Erstwhile, the 2021 Amendment alters its position by incorporating the MSME classified under the Micro, Small and Medium Enterprises Development Act, 20067 within its purview. The cumulative progress by the Government of India to enforce IBC stimulation with the significant heads has provided an extensive interpretation of the term “insolvency” and other related disputes. While the legislature mainly focuses on economising the debtor’s business operation through a resolution applicant for restructuring the corporate debtors insolvency mess. The authors intend to enunciate how the pre-packed insolvency emerged in India as a requisite factor in advancing and resolving the economic bankruptcy crisis.

According to the survey conducted by the MSME Ministry, approximately 29% of the GDP is contributed through both its national and international trade. During the pandemic outbreak, the previous 2 years in the country have interspersed and terminated the entire cash flow. At the end of the credit period, numerous debtors defaulted with their finances with the subsequent interest being tagged along with the principal sum, payable to their respective creditors.

The threshold in the increase of the number of insolvency matters in the MSME precinct, coerced the Government to secure the rights of creditors, exploited during the nationwide crisis. Parliament had to be considerate about this amendment, as it would be the first-ever legal platform including both “manufacturing and service” providing industries under the single framework. The combination of three market standard positions (micro, small and medium enterprise) would be strenuous and also burdensome to the judiciary, when evaluating all these areas on a single platform would have different modus operandi of transactions. So, the Ministry of Corporate Affairs in regulation with the Insolvency and Bankruptcy Board of India guidelines set up an open platform for these marketers to initiate the insolvency procedure against the corporate debtor. In case of default operating through the new scheme of the “pre-packaged insolvency”, the corporate debtor himself could initiate the insolvency proceedings. This was a pivotal step required to safeguard the strata of the community.

Enforcement of pre-packaged insolvency resolution process (PPIRP)

The nationwide crisis due to the Covid-19 pandemic, led to the conception of bringing forth the sentinel for many business sectors which were exposed to dreadful financial distress. Accordingly, the investment plan8maintained under the Code enhances the fluctuating turnover rates for each enterprise defining the classifications and the term “MSME”. The Ordinance was promulgated to limit its applicability only to those corporate debtors who qualified under the framework of MSME. On the other hand, the Ordinance does not define MSME. The Indian MSME insolvency envisaged both formal and informal ways of settlement in order to encounter unspecified circumstances during the proceedings. The pre-packaged insolvency was initiated to incorporate all those business areas, irrespective of financial default caused (threshold mentioned in the notification), and subsequently ensure the moratorium for recovery. While the pre-packaged insolvency application concentrated mainly on the key aspects of speedy disposal and flexibility to ensure maximum efficiency. In order to protect the small businesses from being dragged into insolvency proceedings, the Government of India through a delegating authority constituted a sub-committee for the enhancement of the insolvency framework. However, the lack of funds flowing in the economy created havoc in the judicial chambers. On March 2020 the Committee issued a notification9cumulating the minimum threshold to be Rs 1 crore or more (as may be notified by the Central Government) from the primary limit of Rs 1 lakh, required for initiating CIRP were altered. The default, in general generated a multitude of financial obligations towards corporate debtors across. Erstwhile major part of the MSME sector comprised of the operational creditors. As a matter of fact, the suspension of Sections 710, 811 and 912 caused financial distress to these creditors with the additional economic breakdown. These circumstances plunged the Central Government to reduce the out-of-court workouts by constituting a sub-committee for the advancement of an ecosystem, mandatory checks and balances, etc. for ensuring a prearranged insolvency resolution mechanism.

The report to the Ministry of Corporate Affairs submitted by the Insolvency Law Committee dated 31-10-2020 held the inclusion of only corporate debtors, who were a part of the MSME sector, following the pre-packed framework. The Sub-Committee delineated few basic components to be unfiltered that ensured the stability to guide the pre-packaged insolvency proceedings. The Code highlights, “creditor’s control”, “approval of the resolution plan” and “the moratorium period” to be unfettered. Further, the Central Government notified the initiation of the Insolvency and Bankruptcy Code (Amendment) Ordinance introduced in the lower house for MSME focusing on securing the debtor’s interest and rights via the pre-packaged insolvency resolution process. Interestingly, in spite of the Insolvency and Bankruptcy Code, 2016 being commenced, it took over 5 years to propose the amendments catering to the needs of only the MSME sectors, following the Code’s suspension for a year.

Long overdue in the inception for the pre-packaged insolvency

After the cataclysm, following the mutatis mutandis and the suggestions put forth by the Sub-Committee, the Government rejuvenated the economic speculation through the pre-packaged insolvency. Although the pre-packaged Insolvency Code is in motion in European countries, India started with the insolvency programme off lately during 2016. It practically took the Government five years to begin with the pre-packaged insolvency, irrespective of the introduction of this Code would not had been a newfangled process. The Government of India held the 2016 Act to be congruous and at the same time was reassured about the MSME Developmental Act, 2006 being satisfactory to save the MSME sector from insolvency crisis. It was the 2021 pandemic hit, where innumerable manufacturers had a downslide with their businesses which edged them towards the insolvent position. Also, due to the threshold for insolvency application in these sectors being too stunted, the Government was coerced to bring a subsequent act for withholding the piling of default cases.

The seven-member panel was appointed to scrutinise the prerequisite factors required to reduce the burdens upon the NCLTs. Subsequently, the Sahoo Panel Report suggested the need for “pre-packaged insolvency” to reduce the “out-of-court settlements” and for the overall Code efficiency. The Panel aimed at providing a faster resolution mechanism compared to the traditional CIRP. The approval of Atmanirbhar Bharat funds for MSME sector paved the way to energise a new regime investment threshold. Subsequently, with the nationwide lockdown the Government sheltered these enterprises by the expansion of the term “MSME” along with other incentives following the principle of “nova constitution futuris formam imponere debet, non praeteritis”. The moot point being, whether the Government delays in these enforcements was worth the wait. Affirmatively, the Insolvency Law Committee proposition was to protect the interest of the stakeholders by blending both the formal and informal theories of insolvency procedure to ensure flexibility without any haircut in the bankruptcy claims.

For an impenetrable structure, the Government started following the systemised implementation alongside maintaining the obligatory instructions for its perusal. It first instituted with the increase in the threshold limit, under Section 413of the Code from Rs 1 lakh to 1 crore. The foremost objective of increasing the amount was to substantiate that the creditors shall not file for a petition, ensuring termination of the liquidation process under the Code. On the other hand for initiating PPIRP the minimum threshold of default was of Rs 10 lakhs. This would empower the debtors to have adequate time for the repayment, alongside it would hoard these businessmen from being tagged in the pre-packaged insolvency resolution process (PPIRP). Successively the second stage starting from 25-3-2020, where the Insolvency Ordinance submitted the suspension of Sections 7, 8 and 9 against the corporate debtor for a period of 6 months, restraining the creditors from filing the petition. This would shelter the corporate debtor’s assets against the initiation of insolvency process, the insertion under Section 66(3) of the Code14 have barricaded the adjudicating authority from making any application. However, the insertion of Section 10-A15was a major setback. On 4-6-2020 to safeguard the interest and the welfare of MSME, the Ministry of Micro, Small and Medium Enterprises tried to revise the definition of MSME, in order to encompass a more number of enterprises within this framework. Meanwhile the Insolvency Bankruptcy Code with the MSME Development Act, 2006 incited its way for the “pre-packaged insolvency process” in India.

