Author name: CBCL

[By Soham Banerjee] The author is an Associate (Dispute Resolution) at Vashi and Vashi – Advocates and Solicitors, Mumbai. Introduction: The National Company Law Tribunal (“NCLT”) by way of its Circular dated May 12, 2020 (“Impugned Circular”), directed all new and pending insolvency applications filed by Financial Creditors under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to be mandatorily accompanied by a record of the Financial Default from an Information Utility (“IU”). Accordingly, Univalue Projects Ltd. and Cygnus Investments and Finance Pvt. Ltd. (“Petitioners”) challenged the vires of the impugned Circular invoking the writ jurisdiction of the Calcutta High Court. Grounds of Challenge: Being Financial Creditors with a pending/prospective applications under Section 7 of the IBC, the Petitioners alleged that the impugned Circular would adversely affect the substantive and vested rights of the Petitioners that had accrued upon them as a creditor under the IBC, prior to the publication of the impugned Circular. Additionally, the Petitioners also claimed that the impugned Circular was issued in gross contravention of the IBC, the Companies Act, 2013 (“CA 2013”), and regulations under the Insolvency and Bankruptcy Board of India (“IBBI).  Petitioner’s Submissions: a)Kompetenz – kompetenz of the NCLT to issue the Circular Section 424 of the CA, 2013 lays down the powers of the NCLT and the NCLAT. Accordingly, the Petitioner submitted that upon a bare reading of Section 424 of the CA, 2013, it is ex facie evident the scope of the NCLT’s jurisdiction is limited to the regulation of day to day procedure and such procedure that may be followed for the administration of justice. Section 424 of the CA, 2013 does not confer jurisdiction upon the NCLT to alter and/or contravene the basic structure of the CA, 2013, or the IBC. b)Statutory interpretation of “as may be specified” under Section 7(3)(a) Attention was drawn to Section 3(32) of the IBC on the definition of the term ‘specified’ which means specified by regulations made by the IBBI. Accordingly, relying on the term “as may be specified” under Section 7(3)(a) of the IBC, the Petitioners submitted that the power to make regulations under Section 7 of the IBC vested with the IBBI and not the NCLT. c)Presumption of implied delegated legislation The Petitioners submitted that where a statute expressly provides for delegation of power to a subordinate authority, exclusive jurisdiction vests with that subordinate authority to make rules and regulations under the statute. Accordingly, since the IBC had expressly delegated the power to make regulations to the IBBI, the NCLT traversed beyond the ambit of the statute in issuing the impugned Circular. d)Disjunctive nature of Section 7(3)(a) The Petitioners submitted that Section 7(3)(a) of the IBC envisaged proof of financial default through other modes of documents and evidence. Attention was drawn to the usage of the term “or” in Section 7(3)(a) of the IBC to argue that the intention of the legislature was to make Section 7(3)(a) disjunctive, and not limit proof of financial default to only furnishing of record of default with the IU. Reliance was also placed on Regulation 8(2) of the IBBI Regulations, 2016 to highlight that the said regulation also lists four other categories of documents, in addition to the record of default with the IU to establish financial default. e)Inherent powers of the NCLT and AA Rules, 2016 In conclusion, the Petitioners pre-emptively submitted that even under the NCLT’s inherent jurisdiction under Rule 11 of the NCLT Rules, 2016, the NCLT could not have issued the impugned Circular. A comparison was made with Section 151 of the Code of Civil Procedure, 1908 (inherent powers of a Civil Court) to submit that even a Civil Court cannot resort to its inherent jurisdiction to issue rules and regulations, ultra vires the parent statute [See KK Veluswamy v. N. Palanisami, (2011) 11 SCC 275]. Additionally, reliance was also placed on Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“AA Rules, 2016”), which deals with procedural aspects of an application filed by a Financial Creditor. It was contended that the ‘Form – I’ which had to be filed along with the documents evincing financial default also made provision for accommodating other sources of documents and evidence, apart from the record of default with the IU. Respondent’s Submissions: Per contra, the Respondent argued that Section 424 of the CA, 2013 vested NCLT with the jurisdiction to regulate their own procedure. Further, the Respondent raised strong objections to the furnishing of record of default with the IU as a mere formality and contended that it was an essential feature of the IU to authenticate and verify the information submitted by a financial creditor. Additionally, the Respondent also argued that new disabilities and/or obligations have not been foisted upon financial creditors by way of the impugned Circular since Section 7(3)(a) of the IBC specified, at the outset, that a financial creditor is required to submit the record of the default with the IU, along with the application. Since there exist no specific regulations that govern the submission of other evidence/documents as proof of financial default, the record of default to be furnished to the IU is the only way to establish financial default, and hence mandatory. Findings: a)On jurisdiction of the NCLT: On the NCLT’s jurisdiction to publish the impugned Circular, reliance was placed on Government Of Andhra Pradesh & Ors v. Smt. P. Laxmi Devi [(2008) 4 SCC 720] to expound upon the hierarchy of legal norms when it comes to rules and regulations governing the field of Insolvency laws, as under: (i)Provisions of the CA, 2013 and IBC; (ii)Rules enacted by the Central Government and regulations made by the IBBI; and (iii)NCLT/NCLAT regulating their own procedure subject to Section 424 of the CA, 2013 (iv)Accordingly, while the NCLT has been vested with the jurisdiction to regulate its own procedure, such regulations are subservient to the provisions of the CA, 2013, the IBC, and regulations made by the IBBI b) On implied delegated legislation:

