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Recent Legislative And Case Law Developments In Insolvency And Bankruptcy Law

Tariq Khan & Byron Sequeira
16 April 2020 7:00 AM GMT
Recent Legislative And Case Law Developments In Insolvency And Bankruptcy Law
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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 "corporate debtor" and "transferee", ought to be read as "and"; so as to be conjunctive of the two expressions i.e., "corporate debtor" and "transferee".

b) Whether the lenders of JAL could be categorised as financial creditors of JIL for the purpose of IBC?

The Court held that the debts in question are in the form of third-party security, which were given by the corporate debtor to secure the loans/advances/facilities obtained by JAL from the lenders. Such a 'debt' is not and cannot be a 'financial debt' within the meaning of Section 5(8) of the Code; and hence, the lenders, the mortgagees, are not the 'financial creditors' of the corporate debtor.

Tata Steel Bsl Limited & Anr. v. Union of India & Anr. [W.P.(Crl) 3037/2019 And Crl.M.A. 39126/2019 decided on 16.03.2020]

Whether a Corporate Debtor would be liable for any offence committed prior to commencement of the CIRP and be prosecuted if a resolution plan approved by the Adjudicating Authority?

Setting aside the SFIO complaint, the Delhi High Court observed that a corporate debtor would not be liable for any offence committed prior to commencement of the CIRP and the corporate debtor would not be prosecuted if a resolution plan has been approved by the Adjudicating Authority.

Bimalkumar Manubhai Savalia v. Bank of India [NCLAT Company Appeal (AT) (Insolvency) No. 1166 of 2019 decided on 05.03.2020]

Whether SARFAESI & DRT Proceedings will extend limitation period under IBC or not?

The NCLAT reversed the Order of the NCLT and held that SARFAESI and DRT proceedings will not extend the period of limitation since those proceedings are independent and as per section 238 of IBC, the Insolvency and Bankruptcy Code is a complete Code and will have overriding effect on other laws. Therefore, the proceedings initiated or pending in DRT, either initiated under SARFAESI or under DRT cannot be taken into account for the purposes of limitation. The contention of the Respondent that period of limitation ought to be counted from the date on which the Guarantors have transferred the amount to the account of Corporate Debtor as per Section 19 of the Limitation Act, was also rejected by the NCLAT. It was held that that Section 19 of the Limitation Act will fall under the category of first division of schedule which applies to the suits. However, Section 7 of the IBC is not a suit. Therefore, Article 137 will apply to the applications filed under section 7 & 9 of the IBC.

Flat Buyers Association v. Umang Realtech Pvt. Ltd through IRP & Ors. [Company Appeal (AT) (Insolvency) No. 926 of 2019 decided on 04.02.2020]

a) Whether CIRP against a real estate company is limited to project concerned and not other projects?

The NCLAT held that Corporate Insolvency Resolution Process against a real estate company is limited to a particular project as per approved plan by the Competent Authority and not other projects of that company which are separate at other places for which separate plans are approved.

b) Whether a secured creditor can be given preference over the allottees while providing the asset?

The NCLAT held that a 'secured creditor' such as 'financial institutions/ banks', cannot be provided with the asset (flat/apartment) by preference over the allottees (Unsecured Financial Creditors) for whom the project has been approved. Their claims are to be satisfied by providing the flat/apartment. It was observed that there may be some allottees who may ask for refund but that prayer cannot be granted by the Adjudicating Authority however, after allotment, an allottee can request the IRP or Promoter to find out a third party to purchase said flat/apartment and get back the money.

Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority & Anr. [2020 SCC Online SC 292 decided on 19.02.2020]

a) Whether MHADA Act would prevail over the Insolvency Code?

The Supreme Court held that on the plain terms of Section 238 of the Insolvency Code, the Code must prevail. The idea behind the moratorium under section 14 is to alleviate corporate sickness and a statutory status quo is pronounced under the said provision the moment a petition is admitted under Section 7 of the Code, so that the insolvency resolution process may proceed unhindered by any of the obstacles that would otherwise be caused and that are dealt with by Section 14.

b) Whether Section 14(1)(d) of the Code will apply to statutorily freeze 'occupation' that may have been handed over under a Joint Development Agreement

The Court held that Section 14(1)(d) of the Insolvency & Bankruptcy Code, when it speaks about recovery of property "occupied", does not refer to rights or interests created in property but only actual physical occupation of the property.