Safeguarding the nation’s interest through MSME workouts

The intention behind this Code was to minimise the number of insolvency cases knocking the NCLT. Apart from the first resolution mechanism, the Government had three major outlines to be involved, that is regarding the informal structure setups, the employment generation through these sectors which indeed encouraged many for startups. Quintessentially the issue was to substitute the traditional approach of the Insolvency and Bankruptcy Code, 2016. The highlighting attribute of this Amendment stands for its “informal structure” while dealing without muddling up with the existing Code. The motive behind the commencement of informal mechanism was to make it cost efficient, flexible and speedy maintaining the transparency which assists in reducing the overall tax burden plan. Fundamentally since India has never dealt with any immature bankruptcy dealings, the question arises whether the marketers are ready to opt for an “informal way of settlement. Pre-packaged insolvency opts for an informal plan which operates without the involvements of courts and tribunals. It is a type of restructuring which idealises the debtor and the creditor to discuss for informal workouts and then submit its resolution plan for the approval. However pre-packaged insolvency is hybrid mechanism of the earlier insolvency structure which lacks the statutory sanctity, which in turn breaks down the conflicts post the approval. It is essential to note that approximately 14,510 applications were withdrawn from the NCLT at the pre-admission stage after the relevant parties discussed their workouts through the informal way. Interestingly, unlike the corporate insolvency resolution process the base resolution plan is entirely framed by the corporate debtor. This informal structure has opened gates for a unique way of proposing the resolution plan. While there is no compulsion for the parties to opt for this mechanism, provided it was consensual. This format lowers the burdens on tribunals safeguarding the rights of the parties involved in the insolvency proceedings. The implementation of these amendments gave birth to the long-awaited insolvency procedure.

For the growth of the MSME sector, the Government has bestowed them with granting bank loans without securities, lower electricity bills with promotional subsidies for the overall development. The public sector Bank of India announced the reduction of repo rates from 5.15 per cent to 4.40 per cent ensuring the secularisation of loans at lower rate of interest which is linked to Reserve Bank of India. It is not incorrect to say that “MSME” is the third wheel of the society, contributing majorly towards the socio-economic development. The liberties granted under this scheme have widened the scope of startups in India as the State Government guides in entailing tax benefits, tariffs, capital investment facilities. This sector needs to be carefully nourished and brought up, as it bolsters just not the economy but also the employment. Accordingly, the MSME sector in India has attained position one by generating over 35% employment rates through its different programmes. Consequently, the MSME’s role as an ancillary industry, complementary to the large-scale industries has enhanced the need to safeguard their positions in the markets.

Commencement of the new regime – The 2021 Amendments

The recommendation of the Insolvency Bankruptcy Amendments16 was to shift the burdens from the tribunals to the outside court settlements through informal discussion between the parties. Nirmala Sitharaman had tabled the Bill in Parliament to have an “effective alternative” mechanism to the traditional insolvency procedure. It alongside would have a kick-start to the new pre-packaged insolvency procedure, by liberating the collapse of the MSME’s. Chapter III-A of the Insolvency Code from Sections 54-A to 54-P enlarged the management crisis happening within the corporate debtors company.

  1. The corporate debtors termed as MSME under the MSME Development Act, 2006 stands eligible to initiate for pre-packaged insolvency resolution process. Unlike CIRP, the debtors shall have the entire management control. The corporate debtor alone or at least with the consent of three-fourth of the partner’s approval submit the base resolution plan17. Meanwhile, Section 54-A(1) of the Code18 grant only the corporate debtors to initiate the pre-packaged insolvency procedure after obtaining 66% of approval from their respective creditors, for submitting the resolution plan to the adjudicating authority for the approval. The NCLT has to either approve or reject the resolution plan with 14 days of its receipt submitted. During the initiation of these proceedings, the corporate debtor mandatory shall come in clean chit without undergoing any prior liquidation under CIRP, as an obligatory field required under Section 3319.
  2. The submission of the base resolution plan by the corporate debtor through the nomination process under Section 54-A(4) must comply with provisions under Sections 30(1) and (2) of the Code20. After the completion of the nomination process, the resolution professional is required to submit a report, confirming the condition precedent adhering under the above sections.
  3. There must be no record of a completed CIRP for past 3 years or the initiation of PPIRP during the previous year.
  4. Application under PPIRP should be approved by at least 66% of the “unrelated creditor” obtaining the green signal for the submission of the base resolution plan. In addition to the resolution plan, the creditor must approve for the appointment of the resolution professional. Subsequently, the debtor should also provide the name of the resolution professional to the financial creditors. In case, the corporate debtor does not have an unrelated party, then the corporate debtor is required to hold a similar meeting for operation creditor (major part contribution and comprising MSME) and attain the approval of all the members in the meeting in the same manner conducted for the “unrelated financial creditors”.
  5. The Code includes Section 29-A21 as a prerequisite factor. The Code barricades the related party to the corporate debtor to be a part of the Committee of Creditors while voting for the feasible plan. It is necessary to amputate the related party rights to ensure that company would not regain its control via the liquidation process by stepping through the backdoor mechanism.
  6. Under Section 54-A(2)(f), the declaratory terms and conditions be filed by the majority of the partners or directors of the corporate debtors.
  7. On 24-3-2020, the number of insolvency cases increased as a result the minimum threshold (for default) for initiating CIRP was increased from Rs 1 lakh to Rs 1 crore, which may vary as per the notification from the Central Government. A second proviso inserted under Section 4 stated, minimum thresholds for initiating the application under the PPIRP was Rs 10 lakhs against the MSME.
  8. The penalising of the officer-in-charge (resolution professional) who manages the debtor’s claims under Section 67-A22, with the intend or commit the gross mismanagement to defraud the creditors.
  9. The resolution professional, after the commencement of the Committee of creditors has to submit the plan to the adjudicating authority within a period of 120 days. The completion of the entire process must be within 90 days.
  10. Usually for the withdrawal of CIRP, under Section 12-A23 requires 90% of the approval from the Committee of creditors. Unlikely, under PPIRP anytime from commencement but before the approval of the resolution plan, PPIRP can be terminated for the initiation of CIRP with the approval of at least 66% of the creditors.

Under MSME sector, the filing of an application under the PIRP involves the following methodology. Firstly, the minimum threshold amount of default must be 10 lakh rupees. The base resolution plan must be proposed by the corporate debtor or with the consent of the three-fourth of total partners. During the PPIRP the entire management control shall be with the corporate debtor, unlike CIRP. Subsequently, the appointment of the resolution professional and shall be approved by 66% of the unrelated party of the corporate debtor. The debtor is required to submit prior claims24 and prerequisite details regarding to whom the company owes money. If default or any omission of preliminary information memorandum is suspected, then the promoter, director shall be liable to pay without any prejudice to the damage caused to the individual. After the approval of the base resolution plan by Committee of Creditors, the resolution professional shall submit the proposal to the adjudicating authority for approval. If NCLT is satisfied with the submitted proposal the liquidation process maybe decreed. Consequently, the restructuring scheme rejuvenates the MSME’s depreciating assets through regaining of the creditor’s trust by informal proceedings under the pre-packaged insolvency mechanism. These Amendments have curtailed the debtors from being dragged into the lengthy insolvency procedure and simultaneously reduced the burden on the Company Tribunals.

