Author name: CBCL

The Insolvency and Bankruptcy Code (Amendment) Bill, 2017: Key Highlights and Implications. [Mudit Nigam] The author is a third-year student of National Law Institute University, Bhopal. The President of India, in exercise his power under Article 123 of the Constitution of India, promulgated the ordinance titled the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 (“Ordinance”). The purpose of the Ordinance was to strengthen the insolvency resolution process by disqualifying certain persons from presenting a resolution plan under the Insolvency and Bankruptcy Code (“Code”). However, the same was widely debated as it imposed restrictions on presentation of resolution plan by connected persons thereby adversely affecting the initiation of corporate insolvency resolution process.  In order to fill the gaps and clarify the position, the Insolvency and Bankruptcy Code (Amendment) Bill, 2017 (“Bill”) was passed by Parliament in January, 2018 and currently awaits the President’s assent. The Bill extends the application of the Code to the personal guarantors to the corporate debtor and the proprietorship firms who were earlier immune from any liability under the Code.[1] This has brought much needed clarity on initiation of insolvency process against the personal guarantors of the corporate debtor. Reference must be made to the judgment of the Allahabad High Court in case of Sanjeev Shriya v. State Bank of India, wherein the Court observed that moratorium issued under section 14 of the Code would be applicable to the proceedings initiated against the personal guarantors.[2] The applicability of the Code to proprietorship firms will ensure proper completion of insolvency resolution process against small and medium enterprises (SMEs), which often run on a proprietorship model. A “resolution applicant” under section 5(25) of the Code includes any person who presents a resolution plan to the insolvency professional. However, after the amendment takes effect, the scope of the term would be limited only to such persons who fulfill the eligibility criteria prescribed by way of the amendment and who present a resolution plan in pursuance of the invitation by the insolvency professional under the amended section 25 (2)(h). The imposition of the eligibility criteria is likely to prevent unscrupulous persons from presenting a resolution plan and prevent unnecessary proceedings against the corporate debtor. Further, this change will give importance to the interests of the creditors as they will also have a say in approving the eligibility criteria. Another implication of this change is that it allows persons to jointly submit a resolution plan, thereby facilitating acquisition of large stressed assets. The Bill further amends the duties of a resolution professional under section 25 of the Code. Prior to the amendment, the resolution professional had a duty to invite any prospective lender or investor, or any other person. However, after the amendment, a resolution professional would be under an obligation to impose certain eligibility criteria with the approval of the committee of creditors, which criteria would have to be fulfilled by a resolution applicant in order to qualify for an invitation to present a resolution plan. While deciding the eligibility criteria, regard shall be given to the complexity as well as the scale of operations of the corporate debtor’s business, in addition to other conditions as may be specified by the Insolvency and Bankruptcy Board of India. The Bill inserts a new section 29A in the Code which expressly bars certain persons from presenting a resolution plan. Unlike the Ordinance, the Bill uses the expression ‘persons acting jointly or in concert,’[3] which implies that apart from the ineligible person, any other person acting together with such person for a common objective is also ineligible to be a resolution applicant. The new section also bars undischarged insolvents, disqualified directors,[4] willful defaulters,[5] promoters, and persons whose account has been classified as a non-performing asset by the Reserve Bank of India and a period of a year or more has been passed after such classification. However, the Bill allows such ineligible account holders to become eligible to submit a resolution plan if they clear all the overdue amounts with interest and other charges relating to their NPA accounts.[6] The section also disqualifies a person upon conviction for an offence punishable with 2 years of imprisonment or more. It is still unclear whether the person must be convicted for an economic offence or for any other offence as well, although the use of the word ‘any’ suggests that the nature of the offence is immaterial. Unlike the Ordinance which disqualified a person who ‘has been’ prohibited by the Securities and Exchange Board of India (“SEBI”) from trading and accessing in securities market, section 29A as introduced by the Bill prohibits only a person who is currently barred by the SEBI. This brings more clarity as the Bill relaxes the earlier complete restriction imposed on persons who have been previously disqualified by the SEBI. The same section explicitly disqualifies a promoter or a person who in managerial or controlling capacity in the company/corporate debtor has indulged in unlawful transactions as decided by the National Company Law Tribunal (“NCLT”). Much confusion lies on the presentation of a plan by the guarantor of a corporate debtor. The Ordinance as well as the Bill, under the newly introduced section 29A, bars guarantors of the corporate debtor against whom insolvency proceeding has been initiated. On December 18, 2017, the NCLT in the matter of MBL Infrastructure Limited, observed that the words ‘enforceable guarantee’ used in the section mean and refer to such class of guarantors within the entire class of guarantors who, on account of their antecedent, may adversely impact the credibility of the process under the Code. Thus, a guarantor cannot be disqualified only on the ground of existence of a binding contract of guarantee.  