Important Supreme Court Judgments On Insolvency & Bankruptcy Code

Important Supreme Court Judgments On Insolvency & Bankruptcy Code

Insolvency and Bankruptcy Code was enacted in 2016. Though it received the assent of the President of India in May 2016, it came into force only in November-December 2016.

Stated objective of the code is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.

Some cases requiring interpretation of the Code reached the Supreme Court in 2017 itself. The Supreme Court, (mostly the bench headed by Justice Rohinton Fali Nariman) dealt with many important cases with respect to interpretation of the provisions of the Code. This article discusses ten important judgments on Insolvency and Bankruptcy Code delivered by the Supreme Court since 2017.

Constitutional Validity of IBC Upheld

Swiss Ribbons Pvt. Ltd. & Anr. V. Union of India & Ors.

The Supreme Court upheld the constitutional validity of the Insolvency and Bankruptcy Code 2016 in its "entirety". The Court however held that to attract the bar under Section 29A from participating in resolution process, "related person" should be a person connected to the defaulting entity. "The defaulter's paradise is lost. In its place, the economy's rightful position has been regained", this is how the Supreme Court summed up the judgment upholding the constitutional validity of various provisions of the Insolvency and Bankruptcy Code, 2016. Justice Rohinton Fali Nariman, for the bench also comprising of Justice Navin Sinha, authored 150 paged judgment which starts by discussing the background which led to the enactment of the Insolvency Code. He observed that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors.

Treating Homebuyers As Financial Creditors Not Arbitrary : SC Upholds 2018 IBC Amendment

Pioneer Urban Land and Infrastructure Ltd and Anr vs Union of India

Dismissing a bunch of petitions filed by nearly 200 realtors, the Supreme Court upheld the amendments made to the Insolvency and Bankruptcy Code in 2018 to treat homebuyers as financial creditors. In the judgment, the bench of Justices R F Nariman, Sanjiv Khanna and Surya Kant held that the amendments do not violate Article 14 and 19(1)(g) of the Constitution and rejected the argument that they are 'arbitrary, unreasonable, excessive and disproportionate'. It held:

-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.

-The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.

-Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.

Limitation Act Applicable To Applications Filed Under Sections 7 and 9 Of Insolvency and Bankruptcy Code From The Inception Of The Code

B.K. Educational Services Private Limited V. Parag Gupta And Associates

In a significant Judgment delivered in September 2018, the Supreme Court held that the Limitation Act is applicable to applications filed under Sections 7 and 9 of Insolvency and Bankruptcy Code From the inception of the Code. The two Judge Bench of Justices RF Nariman and Navin Sinha held: "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application."

Lawyer Can Issue Demand Notice Of Unpaid Operational Debt On Behalf Of Operational Creditor

Macquarie Bank Limited vs Shilpi Cable Technologies Ltd,

The Supreme Court held that a lawyer on behalf of the operational creditor can issue a demand notice of an unpaid operational debt.It said: "A conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order"

The court also held that the provision contained in Section 9(3)(c) of the Code is not mandatory for initiating insolvency proceeding. Otherwise, the court noted, despite the availability of such documentary evidence contained in the Section 9 application as other information as may be specified, such application filed under Section 9 would yet have to be rejected because there is no copy of the requisite certificate under Section 9(3)(c). "Obviously, such an absurd result militates against such a provision being construed as mandatory.", the bench added.

Registered Trade Union Can File Insolvency Petition As Operational Creditor On Behalf Of Its Members

Jk Jute Mill Mazdoor Morcha V. Juggilal Kamlapat Jute Mills Company Ltd. .

In a significant ruling, the Supreme Court held that a registered trade union can maintain a petition as an operational creditor on behalf of its members. The bench comprising Justice Rohinton Fali Nariman and Justice Vineet Saran allowed the appeal against the National Company Law Appellate Tribunal (NCLAT) order which held that a trade union would not be an operational creditor as no services are rendered by the trade union to the corporate debtor.

It was held that a trade union is an entity established under a statute – namely, the Trade Unions Act, and would thus fall within the definition of "person" under Sections 3(23) of the Code. It said : Instead of one consolidated petition by a trade union representing a number of workmen, filing individual petitions would be burdensome as each workman would thereafter have to pay insolvency resolution process costs, costs of the interim resolution professional, costs of appointing valuers, etc. under the provisions of the Code read with Regulations 31 and 33 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Looked at from any angle, there is no doubt that a registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members. We must never forget that procedure is the handmaid of justice, and is meant to serve justice."

Insolvency And Bankruptcy Code: Section 14 Moratorium Would Not Apply To A Personal Guarantor Of A Corporate Debtor

State Bank of India V. Ramakrishnan

The Supreme Court held that 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 not apply to a personal guarantor of a corporate debtor. The bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra also observed that Section 14(3) of the Code (introduced vide 2018 amendment) which states that provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor, is retrospective.

Decoding Of Insolvency And Bankruptcy Code, 2016

M/S. Innoventive Industries Ltd. V. ICICI Bank & Anr.

In a detailed judgment, Justice RF Nariman, while sitting with Justice Sanjay Kishan Kaul, extensively travelled through the new legislation – Insolvency and Bankruptcy Code of 2016. The Supreme Court was dealing with an appeal preferred by M/s Innovative Industries, against which insolvency proceedings were initiated by ICICI Bank. It was the contention of the appellant, who is a 'defaulter' under the Code, that there was no debt legally due, because under the Maharashtra Relief Undertakings (Special Provisions Act), 1958, all liabilities were temporarily suspended for one year, which was later extended for one more year. It was further contended that the defaulter company was going through a corporate debt restructuring and though a master restructuring agreement was entered into, the funds were not released as per the restructuring agreement.

Supreme Court Interprets "Existence Of A Dispute" Under IBC

Mobilox Innovations Private Ltd v Kirusa Software Private Ltd

The Supreme Court in this case finally settled the widely debated question of what constitutes "existence of a dispute" in the context of applications filed by operational creditors for initiation of corporate insolvency resolution process (CIRP) of corporate debtors under the Insolvency and Bankruptcy Code, 2016 (IBC). This path breaking judgment follows close on the heels of another landmark ruling of the Supreme Court in M/s Innoventive Industries Ltd. vs. ICICI Bank & Another, which was rendered in the context of a CIRP application filed by a financial creditor.

Stage Of Ineligibility Attaches When The Resolution Plan Is Submitted By A Resolution Applicant; 270 Days Time Limit For Completion Of Insolvency Resolution Process Mandatory

Arcelormittal India Private Limited vs. Satish Kumar Gupta

The Supreme Court, interpreting Section 29A(c) of the Insolvency and Bankruptcy Code, 2016, observed the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant and not any anterior stage. The bench comprising Justice Rohinton Fali Nariman and Justice Indu Malhotra also held that the time limit for completion of the insolvency resolution process as laid down in Section 12 is mandatory and it cannot be extended beyond 270 days.

NCLT Has No Jurisdiction To Enquire Into Justness Of Rejection Of The Resolution Plan

K. Sashidhar vs. Indian Overseas Bank

The Supreme Court 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 comprising Justice AM Khanwilkar and Justice Ajay Rastogi 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.