The UNCITRAL path

The model law was regulated to enhance  the betterment of bilateral agreement, happening between the nations in a manner suitable for them while adapting to assertions prescribed by law. While restructuring the Code, to secure the agreement made with creditors, the United Nations Commission on International Trade Law (UNCITRAL) used a formal base progressing with an informal structure. The negotiation and the proposing of the resolution plan remains the top notch in practices of “pre-packaged insolvency”. The court proceedings are scarcely just a formality for attainting the consent for the liquidation process. Under the pre-packaged insolvency mechanism, the informal plan discussion between the parties, in a manner that permits the resolution professional to rehabilitate and maximise the assets value, prior to the initiation of liquidation process guides them to have manifesto for negotiation on the pre-agreed sale of business assets. This authentication is sanctioned by the governing laws protecting the interest and rights of the demanding party. The model law describes pre-packaged insolvency25 as “the expedited reorganisation proceedings”, to address those situations that follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors. This shall protect the rights of the parties, ensuring a balanced framework without compromising the other parties’ statement. Countries like Singapore, UK, USA, etc. who have adapted insolvency model law is obligatory to follow the pre-insolvency priorities on condition of co-equal opportunities to both the parties. Although, UNCITRAL is not incorporated in India, but under the recommendation of the Indian Insolvency Joint Committee 2015 it follows a cross-border insolvency process under Sections 23426 and 23527. The model insolvency law is indispensable to most of the countries around as it promotes the uniform code of insolvency proceedings. It defines the pre-packaged insolvency to be a “voluntary restructuring process” manifesting the settlement beyond the courts charter. The Indian system needs to adapt the model law guide in order to have an effective insolvency resort. Subsequently it must adapt to these guidelines for ensuring the coordination and harmony between cross-border nations and to avoid encumbrance of cash flow in the economy.

Is India late to the pre-packaged insolvency game

When compared to the traditional way of corporate insolvency resolution process, the restructuring scheme has been the most effective way of sustainability to those distressed firm seeking recovery within the shortest span. Although the Insolvency Bankruptcy Code, 2016 does not cover within its ambit numerous areas of bankruptcies like trust insolvency, the corporative insolvency, etc., but why has the pre-packaged insolvency been added under Chapter III-A, sidelining the rest of the insolvency areas. Erstwhile why did India fail to scrutinise the insolvency grievances of the MSME sector, when many countries under the model law had incorporated the practice of PPIRP. Whether was it the pandemic that urged the Central Government with the proposition or whether this Code has been the long-waited requirement under the Indian Insolvency Code. Affirmatively, the commencement of the pre-packaged insolvency for MSME has rescued the economies major contributing sector from turning insolvent. In countries like UK, Singapore, USA, Canada and South Korea, the PPIRP system has been a common practice shielding the distressed firms from undergoing the liquidation process.

The United Nation follows and recognises the pre-packaged insolvency through voting, rescheduling, negotiating and formulating the plan by the debtor. Therefore, the rights of the stakeholders, creditors are protected before the company files for a petition under Chapter 11 of the Code. It authorises the administrator for the partial or complete sale of the corporate debtor’s business. By summoning all the interested parties to object to the proposed deal put forth, it notifies that the business is clear-cut not involved in the its assets. Section 36328 deals with the pre-arranged insolvency proceedings. Interestingly, both the United Nations and the United Kingdom follows the same principle of Code of permitting the stakeholders of the corporate debtor to initiate the insolvency proceedings. However, the United Kingdom insolvency tricked the debtors for a long time, as only the judicial system supported this process. Contrarily the UK Insolvency Code, 1986 neither provided for nor operated the insolvency process. While this process mainly focused on selling of business assets on “going concern” without the approval of the creditors. Once the administrator was appointed, the entire process would be shut down with no claims being entertained from any side. Addressing this concern, Graham Committee was constituted to analyse this mishap within the process ensuring the stability to avoid transactions to the connected party and the tracking of “serial pre-packing”. Restoring the said provisions under the Insolvency Code, 1986 within a period of 5 years span, on November 2015 the amendments aimed to empower the Government and the pre-pack sale occurring to the connected party. Enlarging the view of pre-pack mechanism in UK, it revived its policy under the Corporate Insolvency and Governance Act, 2020. In comparison to the other countries, Singapore, under its High Court orders sanctioned its first insolvency on January 2018. This Code traces its background from the pre-packaged insolvency procedure of Chapter 11 under the US Bankruptcy laws with the compilation of the Singapore’s formula schemed under Section 211I of the Companies Act. However, the bankruptcy does not strictly claim for the “creditors support agreement”.

The detail reading of the aforementioned provisions above provides a jigsaw of the insolvency proceedings of various countries. Indian pre-packaged insolvency is a blend of both the UK and the US bankruptcy laws, certifying the Code to have an indestructible base. Yet, these structures differ from one another.

  1. The motive behind proposing the “pre-packaged” insolvency regime was to protect the rights of the creditors and the corporate debtor’s company from running insolvent. While comparing this stimulation with USA and Indian insolvency, it is noted that the interest of the shareholders is compromised in India and UK. Although UK and USA follow the same principle and guidelines for the insolvency practice, during the insolvency procedure only the creditors’ claims are considered. In USA, the shareholders’ rights are considered although they are prioritised below the creditors during repayment.
  2. India and USA justices have wide discretionary powers subjected to their restructuring process. India has only two regulatory authorities, NCLT and the Supreme Court practising its inherent powers under Rule 11 of the NCLT Rules29, with the NCLAT being only for appeals. While the other alternative for the MSME sector (creditors) would be the Debts Recovery Tribunal. The Indian courts have limited its scope with only 2 or 3 approaches. Under the USA insolvency base, the jurisdiction is vested in every District Court which issues an “order of reference30”. These are specialised Judges dealing with the core matter of the pre-packaged insolvency proceedings.
  3. Under USA pre-packaged insolvency, the administrator is entitled to wholly or sustainably sell the corporate debtor’s assets, after notifying the interested parties. The insolvency trustee must mandatorily provide the opportunity to all classes of creditors to object. Following the objection, it must then obtain consent from the bankruptcy court as these dealings are operated normal outside the routine cycle, ensuring that the business is not involved in its assets. In India, after the proposition of plan by the corporate debtor (under PPIRP), the Committee of creditors has to approve the plan by at least 66.6% while there is no objection raised by the creditors during the process. The interim resolution professional who is later confirmed as resolution professional submits the plan to the Tribunal which may reject or accept the application.
  4. The Bankruptcy Code of USA does not prescribe a proper structure on how these pre-sale transactions must be conducted and concluded outside the courts. Under the Indian pre-packaged insolvency, it mentions a structured format on how these “pre-planned” transactions must function.

Though India has delayed its inception of pre-packaged insolvency, it has addressed the major issues faced by the MSME sector and accordingly, sheltered their needs. By keeping the base of CIRP intact, the legislators have scrutinised the structure of Insolvency Bankruptcy Code, 2016 and thereby made it less burdensome to the courts with simultaneous commencement of PPIRP. Whilst it also provides for an option to the creditors where they could shift their claims from PPIRP to CIRP.