However, an appeal has been preferred against this order and the matter is pending before the National Company Law Appellate Tribunal. Under clause (j) of section 29A, persons ‘connected’ with the debarred persons are also ineligible to present the plan. Unlike the Ordinance, the Bill clearly explains the words ‘connected person’ as including promoters, persons in managerial capacity and

Discordant Notes in IBC Jurisprudence: The Sanjeev Shriya Case. [Riddhi Joshi] The author is a second-year student at Symbiosis Law School, Pune. The author may be reached at riddhi.dhananjay@symlaw.ac.in. On 6th September, 2017, the Allahabad High Court passed a judgment in the case ofSanjeev Shriya v. SBI, extending the moratorium provided for under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to personal guarantors in respect of the debts alleged to have remained unpaid by a corporate debtor. Facts of the Case The factual matrix of the case is as follows. M/s. LML Ltd. (“LML”) was declared a ‘sick industrial company’ by the Board for Industrial Financial Reconstruction on May 8, 2007. Under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, State Bank of India filed an application before the Debt Recovery Tribunal (“DRT”) for recovery of the debt owed by LML. The Bank instituted the proceedings for recovery of the dues jointly and severally from LML as well as from the personal guarantors. LML filed an application to initiate the corporate insolvency process under Section 10 of the IBC. On May 30, 2017, the National Company Law Tribunal (“NCLT”), Allahabad Bench admitted the application and, as contemplated in section 14 of the IBC, imposed a moratorium on the institution of suits or continuation of pending proceedings against LML. LML and the personal guarantors then moved an application at the DRT seeking stay of proceedings filed by the Bank before the DRT. In view of the NCLT’s order, the DRT stayed the proceedings but only against LML and observed that there was no order to restrain the proceedings against the personal guarantors. The personal guarantors challenged this order of the DRT before the Allahabad High Court. Judgment While staying the proceedings at the DRT against even the personal guarantors, the Allahabad High Court relied on sections 60(1) and 60(2) of the IBC, which provide that the Adjudicating Authority in relation to personal guarantors shall be the NCLT. The High Court observed that in cases where the insolvency resolution process has already begun, the application relating to insolvency resolution of a personal guarantor would also lie before the same NCLT. The High Court also observed that when the primary debt is still in a fluid state, two parallel proceedings in different jurisdictions cannot be maintained. Based on this reasoning, the High Court stayed the proceedings at the DRT even against the personal guarantors. Analysis Unfortunately, the High Court appears to have erred. The Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”) was the precursor to the current regime under the IBC. Section 22 of SICA contemplated a bar on proceedings against a ‘sick industrial company’ in pari materia to the moratarium under section 14 of the IBC. Section 22(1) of SICA provided- Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law…no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority. This provision came up for consideration before the Supreme Court in Kailash Nath Agarwal v. Pradeshiya Industrial and Investment Corporation of U.P. The Supreme Court first took note of section 128 of the Indian Contract Act, 1872, which provides that the liability of a surety is co-extensive with that of the principal debtor, unless it is otherwise provided by contract. While reviewing the section, the Supreme Court also relied on the well established principle of statutory interpretation that where the language of the provision is explicit, the language of the statute must prevail. The Court held that, in section 22, the terms ‘proceedings’ and ‘suit’ have not been used interchangeably. ‘Proceedings’ being a wider term than ‘suit’, the bar on ‘proceedings’ applies only with respect to the industrial company. The Court, therefore, held that proceedings other than a suit for recovery can be proceeded with against the personal guarantors. Now, section 14(1) of the IBC lays down as follows- (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. Clearly, there is no language in this section barring proceedings against personal guarantors. In fact, in Schweitzer Systemek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd., the NCLT, Mumbai Bench clearly interpreted the benefit of the moratorium to be limited only to corporate debtors. It is unfortunate that Schewitzer Systemek India was not brought to the attention of the Allahabad High Court. It is more unfortunate that, even though

