40 Important Judgments On Insolvency And Bankruptcy Code, 2016 [Part-1]
Tariq Khan & Byron Sequeira
29 April 2019 12:04 PM GMT
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To borrow the golden words of Justice Rohinton F. Nariman in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union Of India WP(Civil) No. 99 of 2018 whereby upholding the Constitutional validity of the Insolvency and Bankruptcy Code, 2016 ("IBC") it was held as under: "85. The Insolvency Code is legislation which deals with economic matters and, in the larger sense, deals with the economy of...
To borrow the golden words of Justice Rohinton F. Nariman in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union Of India WP(Civil) No. 99 of 2018 whereby upholding the Constitutional validity of the Insolvency and Bankruptcy Code, 2016 ("IBC") it was held as under:
"85. The Insolvency Code is legislation which deals with economic matters and, in the larger sense, deals with the economy of the country as a whole. Earlier experiments, as we have seen, in terms of legislations having failed, 'trial' having led to repeated 'errors', ultimately led to the enactment of the Code. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation. We have also seen that the working of the Code is being monitored by the Central Government by Expert Committees that have been set up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.
86 …. These figures show that the experiment conducted in enacting the Code is proving to be largely successful. Defaulter's paradise is lost. In its place, the economy's rightful position has been regained."
The IBC has turned out to be a big success which is clear from the observation of the Hon'ble Supreme Court in Swiss Ribbons case where the court was dealing with questions relating to the constitutional validity of the Code and observed that in the working of the Code, the flow of the financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid.
Following are the notable decisions delivered by the Indian Courts on IBC:
WHETHER THE IBC CAN BE INVOKED IN RESPECT OF AN OPERATIONAL DEBT WHERE AN ARBITRAL AWARD HAS BEEN PASSED AGAINST THE OPERATIONAL DEBTOR, WHICH HAS NOT YET BEEN FINALLY ADJUDICATED UPON?
The court held that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place. However, court clarified that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation.
WHETHER FLAT BUYERS CAN INITIATE INSOLVENCY PROCEEDINGS AGAINST BUILDERS UNDER THE IBC?
[Nikhi l Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Ltd. (NCLT Delhi), C.P NO. (ISB)-03(PB)/2017, decided on 23.01.2017]
In this case the NCLAT has ruled that a purchaser of real estate, under an 'Assured-return' plan, would be considered as a 'Financial Creditor' for the purposes of IBC and is, therefore, entitled to initiate corporate insolvency process against the builder, in case of non-payment of such 'Assured/Committed return' and non-delivery of unit. NCLAT further went on to rule that the 'debt' in this case was disbursed against the consideration for the 'time value of money' which is the primary ingredient that is required to be satisfied in order for an arrangement to qualify as 'Financial Debt' and for the lender to qualify as a 'Financial Creditor', under the scheme of IBC.
WHETHER ARBITRATION AWARD DIRECTING TRANSMISSION OF SHARES CAN BE ENFORCED THROUGH NCLT?
[Cheran Properties Ltd. vs Kasturi and Sons Ltd. & Ors. Civil Appeal 10025/2017 decided on 24.04.2018]
The court held that since the award postulates a transmission of share to the Claimant, the directions contained in the award can be enforced only by moving the tribunal for rectification in the manner contemplated by law.
WHETHER ERSTWHILE DIRECTORS OF A COMPANY CAN MAINTAIN AN APPEAL ON BEHALF OF THE COMPANY AFTER AN INSOLVENCY PROFESSIONAL HAS BEEN APPOINTED TO MANAGE THE COMPANY?
The Supreme Court held that once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company and since in the present case, Innoventive was the sole applicant – the appeal was not maintainable. Interestingly, the Supreme Court refused to dismiss the appeal on this score alone, noting that it is delivering a detailed judgment so that all courts and tribunals may take notice of the paradigm shift in the law.
THE DIFFERENCE BETWEEN SECTION 7 AND SECTION 9 OF THE CODE:
Supreme Court held that for triggering Section 7 (1) of the IBC, a default could be in respect of default of financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor.