Conclusion

The pandemic destructions in the MSME sectors have left the judicial system cumbersome, which was later surpassed by the enforcement of the pre-packaged mechanism in India. The authors appreciate this proposition to be magnificent as the pre-packaged insolvency process covers major loopholes found in the corporate insolvency process 2016. Although the pre-packaged insolvency has no suitable statutory definition, yet the legislation has been moving ahead in full-swing since inception. The overall perception about pre-packaged insolvency makes it necessary to have a straitjacket formula in order to avoid the uncertainty and to have an anticipation of the upcoming matters while embracing the judicial assessments. However, the amendment is silent on how the assets of the third party shall be dealt with during the pre-packaged insolvency process. On the other hand, the altered and controlled system reassures the flexibility in the restructuring process, balancing the societal needs. Therefore, in circumstances of puzzlement and overlapping of issues, it is advisable to have a separate tribunal dedicated only to resolve the pre-packaged insolvency issues and to accordingly address them.

*Principal Associate, Saraf and Partners, Law Offices.

**4th year student, BA LLB , SDM Law College, Mangalore.

1Insolvency and Bankruptcy Code, 2016.

2Companies Act, 1956.

3Securitisation and Reconstruction of Financial Assests and Enforcement of Security Interest Act, 2002.

4Sick Industrial Companies (Special Provisions) Act, 1985.

5Micro, Small and Medium Enterprises Development Act, 2006.

6Insolvency and Bankruptcy (Amendment) Ordinance, 2021.

7Micro, Small and Medium Enterprises Development Act, 2006, S. 7(1).

  1. Classification of enterprises.—(1) Notwithstanding anything contained in S. 11-B of the Industries (Development and Regulation) Act, 1951, the Central Government may, for the purposes of this Act, by notification and having regard to the provisions of sub-ss. (4) and (5), classify any class or classes of enterprises, whether proprietorship, Hindu Undivided Family, association of persons, cooperative society, partnership firm, company or undertaking, by whatever name called,—

(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, as—

(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;

(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or

(iii) a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;

(b) in the case of the enterprises engaged in providing or rendering of services, as—

(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

(iii) a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.

Explanation 1.—For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation 2.—It is clarified that the provisions of S. 29-B of the Industries (Development and Regulation) Act, 1951, shall be applicable to the enterprises specified in sub-cls. (i) and (ii) of cl. (a) of sub-s. (1) of this section.

8Expln. 2.1 from the RBI Notification (Noti. No. FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21) defining investment plan as under—

2.1.Classification of enterprises.—An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

9Explanation of the proviso inserted under S. 4 of the Insolvency and Bankruptcy Code, 2016 ((F. No. 30/9/2020-Insolvency) S.O. 1205(E).—In exercise of the powers conferred by the proviso to Section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.

10Insolvency and Bankruptcy Code, 2016, S. 7.

11Insolvency and Bankruptcy Code, 2016, S. 8.

12Insolvency and Bankruptcy Code, 2016, S. 9.

13Insolvency and Bankruptcy Code, 2016, S.  4 (hereinafter referred to as “the principal Act”). In S. 4, after the proviso, the following proviso shall be inserted, namely: “Provided further that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Ch. III-A.”

14Insolvency and Bankruptcy Code, 2016, S. 66(3).

15Insolvency and Bankruptcy Code, 2016, S. 10-A

10-A. Suspension of initiation of corporate insolvency resolution process.—Notwithstanding anything contained in Ss. 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25-3-2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf: 

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25-3-2020.

16Insolvency and Bankruptcy Code (Amendment) Bill, 2021.

17Insolvency and Bankruptcy Act, 2016, S. 5(2-A), after cl. (2), the following clause shall be inserted, namely: “(2-A) ‘base resolution plan’ means a resolution plan provided by the corporate debtor under cl. (c) of sub-s. (4) of S. 54-A.”

18Insolvency and Bankruptcy Code, 2016, S. 54-A(1).

19Insolvency and Bankruptcy Code, 2016, S. 33.

20Insolvency and Bankruptcy Code, 2016, Ss. 30(1) and (2).

21Insolvency and Bankruptcy Code, S. 29-A.

22Insolvency and Bankruptcy Code, S. 67-A.

23Insolvency and Bankruptcy Act, S. 12-A.

24 Insolvency and Bankruptcy Code, 2016, S. 54-G

54-G. List of claims and preliminary information memorandum.—(1) The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date, in such form and manner as may be specified, namely:

(a) a list of claims, along with details of the respective creditors, their security interests and guarantees, if any; and

(b) a preliminary information memorandum containing information relevant for formulating a resolution plan.

(2) Where any person has sustained any loss or damage as a consequence of the omission of any material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum submitted by the corporate debtor, every person who—

(a) is a promoter or director or partner of the corporate debtor, as the case may be, at the time of submission of the list of claims or the preliminary information memorandum by the corporate debtor; or

(b) has authorised the submission of the list of claims or the preliminary information memorandum by the corporate debtor, shall, without prejudice to S. 77-A, be liable to pay compensation to every person who has sustained such loss or damage.

(3) No person shall be liable under sub-s. (2), if the list of claims or the preliminary information memorandum was submitted by the corporate debtor without his knowledge or consent.

(4) Subject to S. 54-E, any person, who sustained any loss or damage as a consequence of omission of material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum shall be entitled to move a court having jurisdiction for seeking compensation for such loss or damage.

25Explanation defining pre-packaged insolvency under the UNCITRAL—The expedited reorganisation proceedings discussed in the Guide to address those situations follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors.

26Insolvency and Bankruptcy Code, 2016, S. 234.

27Insolvency and Bankruptcy Code, 2016, S. 235.

28United Nations Bankruptcy Code, S. 363. S. 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.

29National Company Law Tribunal Rules, 2016, R. 11.

3028 US Code S. 157 Procedures under US Codes  – (a) Each District Court may provide that any or all cases under Title 11 and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11 shall be referred to the bankruptcy Judges for the district.

Case BriefsSupreme Court

Supreme Court: While dealing with a case involving two controversial terms; “operational debt” and “operational creditor” of IBC, the 3-judge Bench of Dr Dhananjaya Y Chandrachud* Surya Kant and Vikram Nath, JJ., explained that the appellant would be an operational creditor under the IBC, since an ‘operational debt’ will include a debt arising from a contract in relation to the supply of goods or services from the corporate debtor. The Bench expressed,

“…no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.”

Factual Conspectus

The genesis of the case related to following undisputed facts:

  • the Consolidated Construction Consortium Ltd.-appellant and the Proprietary Concern; i.e. Hitro Energy Solutions entered into a contract for supply of light fittings, since the appellant had been engaged for a project by Chennai Metro Rail Corpn. (CMRL);
  • CMRL, on the appellant’s behalf, paid a sum of Rs 50 lakhs to the Proprietary Concern as an advance on its order with the appellant;
  • CMRL cancelled its project with the appellant;
  • The Proprietary Concern encashed the cheque for Rs 50 lakhs anyways; and
  • The appellant paid the sum of Rs 50 lakhs to CMRL.

Impugned Order

It was when the proprietary concerned refused to pay the aforesaid sum despite several notices and demands, the appellant approached NCLT under Section 9 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent, Hitro Energy Solutions (P) Ltd. The NCLT allowed the application holding that the respondent’s Memorandum of Association (MoA) proved that it took over the proprietary concern; and that the Proprietary Concern did owe the appellant an outstanding operational debt. Further, the NCLT declared a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional.

