IBC - The Journey So Far – Part II

The factors which could be said to be key for rapid and successful stabilization of the legal positions, have been timely initiatives by the Government by introducing timely amendment in the Code wherever needed and some landmark judgments by the Supreme Court which helped in accelerating the process and cutting short the time. In a short span of four years there were as many as four major amendments in the Code.

The first major amendment was introduced on 23rd November 2017 which, beside introducing other small amendments which were of clarificatory nature, inserted section 29A in the Code which led to exclusion of promoters and their related parties from CIRP. This provision eventually led to exclusion of promoter and its group entities in the Essar case. The said provisions are also applicable at the stage of liquidation.

The second major amendment came by way of Ordinance of 6th June, 2018, which defined the term 'related party', 'relative' in the context of provisions of section 29A. It also introduced section 12A enabling withdrawal of application and paved way for settlement between parties at any stage before approval of resolution plan.

Section 14 was also amended to clarify the position that moratorium under section 14 of the Code will not include action against guarantors, thereby clearing deck for action against guarantors even while borrower is undergoing CIRP. It strengthened the position of the lenders. It also reduced the voting requirement for approval of resolution plan from original percentage of 75% to 66%.

This ordinance also brought in some important changes to clarify position of creditors who become shareholders of the Corporate Debtor under a restructuring plan and excluded them from the definition of related party for the purpose of section 29A. This amendment also excluded Resolution Applicants under IBC from the exclusion under section 29A, where account of corporate debtor acquired by it continued to remain NPA or where avoidable transaction[i] were reported before approval of resolution plan. This amendment also introduced requirement of an affidavit by a resolution applicant to the effect that it is eligible to submit the plan as per the provisions of section 29A.

The amendment also resolved another major issue related to compliances with the provisions of the Companies Act, 2013 as regards various resolutions/ approval required on account of change in management and shareholding of corporate debtor by inserting an Explanation in section 30 of the Code to the effect[ii]. Another important amendment related to application of Limitation Act to IBC. This was done by insertion of a new section 238A[iii]. Section 240A[iv] which excluded MSMEs from application of clauses (c) and (h) of section 29A.

The third amendment was introduced vide notification and amendment dated 6th August, 2019 which, inter alia, prescribed and inserted provisions relating to widening of scope of resolution plan to include merger, amalgamation and demerger (section 5(26) on definition of resolution plan).

The requirement under section 7 of the Code, by which NCLT had to record reasons if an application was not admitted within the period of 14 days was also introduced. It, as also discussed earlier, prescribed maximum time allowed for CIRP and limited it to 330 days including time spent in litigation.

From the lenders perspective it laid down requirement of minimum payment of their share of liquidation value to financial creditor who do not vote in favour of the resolution plan. Another critical amendment was the recognition of inter-se priority of charge among the lenders, which was an issue of intense debate till then. It inserted a new clause (4) in section 30 of the Code by laying down that The committee of creditors may approve a resolution plan by a vote of not less than [sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, 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, including the priority and value of the security interest of a secured creditor.

Section 31 of the Code was also amended to clarify the legal position that on approval, a resolution shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government, or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. This was in view of the experience that a few statutory bodies and tax authorities were initiating action against CD even after approval of plan which extinguished such liabilities of CDs.

During 2020, the Code was amended twice by way of Amendment Act of March 2020 and then by way of Ordinance dated June 5, 2020; which was later replaced by Amendment Act of 2020 w.e.f. September 23, 2020. In between there was the notification of March 18, 2020, which extended provisions of the Code to the reconstituted State of Jammu and Kashmir.

March 2020 amendments mainly related to prescribing new requirements for filing of applications by home buyers and such other entities. From the resolution point of view, it introduced two critical provisions in section 14 of the Code, by clarifying that that a license, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period.

It also empowered a resolution profession of CD to considers and decided which of the services were critical for survival of CD and which would come under moratorium of section 14 of the Code.

It also introduced another critical and much needed provision in the form of a new section 32A in the Code, which facilitated a 'clean slate transfer' of corporate debtor to new resolution applicant after approval of resolution plan. It provided immunity to the Corporate Debtor and it new management from any liability or prosecution for offence committed prior to the commencement of CIRP. Such provisions are also available for sale of assets at liquidation stage.

The Ordinance of June 5, 2020, introduced a new section 10A to deal with the default caused on account of Covid-19 situation, by laying down that no application under section 7, 9 and 10 of the Code shall be filed for any default arising on or after 25th March 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. It is noteworthy that such default is perpetually out of IBC ambit as no application can ever be filed for such default. The amendment has also excluded such COVID-19 period from filing any application on the ground of fraudulent transactions thereby providing leverage to the management to overcome difficulties faced on account of COVID-19 situation. By way of notification dated 22nd December 2020 provisions of section 10A have been extended for further period of three months from the 25th December, 2020.

JUIRISPRUDENCIAL HISTROY:

If we look at the jurisprudential history of IBC regime, Supreme Court has passed some landmark judgments which have helped further evolution and strengthening of IBC regime. The jurisprudence under IBC started with the case of Innoventive Industries Ltd v. ICICI Bank and Anr, where the Supreme Court upheld overriding effect of provisions of IBC over other enactments. While IBC did not lay down requirement of hearing a corporate debtor before admission of the application under IBC, but such requirement was built in by way of judgement of the Hon'ble Supreme Court which laid down 'where the statute is silent on the right of hearing, and it does not in express terms, oust the principles of natural justice, the same can and should be read into it'.

As regards constitutional validity of the Code, the Supreme Court in the case of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors, upheld the constitutional validity of the Code in its entirety.

In Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, the Court dealt with the issue of person acting jointly or in concert with other persons and referred to this as a 'see-through provision' where each case would have to be examined on merits to determine whether, in the facts of a particular case, the disqualification would be applicable and whether certain persons were acting together or whether such persons shared an objective or purpose.

Constitutional validity of section 12A was upheld in the matter of Swiss Ribbons and prior to this the view was that once the CIRP is initiated by admitting the application, it cannot be withdrawn nor can it be set aside 'except for illegality to be shown or if it is without jurisdiction or for some other valid reason'.

As regards the timeline, the Supreme Court in the case of Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta case, has laid emphasis on the need for adherence to strict timelines. However, it allowed exclusion of time taken in legal proceedings from the maximum period of 330 prescribed under the Code.

In the case of K Sashidhar v. Indian Overseas Bank[v] the Supreme Court again settled another important issue dealing with power of CoC and re-established the scheme of the Code by laying down that the role of Adjudicating Authority is limited to being satisfied that the plan, as approved by the CoC, meets with the requirements of section 30(2). Nothing beyond. AA has no jurisdiction or authority to analyse or evaluate the commercial wisdom of the CoC.

State Bank Of India Vs V. Ramakrishnan & Anr[vi] the Apex court clarified that the moratorium under section 14 the Code will not apply to a personal guarantor to a corporate debtor. The case of B.K. Educational Services Private Limited Vs Parag Gupta And Associates[vii] clarified that application under IBC has to be initiated within the limitation period as prescribed under Article 137 of the Limitation Act. Supreme Court in its judgment in the case of Mobilox Innovations Private Limited vs. Kirusa Software Private Limited[viii] has categorically laid down that IBC is not intended to be substitute to a recovery forum. NCLT can also reject the application if the notice of dispute has been received by the operational creditor or there is a record of dispute in the information and this view was reiterated in the case of Transmission Corporation Vs Equipment Conductors[ix].

In a recent judgement[x] by the Supreme Court, to much relief of former directors of companies undergoing CIRP, it has clarified that proceeding under Section 138/141 of the Negotiable Instruments Act cannot be initiated or continued during the moratorium.

NCLAT in the case of Gulabchand Jain Vs. Mr. Ramchandra D. Choudhary clarified that CoC is empowered to take a decision to liquidate a CD even after an application has been filed by the Resolution Professional placing the Resolution Plan approved by the COC before the Adjudicating Authority for approval. NCLAT in the case of Bharat Aluminium Co. Ltd Vs. M/S J.P. Engineers Pvt Ltd, clarified that the bank guarantee is not an asset of Corporate Debtor and Bank guarantee can be invoked even during moratorium under section 14 of the IBC in view of the amended provision under Section 14(3)(b) of the IBC.

However, despite introduction of section 32A, the issue of immunity of CD remain to the decided by the Supreme Court. While NCLAT, in the case of in JSW Steel Limited v. Mahender K. Khandelwal and others, has held that the PMLA proceedings ought to be quashed against CD under the new management, however, an appeal against the judgment of the NCLAT is pending before the Supreme Court. In a separate case, Delhi High in the case of in Tata Steel BSL Limited and another v. Union of India , discharged the accused in proceedings filed against them before the trial court for alleged offences under the Companies Act, 2013, Companies Act, 1956 and the Indian Penal Code, 1860 consequent to approval of Tata Steel Limited's resolution plan for revival of the Bhushan Steel Limited under the IBC process. More recently, in Manish Kumar v. Union of India the Supreme Court dismissed a writ petition challenging the constitutional validity of Section 32A of the IBC while observing that the legislature ought be given freedom to experiment with economic laws and recognizing the imperative need for the IBC in the Indian context. The Court also held that the "extinguishment of criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past and start on a clean slate".

As regards the timeline, we notice a perceptible change at NCLAT level as number of judgements have come from the appellate authority laying down that Adjudicating Authority is statutorily bound to pass an order of admission or rejection on being satisfied in respect of debt, default and completeness of the application within 14 days from the date of filing of such application – Aditya Birla Finance Ltd. Vs. Sintex Prefab and Infra Ltd. However, at ground level a lot is desired to be done as admission of application (which is supposed to be done within 14 days time) is taking on an average more than 200 days.

As regards the issue of admissibility of application under section 7 of the Code based on acknowledgement of debt, the position largely remained inconclusive on account of divergent view taken by different Benches of NCLAT, however, the things appears to be clearing with the judgement of NCLAT in the case of M M Ramachandran Vs. South Indian Bank Ltd. & Ors. Decided on 22.01.2020, where NCLAT allowed admission of section 7 application of the Bank and extension of time of limitation on the basis of email under which the borrower had acknowledge its liability. Appeal filed against this judgement before the Supreme Court was also dismissed so by way of doctrine of merger NCLAT judgement got merged with the order of the Supreme Court. The Supreme Court in its judgement dated 26^th March 2021, in the case of Laxmi Pat Surana Vs Union of India[xi] has set the issue to rest.

In a complex business mechanism where entity might have assets and business operation spread across many countries and jurisdiction, no single court can resolve the issue unless there is co-ordination and co-operation amongst the courts in different jurisdiction which could facilitate smooth conduct of process and its seamless implementation.

Overall, while there remain certain areas of concern, but as discussed earlier, the new regime has tried to address the real issues impacting resolution and default. It has successfully sent a message that one cannot survive if issue of financial constraints are not address within time. There is clear message to debtors and to creditors (as they suffered substantial haircuts under resolution plans) that there has to be serious efforts before planning a project and finance for it. Learning out of almost five years of experience under IBC will lead to strengthening of financial system in the Country in a long run.

Views are personal.

Read Part I here.