Maharashtra Seamless Ltd v. Padmanabhan Venkatesh & Ors. [2020 SCC Online SC 67 Decided on 22.01. 2020]

a) Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not?

The Court held that there is no requirement under the Insolvency and Bankruptcy Code that the resolution plan should match the liquidation value of the corporate debtor. Relying on COC of Essar Steels India Limited vs. Satish Kumar Gupta the court highlighted the limited judicial review available to the Adjudicating Authority and observed that the Court ought to cede ground to the commercial wisdom of the creditors rather than assess the resolution plan on the basis of quantitative analysis.

b) Whether Section 12-A is the applicable route through which a successful Resolution Applicant can retreat?

The Court held that the exit route prescribed in Section 12-A is not applicable to a Resolution Applicant. The same is applicable only to applicants invoking Sections 7, 9 and 10 of the code.

Ajay Kumar Bishnoi Vs Tap Engineering [CRL. OP Nos. 3 4996, 35007, 35011, 35013, 35016 and 35020 of 2019 decided on 09.01.2020]

Whether the acceptance of the Corporate Insolvency Resolution Plan under Section 31 of the Insolvency and Bankruptcy Code, 2016 can be a ground for quashing the prosecution initiated under Section 138 of the Negotiable Instruments Act, 1881?

The Madras High Court held that no provision of the Insolvency and Bankruptcy Code bars the continuation of the criminal prosecution initiated against the Corporate Debtor or its directors and officials.

M/s Embassy Property Developments Pvt. Ltd. vs. State of Karnataka [Civil Appeal No. 9170 of 2019 decided on 03.12.2019]

Whether the High Court under Article 226/227 of the Constitution can interfere with an Order passed by the NCLT and whether questions of fraud can be inquired into by the NCLT/NCLAT?

The Supreme Court held that though, NCLT and NCLAT would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes such as those arising under MMDR Act, 1957 and the rules issued thereunder, especially when the disputes revolve around decisions of statutory or quasi-judicial authorities, which can be corrected only by way of judicial review of administrative action.

Vinod Tarachand Agrawal V. Registrar of Companies, Gujarat [Co. Appeal No. 53/252(3)/NCLT/AHM/2019 decided on 06.11.2019]

Whether Registrar of Companies can strike off the name of a company when insolvency proceedings are pending?

It was held that the impugned action of the Respondent was void in law due to the provisions of Section 238 of IBC, which has an overriding effect over other legislations.

Pioneer Urban Land and Infrastructure Ltd and Anr vs Union of India (2019) 8 SCC 416 decided on 09.08 2019

Whether the amendments made to the insolvency and bankruptcy code, 2016 treating allottees of real estate projects to be "financial creditors" infringes articles 14, 19(1)(g) read with article 19(6), or 300-A of the Constitution of India?

The Court held that the Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India. Further, it was held that RERA is to be read harmoniously with the IBC Code, as amended by the Amendment Act and it is only in the event of conflict that the IBC Code will prevail over RERA. Relying on Section 89 of RERA the court held that the fact that RERA is in addition to and not in derogation of the provisions of any other law for the time being in force, makes it clear that the remedies under RERA to allottees were intended to be additional and not exclusive remedies. Lastly, it was held that Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments.

Jk Jute Mill Mazdoor Morcha V. Juggilal Kamlapat Jute Mills Company Ltd. [Civil Appeal No.20978 of 2017 decided on 30.04.2019]

Whether a trade union could be said to be an operational creditor for the purpose of the Insolvency and Bankruptcy Code, 2016

The Supreme Court held that the trade union represents its members who are workers, to whom dues may be owed by the employer, which are certainly debts owed for services rendered by each individual workman, who are collectively represented by the trade union.

Ferro Alloys Corporation v. Rural Electrification Ltd. [Company Appeal (AT) (Insolvency) No. 92,93 & 148 of 2017 decided on 08.01.2019]

Whether it is necessary to initiate CIRP against the Principal Borrower before proceeding against the Corporate Guarantor?

Relying on the decision of the Supreme Court in State Bank of India v. Indexport Registered & Ors., the NCLAT observed that the Code does not prohibit the 'Financial Creditor' from initiating the corporate insolvency resolution process against the guarantor, since a guarantor is included in the definition of 'Corporate Debtor' as provided under Section 3(8) of the Code. Further, it was held that it is not necessary to initiate 'Corporate Insolvency Resolution Process' against the 'Principal Borrower' before initiating 'Corporate Insolvency Resolution Process' against the 'Corporate Guarantors'.