In appeal, the NCLAT set aside the NCLT’s decision, dismissed the application filed under Section 9 of the IBC and released the respondent from ongoing CIRP on the following grounds:

  • The appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the Proprietary Concern/respondent;
  • There was nothing on record to suggest that the respondent had taken over the Proprietary Concern; and
  • The appellant could not move an application under Sections 7 or 9 of the IBC since all purchase orders were issued on 24 June 2013 and advance cheques were issued subsequently. Hence, there was unjustified delay.

However, by an interim order, the Supreme Court had stayed the operation of NCLAT’s judgment.

Whether the appellant was an operational creditor

The NCLAT, sought to narrowly define operational debt and operational creditors under the IBC to only include those who supply goods or services to a corporate debtor and exclude those who receive goods or services from the corporate debtor. Rejecting the stand taken by NCLAT, the Bench observed the following:

Firstly, Section 5(21) defines ‘operational debt’ as a “claim in respect of the provision of goods or services”. The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver.

Secondly, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 and Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 make it abundantly clear that an operational creditor can issue a notice in relation to an operational debt either through a demand notice or an invoice. As such, the Bench opined,

“…the presence of an invoice (for having supplied goods or services) is not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt.”

Finally, in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, in comparing allottees in real estate projects to operational creditors, the Supreme Court had noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services.

Therefore, the Bench opined that the phrase “in respect of” in Section 5(21) has to be interpreted in a broad and purposive manner in order to include all those who provide or receive operational services from the corporate debtor, which ultimately lead to an operational debt. In the instant case, the appellant clearly sought an operational service from the Proprietary Concern when it contracted with them for the supply of light fittings. Further, when the contract was terminated but the Proprietary Concern nonetheless encashed the cheque for advance payment, it gave rise to an operational debt in favor of the appellant, which remained unpaid.

Whether the respondent took over the debt from Proprietary Concern

The MoA of the respondent unequivocally stated that one of its main objects was to take over the Proprietary Concern. However, the respondent had produced a resolution dated 01-09-2014 passed by its Board of Directors, purportedly resolving to not take over the Proprietary Concern. In this regard, the Bench observed,

“Admittedly, there was no reference to the resolution in the counter-statement dated 18 January 2018 and additional counter-statement dated 9 March 2018 filed by the respondent before the NCLT. However, in their appeal filed before the NCLAT, the respondent states that the resolution was, in fact, brought to the notice of the NCLT.”

Additionally, the NCLT made no mention of that resolution or the auditor’s certificate in its judgment. Therefore, the Bench opined that the conduct of the respondent in bringing up the resolution for the first time before the NCLAT would lead to an adverse inference against them for having suppressed the document earlier, if at all it was in existence.

Even otherwise, Section 13 of CA 2013 provides that where the object clause is amended in MoA, it requires the Registrar to register the Special Resolution filed by the company. However, the respondent had provided no proof that the purported resolution was a Special Resolution, it was filed before the Registrar and that the Registrar ultimately did register that. Thus, the purported amendment to the MOA would not have any legal effect. Consequently, the Bench held that the MOA of the respondent still stands and the presumption would continue to be in favour of the appellant.

Whether the application under Section 9 of IBC was barred by limitation

Rejecting the respondent’s submission that limitation commenced from 07-11-2013, when the cheque was issued by CMRL to the Proprietary Concern and that considering three years limitation period under Article 137 of the Limitation Act 1963, the period would expire on 07-11-2016, while the application under Section 9 was only filed on 01-11-2017, the Bench observed, in its application under Section 9, the appellant had mentioned 07-11-2013 as the date on which the debt became due.

However, in B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633, it was held that limitation does not commence when the debt becomes due but only when a default occurs. As noted, default is defined under Section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due. Hence, it was only on 27-02-2017 that the final letter was addressed by the appellant to the Proprietary Concern demanding the payment on or before 04-03-2017 and Proprietary Concern replied on 02-03-2017, finally refusing to make re-payment to the appellant. Consequently, the application under Section 9 would not be barred by limitation.

Conclusion

Hence, the appeal was allowed and the impugned judgment and order were set aside.  Since the CIRP in respect of the respondent was ongoing due to the Court’s order dated 18-11-2020, no further directions were issued.

[M/s Consolidated Construction Consortium Ltd. v. M/s Hitro Energy Solutions (P) Ltd., 2022 SCC OnLine SC 142, decided on 04-02-2022]

*Judgment by: Justice Dhananjaya Y Chandrachud

Appearance by:

For the Appellant: M P Parthiban, Advocate

For the Respondent: K Parameshwar, Advocate

Kamini Sharma, Editorial Assistant has put this report together

 

Case BriefsSupreme Court

Supreme Court: In a case were the Division Bench of Sanjay Kishan Kaul and M.M. Sundresh*, JJ., was sought to provide judicial interpretation of Section 29A(h) of the IBC, as amended by the Act, 2018, the Bench held that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The Bench remarked,

“…what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process subject to further compliance of invocation of the said personal guarantee by any other creditor.”

An application was filed by RBL Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate corporate insolvency resolution process (CIRP) against Respondent 1. Pursuant to which a resolution plan, after certain modifications was submitted by the respondent 3 on 22-11-2017. Meanwhile, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, Section 29A was introduced to the Code. It was specifically under 29A (h) that the CoC held a meeting to deliberate upon the impact of the amendment qua the eligibility of the Respondent 3 in submitting a resolution plan in the CIRP proceedings.

It was in the above backdrop that respondent 3 approached the NCLT praying for a declaration that he was not disqualified from submitting a resolution plan under sub-section (c) and (h) of Section 29A of the Code. NCLT, vide its order held that the Respondent 3 was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the Respondent 1 which were duly invoked by some of the creditors, on it. It was against the order; the Punjab National Bank approached the NCLAT. However, the Bank later sought to withdraw its appeal to change in circumstances, i.e.  the resolution plan gathered 78.50% vote share. The NCLAT allowed the withdrawal request without any liberty to challenge the same very impugned order.

Consequently, the NCLT approved the resolution plan submitted to it inter alia holding that there is a marked difference between extension and exclusion and therefore, the rigor of Section 12(1) of the Code would not get attracted on the facts of the case particularly when there were pending proceedings with interim orders, notably an interim order was issued by the NCLAT directing the adjudicating authority not to act on resolution plan until the final order of NCLAT. Further, the plan having received 75% vote share, having considered the techno-economic viability and feasibility of the plan, the application filed for approval of the resolution plan was allowed with a direction that the approved resolution plan shall come into force with immediate effect. The appeals against the said order of NCLT were dismissed on the ground that it cannot sit in appeal over the decision of the adjudicating authority or the CoC in the absence of any apparent discrimination.

Grounds for Challenge

Noticeably, the appellant had approached before NCLAT seeking to be impleaded as a party to the proceedings initiated by Punjab National Bank with an intention to continue the lis, however, the same was not favourably considered. The appellant even raised its objection to the withdrawal of appeal. The appellant had approached the Court with the following grievances:

  • The respondent 3, a promoter of the corporate debtor, was ineligible to submit a resolution plan under Section 29A(h) of the Code, as several personal guarantees executed by the Respondent 3 in favour of various creditors of the Respondent 1-corporate debtor stood invoked, prior commencement of CIRP.
  • The law which was prevailing on the date of the application has to be seen, therefore, the disqualification gets attracted on the date of filing of the application and on the same analogy not only Section 29A(h) but also Section 30(4) has to be interpreted.
  • The approval of the resolution plan was made after the mandatory period of 270 days, i.e. after the expiry of the CIRP period. Since there is clear infraction of Section 12, the 12 orders passed are liable to be interfered with.