The Supreme Court contrasted the IBC provisions relating to applications by financial and operational creditors. It held that under Section 8(1), an operational creditor is required to deliver a demand notice on the occurrence of a default and under Section 8(2), the corporate debtor can bring to the notice of the creditor, existence of a dispute or the record of pendency of a suit or arbitration proceedings, which is pre-existing. Existence of such a dispute will make the application of operational creditor inadmissible.
On the other hand, under Section 7, the moment NCLT is satisfied that a default has occurred, the application of the financial creditor must be admitted (unless it is incomplete). The corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. Supreme Court held that it is of no matter that the debt is disputed so long as the debt is "due" i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date.
WHETHER THE LIMITATION ACT, 1963 WILL APPLY TO APPLICATIONS THAT ARE MADE UNDER SECTION 7 OR SECTION 9 OF THE IBC FROM ITS COMMENCEMENT?
The Supreme Court held that the Limitation Act is applicable to applications filed under Sections 7 and 9 of the IBC from the inception of the Code.
WHETHER SECTION 14 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016, WHICH PROVIDES FOR A MORATORIUM FOR THE LIMITED PERIOD MENTIONED IN THE CODE, ON ADMISSION OF AN INSOLVENCY PETITION, WOULD APPLY TO A PERSONAL GUARANTOR OF A CORPORATE DEBTOR?
[State Bank of India vs V. Ramakrishnan Civil Appeal No. 3595 of 2018 decided on 14.08.2018]
The Supreme Court observed that protection of moratorium under Section 14 is applicable only to corporate debtor and not personal guarantor. The Court observed that Section 60(1) of the Code, which provided that the adjudicating authority in relation to the insolvency resolution and liquidation of both corporate debtors and personal guarantors shall be the NCLT.
WHETHER ARBITRATION PROCEEDINGS CAN BE INITIATED AFTER MOROTORIUM HAS BEEN IMPOSED?
The Supreme Court held that an arbitration proceeding cannot be started after imposition of moratorium. Further, it was held that the effect of Section 14(1)(a) of the IBC is that the arbitration that has been instituted after the aforesaid moratorium is non est in law.
WHETHER REGULATION 30 A OF THE CIRP REGULATIONS IS DIRECTORY OR MANDATORY?
In this case an application was filed by the Resolution Professional of the corporate debtor before NCLT for withdrawal of CIRP on the ground that all claims of operation and financial creditors of the corporate debtor are settled. However, the application for withdrawal was filed under Section 60 (5) of the IBC instead of Section 12A because the settlement happened after the issue of invitation for expression of interest under regulation 36A of CIRP Regulations. NCLT Chennai dismissed the application on the ground that since regulation 30A imposes condition for withdrawal application that it has to be filed before invitation for expression of interest; NCLT cannot pass an order allowing the withdrawal ignoring the conditional clause.
The Supreme Court set aside the order of NCLT and held that regulation 30A has to be read along with the main provision section 12A, which contains no such condition. Hence, the condition under regulation 30A can only be considered as directory in nature depending on the facts of each case.
WHETHER THE TIME LIMIT PRESCRIBED IN THE INSOLVENCY AND BANKRUPTCY CODE, 2016 FOR ADMITTING OR REJECTING A PETITION OR INITIATING A PETITION IS A MANDATORY PROCESS?
At the outset, the Supreme Court held that the mandate of sub-section (5) of section 7 or sub-section (5) of section 9 or sub-section (4) of section 10 is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory. It was further held that provision of removing the defects in an application within seven days is directory and not mandatory in nature. The court clarified that while interpreting the provisions to be directory in nature, if the objections are not removed within seven days, the applicant while refilling the application after removing the objections, file an application in writing showing sufficient case as to why the applicant could not remove the objections within seven days.
WHAT ARE THE FACTORS TO BE DETERMINED BY ADJUDICATING AUTHORITY WHILE EXAMINING AN APPLICATION UNDER SECTION 9 OF THE ACT?