[Vishakha Srivastava and Ashutosh Kashyap] The authors are fourth-year students at Chanakya National Law University, Patna. In the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., the Supreme Court was confronted with two pertinent questions in relation to the Insolvency and Bankruptcy Code, 2016 (“Code“): firstly, whether, in relation to an operational debt, the provision contained in Section 9(3)(c)[1] of the Code is mandatory; secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor. Facts of the Case Hamera International Private Limited executed an agreement with the Appellant, Macquarie Bank Limited, Singapore, by which the Appellant purchased the original supplier’s right, title and interest in a supply agreement in favour of the Respondent. The Respondent entered into an agreement for supply of goods in accordance with the terms and conditions contained in the said sales contract. Since amounts under the bills of lading were due for payment, the Appellant issued a statutory notice under sections 433[2] and 434[3] of the Companies Act, 1956. After the enactment of the Code, the Appellant issued a demand notice under section 8 of the Code[4] to the contesting Respondent, calling upon it to pay the outstanding amount. The contesting Respondent stated that nothing was owed by them to the Appellant. They further went on to question the validity of the purchase agreement dated in favour of the Appellant. The Appellant initiated the insolvency proceedings by filing a petition under section 9 of the Code.[5] The National Company Law Tribunal (“NCLT”) rejected the petition holding that section 9(3)(c) of the Code was not complied with, inasmuch as no certificate, as required by the said provision, accompanied the application filed under Section 9. Decisions of the Adjudicating Authorities The NCLT held that section 9(3)(c) of the Code is a mandatory provision, and therefore, non-compliance of the provision would lead to rejection of the application seeking to initiate insolvency proceedings. Thus, it was held that the application would have to be dismissed at the threshold. On appeal, the National Company Law Appellate Tribunal (“NCLAT”) agreed with the NCLT holding that the application would have to be dismissed for non-compliance of the mandatory provision contained in section 9(3)(c) of the Code. It further held that an advocate/lawyer cannot issue a notice under section 8 on behalf of the operational creditor. The NCLAT observed that as there was nothing on the record to suggest that the lawyer/ advocate held any position with or in relation to the Appellant, the notice issued by the advocate/ lawyer on behalf of the Appellant could not be treated as notice under section 8 of the Code. Appeal to the Supreme Court The Court observed that the first thing to be noticed on a conjoint reading of sections 8 and 9 of the Code, as explained in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, is that Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are: occurrence of a default; delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and the fact that the operational creditor has not received payment from the corporate debtor within a period of 10 days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt. It is only when these conditions are met that an application may then be filed under section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed. Under section 9(3), what is clear is that, along with the application, certain other information is also to be furnished. Under section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. Under rules 5 and 6 of the Adjudicating Authority Rules 2016, read with Forms 3 and 5, it is clear that, as Annexure I thereto, the application in any case must have a copy of the invoice/demand notice attached to the application. That this is a mandatory condition precedent to the filing of an application is clear from a conjoint reading of sections 8 and 9(1) of the Code. On a reading of sub-clause (c) of section 9(3), it is equally clear that a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt. The true construction of section 9(3)(c) is that it is a procedural provision, which is directory in nature, as the Adjudicatory Authority Rules read with the Code clearly demonstrate. The Court further observed that section 8 of the Code speaks of an operational creditor “delivering” a demand notice. It is clear that had the legislature wished to restrict such demand notice being sent by the operational creditor himself, the expression used would perhaps have been “issued” and not “delivered”. Delivery, therefore, would postulate that such notice could be made by an authorized agent. In fact, in Forms 3 and 5, it is clear that this is the understanding of the draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized to act” on behalf of the operational creditor must be appended to both the demand notice as well as the application under section 9 of the Code. The position further becomes clear that both forms require such authorized agent to state his position with or in relation to the operational

