Author name: CBCL

[By Shubham Singh] The author is a student of National Law University, Odisha.   Introduction Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC) establishes a waterfall mechanism for the distribution of assets in liquidation, with secured creditors having the highest priority and equity shareholders having the lowest priority. The waterfall mechanism is designed to ensure that the most important creditors are paid first and that all creditors are treated fairly. It also helps to protect the interests of workers and other vulnerable stakeholders. Government dues are treated after all other creditors and before the shareholders of a company. However, the ruling of the Supreme Court in State Tax Officer (1) v. Rainbow Papers Limited, placed government dues on par with secured creditors and mandated their inclusion in the resolution plan. Given the Rainbow Papers ruling’s deviation from the established principles of the IBC, subsequent litigation concerning Government dues was a predictable consequence. There have been different and conflicting rulings by the Supreme Court regarding the government dues to this date. In this article, the author will delve into those different rulings by Supreme Court post rainbow papers and their reasoning, while critically analysing them and their effect on the present Indian IBC scenario Supreme Court Rulings The reasoning behind the Rainbow Papers ruling was provided by the two-judge bench of the Supreme Court. They stated that a statutory charge can be considered a form of security, and according to the definition of a “Secured Creditor” under the IBC, the government can be classified as a secured creditor if it holds a statutory charge. This technical perspective adopted by the court, treating statutory charge as security and using that security to treat government dues as secured creditors contradicts Section 53 of IBC which specifically puts government dues below in the waterfall mechanism. The Rainbow Papers judgement goes against the legislation. However, In July 2023, the Hon’ble Supreme Court of India, in the case of Paschimanchal Vidyut Vitran Nigam Ltd. Vs. Raman Ispat Private Limited & Ors, ruled that the Rainbow Papers judgment overlooked Section 53 of the IBC, which grants priority to secured creditors in liquidation proceedings. This ruling is significant because Rainbow Papers primarily dealt with the resolution process rather than liquidation. Nevertheless, it’s important to note that this judgment was delivered by a single-judge bench, and it cannot ultimately overturn the Rainbow Papers decision. Interestingly, a review petition was filed against the Rainbow Papers judgment in front of a two-judge bench in October 2023, in the case of Sanjay Agarwal v. State Tax Officer. The review petitioner heavily relied on the Paschimanchal Vidyut Vitran case and argued that the court in Rainbow Papers failed to consider all relevant IBC provisions and cases, including the “waterfall mechanism” discussed in the Rainbow Papers decision. However, the court dismissed the petition However, once again, in October 2023, a two-judge bench in the case of Principal Commissioner of Customs V. Rajendra Prasad Tak & Ors. stated that tax and customs dues must be paid following the “waterfall mechanism” outlined in Section 53 of the IBC. The ongoing disparity in judicial interpretations raises critical questions about the alignment of these rulings with the legislative framework of the IBC. The Game Show – Analysis of Rulings While analysing the judgment in the Rainbow Papers case (Supra), the decision in the case of Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. was cited, but it was considered in the context of a resolution plan. However contrary to Rainbow papers, In the Ghanashyam Mishra case, the Supreme Court ruled that all types of government dues would be classified as operational debt and could be extinguished if they were not included in the approved resolution plan. Rainbow Papers was judged by a two-judge bench, and Ghanashyam Mishra’s case was judged by a three-judge bench. However, the ruling in the review petition in the Sanjay Agarwal case (Supra) feels like a conundrum in itself. In the Sanjay Agarwal case, the court stated that Rainbow Papers analyzed the cases and provisions cited in Rainbow Papers correctly. The review was denied, citing the practice that a bench of equal authority cannot critique decisions made by another bench citing cases like Beghar Foundation vs. Justice K.S. Puttaswamy (Retired) and Others, which stated the same. The bench in this case was also a two-judge bench In the Ghanshyam Mishra case, the ruling was provided from the perspective of the legislative effect of the IBC. In contrast, the Rainbow Papers case was approached from a technical standpoint, neglecting the examination of why Government