Recent Legislative And Case Law Developments In Insolvency And Bankruptcy Law

The Insolvency and Bankruptcy Code, 2016 was implemented to provide a time-bound process to resolve insolvency among companies and individuals. Since its inception, the constitutional validity of many provisions of the IBC has been challenged and the government has carried out amendments from time to time to remove the difficulties in the implementation of the Code. Incidentally, while dealing with the challenges to the provisions of the IBC, the Supreme Court has in various decisions interpreted the same, which eventually resulted in giving more clarity to the Code. In the case of Swiss Ribbons Private Limited and Anr. v. Union of India and Ors. (2019) 4 SCC 1726 while upholding the constitutional validity of the IBC, 2016, the Court held as under: "86 …. These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful position has been regained." A challenge was also made to various provisions of the Insolvency and Bankruptcy Code, 2016 recently in Hindustan Construction Company Limited v Union of India Writ Petition (Civil) No. 1074 of 2019 on the ground that it operates arbitrarily. The issue before the Court was whether 'Corporate Person', as defined by Section 3(7) of the Insolvency Code, is to be read to include Government Bodies other than Government Companies (which are already included). The Supreme Court held that NHAI is a statutory body which functions as an extended limb of the Central Government and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. Thus, it is not possible to either read in, or read down, the definition of 'corporate person' in Section 3(7) of the Insolvency Code. It was clarified that the Insolvency Code is not meant to be a recovery mechanism. Also, the Insolvency Code, belonging to the realm of economic legislation, raises a higher threshold of challenge, leaving the Parliament a free play in the joints. For the foregoing reasons, the challenge to the provisions of Insolvency Code, was held to be devoid of merit. A. HIGHLIGHTS OF THE RECENT DECISIONS DELIVERED BY THE INDIAN COURTS ON INSOLVENCY AND BANKRUPTCY LAW ARE AS FOLLOWS: Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Ltd., [Civil Appeal Nos. 8512-8527 of 2019 decided on 26.02.2020] In this case 858 acres of unencumbered land owned by the corporate debtor Jaiprakash Associates Limited (JAL) was mortgaged to secure the debt of the related party Jaiprakash Associates Limited (JAL) in the midst of the corporate debtor's immense financial crunch. Further, the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor. Following issues were raised before the Supreme Court: a) Whether the transactions in question are preferential transactions within the meaning of Section 43 of the Code? The Supreme Court held that the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent operational debts as also other facilities extended by it; and the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code. Further, it was held that the scheme of IBC is to disapprove and disregard such preferential transaction which falls within the ambit of Section 43 and to ensure that any property likely to have been lost due to such transaction is brought back to the corporate debtor; and if any encumbrance is created, to remove such encumbrance so as to bring the corporate debtor back on its wheels or in other event (of liquidation), to ensure pro rata, equitable and just distribution of its assets. The court observed that in the scheme of such provisions in the Code, the underlying concept is to disregard and practically annul such transactions which appear, in the course of insolvency resolution or liquidation, to be preferential so as to minimise the potential loss to other stakeholders in the affairs of the corporate debtor, particularly its creditors. The Court further observed that clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression "or", appearing as disjunctive between the expressions...

Recent Legislative And Case Law Developments In Insolvency And Bankruptcy Law

Tariq Khan & Byron Sequeira

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