In this case the NCLAT without discussing the merits of the case and also without stated how the amount was payable, given wielded threat to the Appellant by giving a one chance, 'to settle the claim, failing which this Appellate Tribunal may pass appropriate orders on merit'. The Supreme Court relied on the decision in Mobilox case and held that while examining an application under Section 9 of the Act, the Adjudicating Authority will have to determine (i) Whether there is an "operational debt" as defined exceeding Rs 1 lakh, (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid and (iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute. With these observations the NCLAT order was set aside.
WHETHER THE ADJUDICATING AUTHORITY CAN ENGAGE ANOTHER RESOLUTION PROFESSIONAL OR LIQUIDATOR IN PLACE OF THE EXISTING RESOLUTION PROFESSIONAL OR LIQUIDATOR IF PERFORMANCE OF SUCH RESOLUTION PROFESSIONAL OR LIQUIDATOR IS NOT SATISFACTORY?
The NCLAT ruled that Resolution Professional's performance did not amount to misconduct, but as the Adjudicating Authority was not satisfied with the performance of the RP, it was well within its jurisdiction to engage another person as RP or Liquidator.
WHETHER THE NCLT IS THE ULTIMATE AUTHORITY TO APPROVE OR REJECT THE PLAN AND WHAT FACTORS ARE TO BE CONSIDERED BY THE NCLT IN DECIDING THE SAME?
The Supreme Court upheld the order passed by the NCLAT that approval of the NCLT is not a mere requirement/ formality. Even though the NCLT is not permitted to alter the terms of the plan, the ultimate authority to approve or reject a plan vests with the NCLT, and for that it should consider the following aspects: (i) whether the plan complies with the requirements of Section 30(2)? (ii) Whether the plan is fair and equitable or there is any unjust discrimination not envisaged in law? (iii) Whether the plan adheres to the object of the Code i.e. maximizes the value of assets and balances the interests of all the stakeholders? Only if the aforesaid questions are answered in satisfactory, the plan is confirmed, if not the NCLT may deny its confirmation.
WHETHER THE ORDER OF MORATORIUM WILL COVER A CRIMINAL PROCEEDING UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT?
[Shah Bros Ispat Pvt. Ltd v. P. Mohanraj & Ors. 2018 SCC Online NCLAT 415 decided on 31.07.2018]
The NCLAT held that Section 138 of the N.I Act is a penal provision which empowers the court of competent jurisdiction to pass order of imprisonment of fine, which cannot be held to be proceeding of any judgment, decree of money claim. It was further concluded that imposition of fine cannot be held to be a money claim or recovery against the corporate debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the directors, they cannot come within the purview of Section 14 of the I &B Code, 2016. Hence no criminal proceedings are covered under Section 14 of the I & B Code.
WHETHER, IN VIEW OF RULE 8 OF I & B (APPLICATION TO ADJUDICATING AUTHORITY) RULES, 2016, THE NCLAT COULD UTILIZE THE INHERENT POWER RECOGNIZED BY RULE 11 OF THE NCLAT RULES, 2016 TO ALLOW A COMPROMISE BEFORE IT BY THE PARTIES AFTER ADMISSION OF THE MATTER?
The Supreme Court exercised Article 142 and approved the settlement between parties after initiation of CIRP.
WHETHER THE NCLT HAS THE JURISDICTION TO ENQUIRE INTO JUSTNESS OF REJECTION OF THE RESOLUTION PLAN?
[K. Sashidhar Vs Indian Overseas Bank & Ors. Civil Appeal No.10673 of 2018]
The Hon'ble Supreme Court has observed that National Company Law Tribunal has no jurisdiction and authority to analyse or evaluate the commercial decision of the Committee of Creditors (CoC) to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. The bench observed that upon receipt of a "rejected" resolution plan, the adjudicating authority (NCLT) is obligated to initiate liquidation process under Section 33(1) of the Insolvency and Bankruptcy Code
Tariq Khan, is a Senior Associate (Advani & Co.) And Byron Sequeira is a 4th year B.A LLB Student from Lloyd Law College