[By Prashansa M. Agrawal] The author is an Advocate practicing in the High Court of Bombay. Recently, in the judgment dated 14th August 2020 in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr., the Supreme Court decided that the application filed by the financial creditor therein was not barred by limitation. While pronouncing the decision, the Supreme Court reasserted the settled aspects of limitation under the Insolvency and Bankruptcy Code, 2016 (“the Code”) in reference to its earlier landmark judgments. At the same time, the Supreme Court touched upon a slightly different and disputed position with respect to the applicability of Section 18 of the Limitation Act to the Code― which has come up before the Supreme Court for the first in the instant case. In this article, the author analyses the landmark judgments on the limitation period under the Code along with a few disputed judgments on Section 18, in order to assess the stand of the Supreme Court in the instant case. Background The legislature sought to answer the ever-looming question of ‘limitation’ under the Insolvency and Bankruptcy Code, 2016 (“the Code”) by incorporating Section 238A in the Code by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which applies provisions of the Limitation Act (“the Act”) to the proceedings before National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) Consequently, the question of retrospective application of Section 238A arose before the Supreme Court in B.K. Educational Services Private Limited v.Parag Gupta and Associates. The Apex Court held that limitation provisions were applicable to the Code from its very inception. Therefore, it was construed that Section 238A only clarifies the said position and is applicable retrospectively. Thus, as per the judgment in B.K. Education(supra), the right to sue accrues when the default occurs, which lasts for three years to be computed from the date of default. After the said period, an application under the Code would be barred under Article 137 of the Act except when the delay is explained and condoned as per Article 5. However, there arose ambiguities with regard to other ways of extending the prescribed limitation period of three years. One such ambiguity relates to the applicability of Section 18 of the Act to the Code which came for consideration before the Apex Court in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. As per Section 18, when a party against whom a property or right is being claimed acknowledges the liability during the subsistence of the limitation period prescribed for a suit or application in respect of such property or right i.e. 3 years under the Code, a fresh period of limitation shall be computed from the date of such acknowledgment. The contention, ‘Whether or not Section 18 pushes the date of default under the Code’ has been addressed in a few judgments over the years as provided below- Prior to the Instant Case In Fernas Construction India Pvt. Ltd. v. RVR Projects Pvt. Ltd., the National Company Law Appellate Tribunal (“NCLAT”) held that Section 18 in Part I of the Act would not apply to an application under the Code as such an application is neither a suit nor can be regarded as a recovery proceeding. Thereafter in Jignesh Shah & Anr. v. Union of India & Anr., the question before the Supreme Court was whether a prior suit for recovery extends the limitation period for filing a subsequent winding-up petition. The Supreme Court answered the aforementioned in negative and remarked that the limitation period can only be extended by the provisions under the Limitation Act such as by way of Section 18 of the Act. Relying on the aforementioned judgment of the Supreme Court, the NCLAT in Sh G. Eswara Rao v.. Stressed Assets Stabilisation Fund and Others held that the period of limitation under the Code commences from the date of default and this date of default can be forwarded to a future date only under Section 18 of the Act. In light of the judgments in Jignesh Shah (supra) and Sh. G Eswara Rao (supra), the financial creditor in the instant case argued the applicability of Section 18 which was not accepted by the Supreme Court as explained below. Obiter Dictum of the Instant Case The Supreme Court clarified that the illustrative reference to Section 18 in Jignesh Shah(supra) was only with respect to suits or other proceedings, wherever it could apply. It further emphasized that the said observations in Jignesh Shah (supra) do not alter the settled position in B.K. Education(supra) i.e. an application under Section 7 (i.e. by a financial creditor) under the Code is time-barred after 3 years from the date of default except when the delay is condoned under Article 5. The Supreme Court further observed that even while assuming that Section 18 is, in fact, applicable for extension of the limitation period for an application under the Code, the same would not come to the rescue of the applicant creditor in the instant case as no suggestion of any acknowledgment as required under Section 18 has been made. It was thus observed that limitation is a mixed question of fact and law which requires the pleader to produce the necessary facts and evidence in order to argue that a particular provision is applicable to extend the prescribed limitation period. In light of the above observations, the Supreme Court decided that the application filed by the financial creditor was barred by limitation. Conclusion and Analysis The instant case certainly creates a doubtful situation around the applicability of Section 18 to the Code, causing dilemma to a number of creditors. In order to understand the position of Section 18 vis-a-vis an application under the Code, it is imperative to note that the phrase ‘suits or applications’ appears under Section 18, as opposed to Article 62 of the Act relating to mortgages which only contains the word ‘suits’ and