Dues are placed lower in the waterfall mechanism, contrary to its legislative intent. The analysis of the Ghanshyam Mishra case was confined to the resolution plan in Rainbow Papers, and the assertion in the Sanjay Mishra case that everything was correctly analyzed in Rainbow Papers seems questionable. This doubt arises not only from the perspective of the Ghanshyam Mishra case but also considering the provisions of the IBC. However, the main argument of this article pertains to the treatment of the Ghanshyam Mishra case. Even if one argues that there may be a different perspective in the Ghanashyam Mishra case and the Rainbow Papers case, and the analysis is correct, the reasoning in the Sanjay Agarwal case, emphasizing the importance of the bench in a judgment, raises a question  Why was the ruling in the Ghanashyam Mishra case, asserting that government dues are not a priority with secured creditors, not embraced in Rainbow Papers, considering that the Ghanashyam Mishra case was decided by a larger bench then rainbow Papers and a larger bench always prevails over a shorter bench? In the Rajendra Prasad Tak (supra) case, an order was passed which stated that the dues of the Central Board of Indirect Taxes & Customs must adhere to the specific hierarchy outlined in Section 53 of the IBC. This judgment emphasizes the importance of following the structured hierarchy for the fair treatment of creditors and

[By Bhabesh Satapathy & Vatsala Tyagi] The authors are students of National Law University, Odisha.   Introduction In the intricate web of insolvency jurisprudence, the intersection of personal guarantees and the Insolvency and Bankruptcy Code, 2016 (“Code“) has recently been scrutinized by the Supreme Court (“SC”) in the case of Surendra B. Jiwrajika v. Omkara Assets Reconstruction Private Limited.  A personal guarantee, emblematic of an individual’s commitment to assume liability for a debtor’s obligations, has long been a focal point of legal deliberation. The SC’s verdict, ostensibly settling the fog of uncertainty surrounding personal guarantors’ obligations under the Code, manifests a pivotal development. Notably, it fortifies creditors’ position by extending the reach of the insolvency resolution process to Personal Guarantors (“PG”), effectively creating a twofold safeguard for creditors seeking recourse. However, the ramifications of this pronouncement are profound, as it curtails the protective ambit afforded to personal guarantors, thereby amplifying creditors’ leverage. This shift in legal paradigm engenders multifaceted consequences for PG, leaving them with scant recourse. The judgment, though ostensibly clearing the legal waters, leaves PG caught in a crossfire of diminished protection and heightened creditor empowerment. A Spotlight on the Essential Backdrop The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, and Notification No. S.O. 4126  empowered the initiation of insolvency proceedings against PG independently. In Lalit Kumar Jain v. Union of India, the SC has affirmed the constitutionality of these provisions, clarifying that an “involuntary act of the principal debtor leading to loss of security, would not absolve a guarantor of its liability”. PG’s liability under the Code remains co-extensive with the corporate debtor, as per Section 128 (“S.”) of the Indian Contract Act. In the State Bank of India v. Ramakrishnan , the SC determined that S.31 (1) of the Code does not absolve the PG of their responsibilities. Further, Essar Steel India Limited v. Satish Kumar Gupta delineated that approval of a resolution plan is binding upon the PG. Ever since the contours of resolution plan against PGs were defined, its inherent neglect of natural justice has been criticised. In the present case, the constitutional bench addresses a barrage of 384 petitions questioning the constitutional validity of S.95-100. Procedural Fairness: A Hollow Framework without Natural Justice PGs have vehemently called out this blind spot as they are caught in between unfair and unreasonable screws of resolution plan. a. Violation of principles of natural justice Maneka Gandhi v. Union of India constitutionalised natural justice principles into Articles 14, 19, 21, and 22. The impugned provisions violate two principles of natural justice, namely; right to be heard (Audi alterum partem) and the prohibition of self-judgment (Nemo judex in causa sua). Top of Form The court brushed aside these contentions highlighting the following: S.99(2) offers ample representation opportunity for the debtor; S.100 complies with natural justice principles. The role of the Resolution Professional (“RP”) as under S.99 (“u/s”) of the Code, is limited to collection of facts and hence is not adjudicatory in nature. In Madhyamam Broadcasting Ltd. v. Union of India, Justice Chandrachud, observed that such