Excel Metal Processor Limited vs Benteler Trading International GMBH and Anr. [Company Appeal (AT) (Insolvency) No. 782 of 2019 decided on 21.08.2019]

Whether jursdiction clause in a contract can oust the jurisdiction of NCLT/NCLAT under the IBC?

NCLAT relied on its decision in Binani Industries Limited vs. Bank of Baroda and Anr. – Company Appeal (AT) (Insolvency) No.82 of 2018, wherein it was held that 'Corporate Insolvency Resolution Process'/ insolvency proceedings is not a 'suit' or a 'litigation' or a 'money claim' for any litigation; No one is selling or buying the 'Corporate Debtor' a 'Resolution Plan'; It is not an auction; it is not a recovery, which is an individual effort by the creditor to recover the dues through a process that had debtor and creditor on opposite sides; and it is not liquidation. The object is mere to get resolution brought about, so that the Company do not default on dues.Further it was held that NCLT has the jurisdiction to entertain an application under Section 9 of the I&B Code and the Appellant cannot derive advantage of the terms of the Agreement reached between the parties.

  1. HIGHLIGHTS OF THE RECENT LEGISLATIVE DEVELOPMENTS

On March 29, 2020, the Insolvency and Bankruptcy Board of India (IBBI) has introduced Regulation 40C to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. As per the said Regulation, the lockdown period imposed by the Government due to COVID19 outbreak shall be excluded from the timeline for any activity that could not be completed due to the lockdown in relation to CIRP. The Ministry of Corporate Affairs had also issued a notification on March 24, 2020 as per which "minimum amount of default" for the purposes of Section 4 was raised from Rs. 1 Lakh to Rs. 1 Crore. Interestingly, in a press conference held on March 24, 2020, the Finance Minister said that the threshold has been increased to prevent triggering of IBC for MSMEs. Further, the Finance Minister also said that the government may consider suspending Section 7, 9 and 10 of the IBC 2016 for a period of 6 months if the present situation doesn't improve beyond April 30, to stop companies at large from being compelled into insolvency proceedings in such force majeure causes of default. The relevant amendments introduced in Insolvency and Bankruptcy Code (Amendment) Act, 2020 are as follows:

· Insolvency commencement date: Under Section 2 of Amendment Act, 2020 omits the proviso from the definition of "insolvency commencement date" under section 5(12) of the Code which states that the insolvency resolution process commences from the date of admission of an application for initiating corporate insolvency resolution process (CIRP), by the adjudicating authority.

· Minimum threshold for certain classes: The new amendment under Section 7 raises the minimum threshold for certain classes of financial creditors for initiating CIRP, prescribing that the application by these creditors u/s 7(1) of the Code should be filed jointly by at least 100 such creditors or 10% of their total number of such creditors in the same class, whichever is less.

· Non suspension of Debtor's license, permits etc during moratorium: The explanation to Section 14(1) of the Code which extends the moratorium under IBC to protect the license, permit, registration, quota, concessions, clearances and other similar grants or rights given by the Central or State Government, local authority, sectoral regulator or any other authority from suspension and termination during the CIRP, unless there is a default in payment of the current dues for its use or continuation during the moratorium period.

· Resolution Professional continue to manage the affairs of the corporate debtor: The substitution of the proviso u/s 23(1) of the Code clarifies that a RP shall continue to manage the affairs of the corporate debtor till the Resolution Plan is approved by the AA u/s 31(1) or till the appointment of a liquidator u/s 34 by the AA in the event of rejection of the resolution plan for failure to meet requirements mentioned in Section 30.

· Insertion of Section 32A: The waiver of offences committed by a corporate debtor prior to the commencement of the CIRP. The Government strives to protect the successful resolution applicants and their property from the threat of criminal proceedings qua the offences committed by the former promoters of the corporate debtor.

· Insolvency and liquidation for financial service providers: The explanation to Section 227 of the Code provides that the proceedings for insolvency and liquidation for financial service providers or categories of financial service providers may be conducted with such modifications and in such manner as may be prescribed.

Views Are Personal Only

(Tariq Khan, Principal Associate, Advani & Co. and Byron Sequeira, Final year student at Lloyd Law College Greater Noida)


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