Hence, the instant case was filed for seeking judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016, as amended by the Act, 2018.

Interpretation of Section 29A (h) of the Code

The idea of the Insolvency and Bankruptcy Code, 2016 being to facilitate a process of rehabilitation and revival of the corporate debtor with the active participation of the creditors, the Bench opined that there are two principal actors in the entire process, viz., (i) the committee of creditors and, (ii) the corporate debtor. Therefore, there can never be any other interest than that of the committee of creditors and the corporate debtor.

Observing that the objective behind Section 29A of the Code is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing their personal interests to step in, and to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification, the Bench relied on Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707, to hold that the CoC even with the requisite majority, while approving the Resolution Plan must consider the feasibility and viability of the Plan and the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53 of the IBC. And that the CoC cannot approve a Resolution Plan barred under Section 29A of the IBC.

Rejecting the contention of the respondents that Section 29A(h) had to be literally interpreted to the extent that a personal guarantor is barred from submitting a resolution plan only when the creditor invoking the jurisdiction of the adjudicating authority has invoked a personal guarantee executed in favour of said creditor by the resolution applicant and no personal guarantee stood invoked by RBL Bank at the time of application to the adjudicating authority under Section 7 of the Code, the Bench emphasised that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation.

Difference between Extension and Exclusion

On the question of limitation, the Bench affirmed the views of adjudicating authority as confirmed by the appellate tribunal, noticing that there were earlier rounds of litigation with the interim orders. Therefore, the Bench held that delay of 106 days had been rightly condoned and excluded by the adjudicating authority by invoking Section 12(3) of the Code.

Hence, the Bench opined, the adjudicating authority was right in holding that there is a marked difference between extension and exclusion. Exclusion would come into play when the decision is challenged before a higher forum. Extension is one which is to be exercised by the authority constituted.

Factual Analysis

Admittedly, the Respondent 3 had executed personal guarantees which were invoked by three of the financial creditors even prior to the application filed. Therefore, the Bench held that rigor of Section 29A(h) of the Code obviously got attracted and the plan submitted by the Respondent 3 ought not to have been entertained. Accordingly, the Bench concluded, the adjudicating authority and the appellate tribunal were not right in rejecting the contentions of the appellant on the ground that the earlier appeals having been withdrawn without liberty, the issue qua eligibility cannot be raised for the second time, particularly when the appellant was not a party to the decision of the adjudicating authority on the first occasion.

Though the resolution plan submitted by the Respondent 3 was held ineligible and not maintainable, the Bench opined that much water had flown under the bridge as the requisite percentage of voting share had been achieve, majority of the creditors had given their approval to the resolution plan and the plan was also put into operation since 18-04-2018. The Bench remarked,

“We need to take note of the interest of over 23,000 shareholders and thousands of employees of the Respondent 1. Now, about Rs. 300 crores has also been approved by the shareholders to be raised by the Respondent 1. It is stated that about Rs. 63 crores has been infused into the Respondent No.1 to make it functional. There are many on-going projects of public importance undertaken by the Respondent No.1 in the nature of construction activities which are at different stages.”

Conclusion

Hence, considering the ultimate object of the Code, i.e. to put the corporate debtor back on the rails, and noticing that no prejudice would be caused to the dissenting creditors as their interests would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits, the Bench refused to disturb the resolution plan leading to the on-going operation of the Respondent 1. The appeal was dismissed.

[Bank of Baroda v. Mbl Infrastructures Ltd., 2022 SCC OnLine SC 48, decided on 18-01-2022]

*Judgment by: Justice M.M. Sundresh

Appearance by:

For the Appellant: Tushar Mehta, Solicitor General and Bishwajit Dubey, Advocate

For Respondent 1: Ranjit Kumar, Senior Advocate

For Respondent 3: Parag P. Tripathi, Senior Advocate

Kamini Sharma, Editorial Assistant has put this report together 

 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Ashok Bhushan (Chairperson) and Dr. Alok Srivastava (Technical Member) allowed distribution of INR 223 crore from the cash balance available with EPC Construction among its creditors and lenders.

The instant appeal was filed by IDBI Bank in its capacity as a financial creditor and lead lender of EPC Construction India-Corporate debtor as well as a representative of all other lenders of the Corporate Debtor against the order of the NCLT whereby the application urging to direct the Respondent-Liquidator to permit the Financial Creditors of the Corporate Debtor to distribute an amount of INR 223 crore from the cash balance available with the Corporate Debtor in the proportion of their respective voting share in the erstwhile CoC had been dismissed.

The appellant submitted that the said application had been wrongly rejected by the Adjudicating Authority (NCLT) on the ground distribution of the cash would derogate the value of the Company, which observations were not in accordance with law.

Initially, an application was filed by the appellant-creditor before the Adjudicating Authority seeking a direction against the Respondent-Liquidator to distribute the available cash balance of the Corporate Debtor, amongst the stakeholders of the Corporate Debtor in favour of whom the same were charged, including the appellants herein, as per the waterfall mechanism set out in Section 53 of the Insolvency and Bankruptcy Code, 2016, and amongst the workmen of the Corporate Debtor as required under Section 53 (1) (b) (i) of the Code after accounting for the costs/reserving the estimated costs under Section 53(1) (a) towards Insolvency Resolution Process costs and the liquidation costs.

Noticeably, the liquidator did not raise any objection to distribution of surplus cash balance of the Corporate Debtor up to an extent of INR 220 Crores amongst the stakeholders in accordance with the order of priority and in the manner specified under Section 53 of the IBC, however, a condition was made to the extent that if there is any shortfall in meeting the requirements involved in the liquidation process, then the said amount shall be replenished by the financial creditors within a period of fifteen (15) days, from the date of demand. The said condition had been agreed by the appellants. The rationale behind the liquidator’s claim was following:

  1. “As per records, Corporate Debtor has a balance of approximately INR 300 (three hundred) crores in its bank accounts–which includes funds received from invocation of performance bank guarantee of INR 42 (forty-two) crores. In addition, there is additional margin money of approx. INR 13 (thirteen) crores also available. The Corporate Debtor further also generates approximately INR 6-7 crores in cash every month.
  2. Most of the business of the Corporate Debtor is non-functional. Only the equipment leasing division of the Corporate Debtor is operational. All the other division of the Corporate Debtor are being utilized for recovery of dues. The Corporate Debtor at present has a total 109 employees along with 14 employees serving notice period and superannuation. The Respondent estimates that, the process of liquidation, in all likelihood, subject to other external factors should be completed within a year. Therefore, as per the estimate of the liquidator, the cost of the liquidation process may not exceed INR 80 crores approximately – which has been computed by factoring in the receipts during liquidation period minus expenses incurred during the said period and CIRP costs.”

The liquidator contended that even after distribution of INR 223 crores, as sought in the appeal, the Corporate Debtor would have sufficient liquidity of approximately INR 80 (eighty) crores to enable him to run the liquidation process smoothly in accordance with law.