[By Amay Bahri] The author is a student at the National Law University, Delhi. Like any new legislation which is introduced, even the Insolvency and Bankruptcy Code 2016 (hereinafter ‘IBC’ or ‘the code’) has been marred by litigation since its inception. One of the more recent discussions on IBC is regarding the power of the creditor against guarantors of a corporate debtor. This discussion becomes all the more relevant after the introduction of new rules and regulations for governing the insolvency of personal guarantors. These new rules and regulations allow the creditor to initiate insolvency proceedings against the personal guarantor, however, there are still unresolved issues regarding the powers of the creditor to have legal recourse against the guarantor when the principal debtor is unable to pay debts. To iron out these unresolved issues, we refer to the already established precedents relating to corporate guarantors. Though corporate and personal guarantors are different to the extent of their liability, there appears to be no distinction or any reason for the distinction in their treatment within the code; thus the developed jurisprudence surrounding the rights against corporate guarantors can be applied to the personal guarantor. One of the objectives mentioned in the preamble to the Insolvency and Bankruptcy Code is that the code seeks to balance of interest of stakeholders. The code marks a paradigm shift from a regime of unaccountable corporates to adopting a realistic approach where commercially unviable companies would close shop. Upon such shift, the code has adopted a creditor centric approach, wherein wide powers to institute the insolvency proceedings are vested with the creditors. The concept of a guarantee is rooted in the Indian Contract Act, thus the powers of the creditor under IBC are to be exercised keeping in mind the principles of guarantee under the Indian Contract Act. There are two distinct issues that arise here, first regarding the power of the creditor to recover after acceptance of the resolution plan; and second regarding the power of the creditor to proceed against the guarantor when insolvency proceedings against corporate debtor have been initiated but the resolution plan has not been accepted. Against this backdrop, the author seeks to discuss the recovery mechanisms available to the creditor against the guarantor a) after the acceptance of the resolution plan and b) when the corporate debtor is under CIRP. The author shall then provide his own conclusion as to the flaws in the recovery mechanism and the way forward. Power of the creditor to recover after Acceptance of Resolution Plan According to the IBC, the acceptance of the resolution plan by the Committee of Creditors (CoC) and approval of the same by the adjudicatory body brings the insolvency proceedings to an end. As per section 31 of the IBC, such an accepted resolution plan determines the full and final liability of the principal debtor. The IBC does not directly deal with the liabilities of a guarantor; neither does it bar the creditor to institute proceedings against the guarantor of the debt. Guarantors seek to protect themselves from the claims of recovery of debt amount by applying the provisions of the Indian Contract Act. These provisions are Section 133 and 134 of the Indian Contract Act. Section 133 provides that a surety is discharged of the debt if there is variance in the terms of the contract without the consent of the surety. The resolution plan can be seen as a variance of terms without the consent of the guarantor, thus the guarantor should be absolved from its liability. However, section 31(1) of the IBC makes the resolution binding on the guarantor, thus countering such claims of the guarantor and making the guarantor liable to bear the liability. Turning to section 134 of the Contract Act, the provision provides that any act which relieves the principal debtor of its obligation to pay will also discharge the surety of its obligation for such a debt. Applying section 134 would be erroneous since a crucial ingredient to satisfy the requirements of this section is that the agreement to discharge the principal debtor of the debt was reached through their own volition and not due to any operation of law. By approval of the resolution plan, the corporate debtor is discharged of its obligations to make a payment, but this discharge is due to the application of the law. Since the crux of section 134 is not satisfied, the said section cannot be invoked to discharge the guarantor of their obligation to pay. Hence, the guarantor is bound to pay the unpaid amount of debt, after the acceptance of the resolution plan and the creditor can take legal actions against the guarantor. One complication that arises out of this arrangement is whether the right to subrogation survives after acceptance of the resolution plan. This was answered in negative, in the case of Essar Steel case but this does not seem to be the final position of law. The right to subrogation would entitle the guarantor to recover the amount of debt paid to the creditor as the guarantor would then step into the shoes of the creditor to claim the amount paid. The holding of Essar Steel is a huge blow to the rights of the guarantor as the judgment has done away with a right to subrogation, which is not only a statutory right under the Indian Contract Act, but also a principle of natural justice. Considering this decision not only impacts the inherent rights of guarantors, but also has adverse impacts on the market economy; the decision of Essar Steel relegating subrogation right requires reconsideration. Power of the creditor to proceed against the guarantor when the debtor is under CIRP As per the Indian Contract Act, the liability of a guarantor and that of the principal debtor are co-extensive, thus a creditor is not obligated to expend the legal remedies against the principal debtor before making a claim against the guarantor and can sue either of them for the debt