principles of fairness ‘express…that to be a person, rather than a thing, is at least to be consulted about what is done with one’. However, irreversible steps from S.95-S.100 in this case lack due consultation with relevant parties. The interesting aspect of the case is, the judgement was pronounced by Justice D.Y. Chandrachud. Despite having previously integrated this procedural requirement, he conspicuously omitted it in this particular case. (Emphasis supplied) b. Inadequacy of procedural fairness The court balances incorporating constitutional morality in the Code while respecting judicial review constraints. Hence, it upholds validity of opportunity of representation u/s 99(2), it ignoring its rudimentary nature in view of the instantaneous moratorium. Interpreting S.99(10) literally, the RP must share the report with the applicant u/s 94 or 95. The  IBBI’s discussion paper dated 27th September, 2023, highlights that the current scheme of the Code, does not mandate sharing of the Report with both the parties. In the Madhyamam Broadcasting case, Justice Chandrachud emphasizes the right to know about inquiries, stating that “it is sufficient if the non-disclosure would lead to a possibility of bias and prejudice”.  The Code is ignorant towards such inchoate principles of legal justice. (Emphasis supplied) The Court tilts towards legal positivism overlooking discussion on aforementioned grounds. While it evaluates the presence of procedural provisions, it somehow failed to realise their inadequacy, leaving natural justice impotent and hence unrealised. Putting Section 96 on Trial: Examining Legal Consequences of Interim Moratorium Application under S.94 or S.95 triggers immediate interim moratorium under S.96, facing constitutional challenges for violating Articles 14 and 21. a. Fundamental Rights Under Siege Part II and II of the Code face criticism for alleged arbitrary dissimilarity, violating Article 14. The court justifies distinct stages for the AA’s involvement, citing S.96‘s debt-focused moratorium. However, the court, engrossed in doctrinal intricacies, neglects broader impacts. The debtors can exploit an automatic interim-moratorium to undermine the rights of other creditors by merely filing an application u/s 95 of Code. Further, Subramanian Swamy v. Union of India, acknowledged right to reputation as a fundamental right under Article 21. Insolvency harms reputation and strains commercial relationships. The Court overlooks the psychic consequences of interim moratorium. Breathing natural justice into the process is essential to avoid Article 21 violation.Top of Form b. Adjudication of jurisdictional facts delayed is adjudication denied Before insolvency, a “debtor-creditor relationship” is essential. Initiating resolution plan u/s 95-100 necessitates early adjudication of jurisdictional facts, which is postponed until after moratorium and RP’s report submission.Top of Form This indicates a prima facie assumption of substantial merit in the application. The Code contemplates a presumption of civil guilt over the preferred presumption of civil innocence. The scheme of the Code presents a rare anomaly wherein the merits of the claim are decided prior to the maintainability of the claim. Introducing an adjudicatory stage before S.100 might seem to compromise the Code’s time-bound nature, but it’s a myopic view. The Bombay High Court

[By Uravi Pania] The author is a student of National Law School Of India University, Bengaluru   Introduction In May 2023, the National Company Law Tribunal (hereinafter the ‘NCLT’) admitted Go First’s insolvency plea with regards to default of around Rs. 2660 crores to its aircraft lessors and of Rs. 1202 crores to its vendors. The National Company Law Appellate Tribunal (hereinafter the ‘NCLAT’), on an appeal contending that the plea of insolvency was malicious, upheld the NCLT’s order and presently, the airline company is undergoing the Corporate Insolvency Resolution Process (hereinafter the ‘CIRP’), with Shailendra Ajmera as the resolution professional. Post the NCLT’s order, a moratorium mandated by section 14 of the Insolvency and Bankruptcy Code 2016 (hereinafter the ‘Code’) was imposed, which prohibited the initiation of any proceedings, transfer of assets or legal rights, foreclosure of securities or, recovery of any property of the Corporate Debtor (hereinafter the ‘CD’).  