In the light of above submissions, the NCLAT reversed the decision of the Adjudicating Authority and directed for distribution of INR 223 crores as submitted by the Liquidator subject to undertaking by the members of the CoC to return the amount in the event they are paid any amount in excess to their entitlement as per waterfall mechanism under Section 53 of the Code. The impugned order was set aside.[IDBI Bank Ltd. v. Liquidator, EPC Constructions (India) Ltd., 2022 SCC OnLine NCLAT 43, decided on 27-01-2022]

Kamini Sharma, Editorial Assistant has reported this brief.

Appearance by:

For Appellant: Tushar Mehta, Sr. Advocate with Akshay Sapre, Advocate

For Respondent: Pulkit Sharma, Swarnendu Chatterjee and Shriraj H. Khambete, Advocates

Case BriefsSupreme Court

Supreme Court: In a case relating to Corporate Insolvency, the Division Bench comprising of Indira Banerjee* and J.K. Maheshwari, JJ., quashed the order of NCLAT rejecting the application under S. 60(5) of IBC. The Bench held that the NCLAT and NCLT had failed to consider the law laid down by the Court with regard to extension of limitation period due to Covid-19 pandemic.

The appeal was filed under Section 62 of the Insolvency and Bankruptcy Code 2016 (IBC) against a judgment and order of NCLAT, whereby it had dismissed the application assailing order of NCLT under Section 61 of the IBC, mainly on the ground that the Resolution Process had already been approved by the Committee of Creditors.

The Appellant, an entity indulged in business of Supply and Erection of Piping Systems had entered into a contract with the Rohit Ferro Tech Ltd.-Corporate Debtor, who contacted the Appellant and placed a Purchase Order for design, supply, erection and testing of LP piping system and the commissioning of an LDO (Light Diesel Oil) storage handling system for its IX 67.5 MW Power Plant (Unit-II) for a consideration of Rs.5,37,75,761 excluding taxes and duties. Subsequently, the Corporate Debtor amended the said purchase order to include additional work of the value of Rs.88,64,239 excluding taxes and duties.

Arbitral Award

Some dispute arose between the parties due to failure and negligence of the Corporate Debtor to pay a sum of Rs.76,85,472 in connection with the said purchase order, pursuant to which the appellant invoked the Arbitration Clause and an Arbitrator was appointed by the High Court of Calcutta. The Arbitrator decided the case in favour of the appellant declaring that the claimant-appellant shall be awarded a sum of Rs.55,01,661 along with interest at the rate of two percent higher than the current rate of interest prevalent on the date of the award on and from 08-08-2014 till the date of payment. Further, the costs at Rs. 5,00,000 was also awarded to the claimant-appellant.

Initiation of CIRP

However, the said award was challenged before the Trial Court by the appellant under Section 34 of the Act, 1996. Meanwhile, the respondent 2, namely State Bank of India being a Financial Creditor of the Corporate Debtor, filed an application before the NCLT under Section 7 of the IBC, for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, and one Supriyo Chaudhuri was appointed as Resolution Professional.

Covid-19 and Countrywide Lockdown

The grievance of the appellant was that due to the COVID-19 pandemic and subsequent imposition of countrywide lockdown, it was not aware of the initiation of CIRP against the Corporate Debtor till 27-11-2020 whereafter it came to know the Corporate Debtor had not been taking steps in the Arbitration Proceedings in view of Insolvency process initiated against it.

IBC and Period of Limitation

The appellant’s claim of Rs.1,13,38,651, filed under Regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency Process for Corporate Persons) Regulations 2016 against the Corporate Debtor was rejected by the Resolution Professional on the ground that it had been filed beyond time. It was this order of the Resolution Professional which was being assailed before NCLT and NCLAT and which was being impugned in the instant appeal.

The Bench observed that the NCLT had failed to consider the order of the Supreme Court in Cognizance For Extension of Limitation: In Re, (2021) 5 SCC 452, wherein, taking cognizance of the situation arising out of the challenge faced by the country on account of Covid-19 Virus and resultant difficulties that may be faced by litigants across the country the Supreme Court had ordered that for the purpose of counting period of limitation in all proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not the period from 15-03-2020 till 14-03-2021 shall stand excluded. The Court had further declared that in cases where the limitation would have expired during the period between 15-03-2020 till 14-03-2021, notwithstanding the actual balance period of limitation remaining, all persons shall have a limitation period of 90 days from 15-03-2021.

Therefore, noticing that the NCLAT had also failed to consider the order of the Court extending period of limitation, the Bench held that since the appellant was required to file its claim within 3 months from 11-02-2020, and the appellant actually filed claim well before 14-01-2021, the claim ought not to have been rejected in the light of the above mentioned order.

Conclusion

In the backdrop of above, the Bench held that the NCLAT erred in dismissing the appeal without even considering the effect and impact of the orders of the Court in Cognizance For Extension of Limitation: In Re. Accordingly, the appeal was allowed and the impugned judgment and orders of NCLAT and NCLT were set aside. The application of the appellant under Section 60(5) of the IBC was allowed.

[GPR Power Solutions (P) Ltd. v. Supriyo Chaudhuri, 2021 SCC OnLine SC 1328, decided on 29-11-2021]

*Judgment by: Justice Indira Banerjee

Appearance by:

For Appellant(s): Sumit Kumar, AOR, Rajesh Pathak, Kumari Supriya, Abhishek Chakraborty, Hemant Kumar and Harshita Sinha, Advocates

For Respondent(s): Indranil Ghosh, Orijit Chatterjee, Swati Dalmial, Palzer Moktan, Ojasa Arya,  Akash Yadav, Advocates

Satya Mitra, AOR, Swarnendu Chatterjee, AOR and Naman Kamdar, Advocate

Report by: Kamini Sharma, Editorial Assistant

 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): Coram of Justice Ashok Bhushan (Chairperson) and Justice Jarat Kumar Jain, Judicial Member and Dr Alok Srivastava, Technical Member heard appeals filed against the decision passed by National Company Law Tribunal, Mumbai.

A petition was filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 through the Resolution Professional against the three appellants. Adjudicating Authority passed an order on the application filed through the Resolution Professional directing the Resolution Professional to exercise the powers enumerated under Section 99 of the I&B Code and submit the recommendations with reasons in writing for acceptance or rejection of application within the stipulated time as envisaged under Section 99.

Aggrieved by the above order, appeals were filed.

Analysis, Law and Decision

Section 97 of the I&B Code which deals with ‘appointment of resolution professional’ with reference to Insolvency Resolution Process under Chapter III, following is a statutory scheme as delineated by Section 97(1) and (2).

Appellate Tribunal expressed that there cannot be any dispute with the statutory scheme as contained in Section 97 that when application is filed by the Resolution Professional under Section 95, the Adjudicating Authority shall direct the Board within seven days of the date of the application to confirm that disciplinary proceedings pending against the Resolution Professional or not and the Board was required within seven days to communicate in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional.

Coram stated that in the present matter, appellant’s case was not that any disciplinary proceedings were pending against the Resolution Professional who had filed the application, Appellate Tribunal saw no useful purpose in again directing the Adjudicating Authority to send the recommendation to the Board for confirmation.

The order having been passed more than three months’ prior to the passing of the order, hence Appellate Tribunal opined that due to the said reason the order of the Adjudicating Authority does not need to be interfered with.