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant. [Vishal Hablani] The author is a second-year student at West Bengal National University of Juridical Sciences, Kolkata. He may be reached at vishalhablani@nujs.edu. On 11th December, 2017, the High Court of Delhi held that moratorium under the Insolvency and Bankruptcy Code, 2016 (“Code”) would not be applicable to proceedings beneficial to the concerned corporate debtor. However, in case the decree is passed against the corporate debtor, the enforceability of such decree would be covered by the moratorium commenced earlier under section 14(1)(a) of the Code. The write-up aims to critique the judgement passed in the matter of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. In the said case, a financial creditor filed an application under section 7 of the Code against the respondent company. However, when the application was filed, proceeding under section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award passed in favour of the respondent was already pending. The question before the High Court, therefore, was whether the proceeding under section 34 ought to be stayed by virtue of section 14(1)(a) of the Code. The respondent submitted that before suspending the proceedings, the nature thereof must be taken into consideration. If proceedings are in favour of the corporate debtor, granting a stay would defeat its efforts to recover money. Moreover, stay of such a nature would not fall in the embargo of section 14(1)(a). The Court in the instant case had to decide whether the term “proceedings” used in the said section could be read in such a way so as to include “all legal proceedings”, or it should be read restrictively to cover only a specific type of legal proceeding viz., “debt recovery action” which may diminish debtor’s assets during the insolvency resolution period. It becomes pertinent here to discuss the relevant provision in the Code. xxx Moratorium – (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; xxx The Court placed reliance on Canara Bank v. Deccan Chronicle Holdings Limited to hold that since the word “proceedings” under the provision is not preceded by the word “all”, the provisions of moratorium would not apply to all the proceedings against the corporate debtor. The object of the Code was interpreted and the view was taken that moratorium is implemented with the objective of protecting the assets of the corporate debtor from dissipation. If the proceedings are suspended, it would extend the non-executability of the award which would add to the woes of the debtor. The Court opined that section 14 of the Code would be inapplicable to proceedings which are beneficial for the corporate debtor, as the conclusion of these proceedings would not have any impact over the assets during the insolvency resolution process. Reliance was placed on the report of the Bankruptcy Law Reforms Committee, and it was construed that the objective behind the moratorium is to protect the assets of the corporate debtor from additional stress. Interestingly, the judgment provided that if a counter claim is allowed against the corporate debtor, section 14(1)(a) would come into play and the decree then would not be executed against the corporate debtor. The judgment passed by the Delhi High Court seems to be fallacious, for the Court failed to take into consideration the situation that, if the proceedings are continued and counter claim against the corporate debtor admitted, then, by the effect of this judgement, it would then become impossible for the innocent litigant to enforce the decree against the Corporate Debtor by the subsequent effect of the moratorium. This raises various questions which the Court failed to answer: Is it possible for the litigant then to enforce the decree subsequently against the firm, or an individual whose resolution plan has been accepted, after the moratorium ceases to have the effect, provided the case was still pending while the claims against the corporate debtor were being invited before the acceptance of such resolution plan?   What recourse would be available to this litigant, in case the Adjudicating Authority passes an order for liquidation of corporate debtor, provided the case was still pending while the claims against the corporate debtor were being invited before passing of such order?  The Code provides for completion of resolution proceedings within 180 days, subject to extension for a period of 90 days. However, no statutory time limit has been prescribed for the adjudication of a suit pending before conventional courts. This gives rise to a critical question: What if the resolution proceedings are completed against the corporate debtor and the suit against him is still pending before the Court? Would the suit be automatically terminated then? In this scenario, rights of both the parties to the suit would be jeopardised, and the arbitral award would be rendered useless. There might also be a situation where the court decides the suit in favour of the corporate debtor after the acceptance of resolution plan, or passes an order for liquidation of the corporate debtor. This also gives rise to certain critical questions: Would the firm or an individual whose resolution plan has been accepted have the locus standi for the enforcement of the arbitral award in question?​ If the Adjudicating Authority approves the liquidation of corporate debtor, can the liquidator then enforce the arbitral award against the party which has lost the suit? The author hopes that the questions presented hereinabove would soon be answered by an appropriate forum so as to fill the vacuum.