A major question arose in the midst of the matter regarding the rights of the aircraft lessors, who faced a bar on recovering the same due to the imposition of a moratorium under section 14 of the Code. The Ministry of Corporate Affairs (hereinafter the ‘MCA’) and the Ministry of Civil Aviation appeared to be in support of differing positions regarding the aircraft lessors’ rights vis a vis the moratorium. However, the MCA via a notification dated October 3, 2023, exempted the application of s.14 moratorium on transactions, arrangements or agreements, relating to aircraft, aircraft engines, airframes and helicopters. This post analyses the exemption notification vis-a-vis the aims of the Code to highlight its inconsistency. It argues that the notification violates principles of insolvency process in India and, that the utilisation of a notification route leads to an inadequate adoption of the Cape Town Convention (hereinafter the ‘CTC’). India being a signatory to the Convention, planned to ratify it through the Cape Town Convention Bill, which has not been introduced yet. Not only is this mechanism of implementing provisions of the Convention procedurally deficient as the CTC has not been ratified yet, but it also principally goes against the Insolvency and Bankruptcy Code. The scope of this post is limited to the latter proposition. Firstly, the exemption of lessors from the moratorium goes against the underlying principles of the Code, which includes not just credit recovery but also managing and sustaining a stressed firm’s operations and helping its resolution. Secondly, by utilising the notification route, the government has brought in inadequate application of the CTC, making the present Code incompatible with it—though the Convention provides for a gradual and balanced approach, the same cannot be incorporated into India’s insolvency proceedings without an amendment of the Code. Aviation Industry’s Demands India’s aviation market consists of a large share of 80% leased aircrafts as compared to purchased ones due to its cost-efficiency, enabling airlines to provide low-cost airline services too. However, with Go First filing for insolvency, its market share declined, leading to a surge in market shares as well as the prices of its competitors. Additionally, on the admission of the insolvency application by the NCLT, Go First’s aircrafts entered the protection of the moratorium period as provided by section 14 of the Code. The lessors of Go’s aircrafts filed interlocutory applications before the NCLT, to which the Tribunal held that the recovery of the leased aircrafts couldn’t be made due to the moratorium. Thus, section 14 prohibited the aircraft lessors from initiating any proceeding to recover the leased aircrafts. However, with the MCA notification, the moratorium would be exempted and, aircraft lessors would be able to recover their aircrafts. Disagreement with IBC Principles The Code’s inception in 2016 brought in a streamlined procedure to deal with reorganisation of assets in a time-bound manner and aimed to balance and maximise multiple stakeholders’ interests. The Supreme Court noted the object of the Code to be discerned by the Preamble of it—that it is “first and foremost a code for reorganisation and insolvency resolution of corporate debtors”. It also observed that IBC seeks to ensure revival and continuation of the CD from its own management as well as from a corporate death through liquidation. This view has been consistently argued and affirmed by various Courts and Tribunals. Protecting assets of a CD is significant towards treating it as a going concern, which is also another important objective of the legislation. The MCA notification exempts section 14 from “transactions, arrangements or agreements, under the Convention”. The Convention allows for the possession of the aircraft to be returned to the creditor on occurrence of an “insolvency related event”. Such allowance goes against the very essence of section 14 of the Code as section 14(2A) of the Code provides that an Interim Resolution Professional (IRP) or the Resolution Professional (RP) can prevent such return if the supply of such goods or services is critical for value of the CD or to manage its operations. It is evident that aircrafts would be critical to preserve the value of an airline business as well as to manage its operations. The Supreme Court in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, considering an ipso facto clause in a power purchase agreement (PPA), held that the “going concern” status of the debtor would be nullified if the PPA was terminated. The PPA would be the “sole basis for the CD’s existence” and its termination would affect the going concern status of the CD. The Court considered section 14(2) and 14(2-A) to maintain the status of a CD as a going concern and that it should not be hampered on insolvency. A similar reasoning can be extended to the essentiality of the aircrafts for airline corporate debtors. Aircrafts are the sole basis of airlines and termination of aircraft leases on insolvency will affect the going concern status of such CDs. This violates the existing jurisprudential reasoning of section 14 of the Code, as employed by the NCLT tribunal while considering Go First’s lessors’ pleas as well. The tribunal observed that