Coming to another submission that Adjudicating Authority was not required at the stage when report was still to be filed by the Resolution Professional to record a finding regarding default, Appellate Tribunal was of the view that the said submission was fully supported by the decision Ravi Ajit Kulkarni

In the impugned judgment, the Adjudicating Authority had made observations to the following effect at page 33:-

“Based on the submissions made by the Applicant and the documents produced and placed on record before this Bench, the Bench has no doubt in its mind that there is a ‘default’ on the part of the Personal Guarantor by not fulfilling the debt owed to the Corporate Debtor, i.e., Anoushka Medicare & Diagnostics Private Limited as per the Deed of Personal Guarantee entered between the parties through the Deed of Personal Guarantee dated 01.08.2017.”

Appellate Tribunal found substance in the appellant counsel’s submission that the observation regarding default deserved to be deleted from the Judgment and was ordered to be deleted.

Counsel for the Respondent submitted that in the last paragraph, the Adjudicating Authority gave full liberty to the Resolution Professional to make a recommendation with reasons in writing for acceptance or rejection of the Application. The above directions do clearly mention that report has to be submitted as per Section 99, but to avoid any prejudice to any of the parties, Coram opined that the observations as quoted above are required to be deleted from the judgment.

Appeals were partly allowed. [Kanchan Nanubhai Desai Personal Guarantor v. Finquest Financial Solutions (P) Ltd., 2022 SCC OnLine NCLAT 8, decided on 3-1-2022]

Case BriefsSupreme Court

Supreme Court: The Division Bench comprising of Dr Dhananjaya Y Chandrachud* and A S Bopanna, JJ., held that the powers of NCLT under S. 7(5) of IBC are limited to verifying existence of default and then accordingly, either admit or reject an application. Holding that the Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute, the Bench remarked,

“While the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.”

The question before the Bench for adjudication was whether, in terms of the provisions of the IBC, the Adjudicating Authority (NCLT) can without applying its mind to the merits of the petition under Section 7, simply dismiss the petition on the basis that the corporate debtor has initiated the process of settlement with the financial creditors?

The grievance of the appellants was that on a petition instituted under Section 7 of the IBC for initiating the Corporate Insolvency Resolution Process (CIRP) in respect of the respondent, the NCLT declined to admit the petition and instead directed the respondent to settle the claims within three months which was further affirmed by the NCLAT.

Noticeably, a Master Agreement to sell was entered into between the respondent, IDBI Trusteeship Ltd. and Karvy Realty (India) Ltd. in order to raise an amount of Rs 50 crores for the development of 100 acres of agricultural land. Since the requisite funds could not be generated through the Master Agreement, a Syndicate Loan Agreement was entered into between the respondent, IDBI Trusteeship Ltd. and the Facility Agent for availing a term loan of Rs 18 crores from prospective lenders. It was in that background that the petitioners-appellants had instituted a petition under Section 7 of the IBC before the NCLT due to the respondent’s default in making the re-payment of an amount of Rs 33,84,32,493.

Decisions of NCLT

The Adjudicating Authority listed the petition for admission on diverse dates and had adjourned it, inter alia, to allow the parties to explore the possibility of a settlement yet no settlement was arrived at by all the original petitioners who had instituted the proceedings. Though, the Adjudicating Authority noticed that joint consent terms had been filed before it but it was common ground that those consent terms did not cover all the original petitioners who were before the Adjudicating Authority. Eventually, the Adjudicating Authority did not entertain the petition due to following factors:

  • Respondent’s efforts to settle the dispute were bona fide, as evinced by the fact that they had already settled with 140 investors, including 13 petitioners before it;
  • The settlement process was underway with 40 other petitioners;
  • The procedure under the IBC was summary in nature, and could not be used to individually manage the case of each of the 83 petitioners before it; and
  • Initiation of CIRP in respect of the respondent would put in jeopardy the interests of home buyers and creditors, who have invested in the respondent’s project, which was in advanced stages of completion.

IBC Mandate

On a bare reading of the provision, Section 7 (5) Clauses (a) and (b) use the expression “it may, by order” while referring to the power of the Adjudicating Authority. Section 7(5)(a) states that the Adjudicating Authority may, by order, admit the application while Section 7(5)(b) states that it may, by order, reject such an application.

Thus, two courses of action are available to the Adjudicating Authority in a petition under Section 7. The Adjudicating Authority must either admit the application under Clause (a) of sub-Section (5) or it must reject the application under Clause (b) of sub-Section (5). The statute does not provide for the Adjudicating Authority to undertake any other action, but for the two choices available.

Factual Analysis

Observing that no settlement had been arrived at by the respondent with all the appellants and impleadment applications had also been filed on behalf of an additional set of individuals claiming non-payment of their dues by the respondent, the Bench held that the order of the Adjudicating Authority, and the directions which eventually came to be issued, suffered from an abdication of jurisdiction.

The Appellate Authority was cognizant of the fact that even the time schedule for settlement which had been indicated by the Adjudicating Authority had elapsed, but then noted the impact of the outbreak of COVID-19 pandemic on the real estate market, including on the respondent. Therefore, the Adjudicating Authority failed to exercise the jurisdiction which was entrusted to it. Furthering, holding that the Adjudicating Authority’s observation that the appeal was not maintainable was erroneous, the Bench remarked,

“While acknowledging that the consent terms were “filed by some of the stake holders though may not be all encompassing”, the Appellate Authority nonetheless proceeded to dismiss the appeal as not maintainable.”

Findings of the Court

IBC is a complete code in itself and the Adjudicating Authority and the Appellate Authority are creatures of the statute and their jurisdiction is statutorily conferred, the Bench stated that the statute which confers jurisdiction also structures, channelises and circumscribes the ambit of such jurisdiction. Thus, while the Adjudicating Authority and Appellate Authority can encourage settlements, they cannot direct them by acting as courts of equity.

Referring to the IBC mandate, the Bench opined that the Adjudicating Authority had clearly acted outside the terms of its jurisdiction as it is empowered only to verify whether a default has occurred or if a default has not occurred and accordingly, it must then either admit or reject an application.

“There are the only two courses of action which are open to the Adjudicating Authority in accordance with Section 7(5), therefore, the Adjudicating Authority cannot compel a party to the proceedings before it to settle a dispute.”

Further, opining that undoubtedly, settlements have to be encouraged because the ultimate purpose of the IBC is to facilitate the continuance and rehabilitation of a corporate debtor, as distinct from allowing it to go into liquidation, the Bench stated, what the Adjudicating Authority and Appellate Authority, however, had proceeded to do was to abdicate their jurisdiction to decide a petition under Section 7 by directing the respondent to settle the remaining claims within three months and leaving it open to the original petitioners, who were aggrieved by the settlement process, to move fresh proceedings in accordance with law.

Conclusion

Consequently, the appeal was allowed and the impugned judgments of NCLT and NCLT were set aside. The petition was restored to the NCLT for disposal afresh. [E S Krishnamurthy v. Bharath Hi Tech Builders Pvt. Ltd, 2021 SCC OnLine SC 1242, decided on 14-12-2021]

Kamini Sharma, Editorial Assistant has put this report together

Appearance by:

For the Appellants: Srijan Sinha, Advovate

For the Respondent: Aakanksha Nehra, Advocate

*Judgment by: Justice Dhananjaya Y Chandrachud