Author name: CBCL

[By Utkarsh Mishra] The author is a student at Nirma University, Institute of Law. Introduction The Government of India on 24 March 2020 announced an increase in the threshold of default under Section 4 of Insolvency and Bankruptcy Code (“IBC”) to Rs 1 crore from the previous threshold of Rs 1 lakh. This move was taken by the government to protect the small and medium enterprises (“MSMEs”) from initiation of insolvency proceedings against them. Further, to address the plight of the corporations, the government on 22 April 2020 took the much-needed step of suspending the filing of new cases under Insolvency and Bankruptcy Code for six months. Pertinently, on 17 May 2020, the ongoing suspension was further extended from 6 months to 1 year. Finally, on 5 June 2020 the government promulgated an ordinance which clarifies the suspension of IBC. The said ordinance categorically suspends the IBC for the purpose of initiation of Corporate Insolvency Resolution Process (“CIRP”) for a period of six months for defaults occurring after 25 March 2020. However, when this suspension will be lifted, the tribunals i.e National Company Law Tribunals (“NCLT”) will be flooded with insolvency applications under Sections 7, 9 and 10 because of the already existing economic crisis coupled with the absence of workforce. Therefore, the corporations will not be able to perform with full efficiency, and eventually, they will commit a default. This problem of burdening on the NCLT could be resolved by introducing another mechanism known as ‘Pre Package Scheme’. What is a Pre Package Scheme? In this mechanism, the negotiation of assets of the corporate debtors occurs before the filing of an application under Sections 7, 9 and 10 of IBC. After the negotiation comes to an end, it will only have to be approved by the committee of creditors (“CoC”) and later by the NCLT. Thus, the mechanism acts as a time saving tool for both the debtor as well as the creditors from all the litigation and other legal formalities like invitation to prospective resolution applicants under Section 25(2)(h) of the IBC. The average time taken in an IBC proceeding is of 340 days, and after the above-mentioned suspension gets over, if the ‘Scheme’ is timely implemented, corporates can focus more on reviving themselves rather than getting involved in lengthy legal procedures. Apparently, this procedure is not new; countries like the United States of America (USA) and the United Kingdom (UK) have successfully implemented this procedure in their respective insolvency laws. Additional advantages of Pre Package Scheme: As per the insolvency law in India, one of the significant problems with the appointment of the interim resolution professional (“IRP”) is damage and deterioration to the goodwill and image of the corporate debtors in the market. The whole process ultimately results in a decrease in the market value of the corporate’s assets as new investors will not risk their money. Therefore, when the entity goes into liquidation, it will not get the full value of its assets. On the contrary, if the ‘Pre Package Scheme’ is introduced, then the problem of value deterioration can be bypassed. It is because of the mechanism of the Scheme, as in this, all the negotiation is done privately and before filing of the application. Further, this negotiation cum resolution plan only needs to be approved by the CoC and then by the NCLT, thus, giving lesser time for the market to react. After the completion of the CIRP, creditors generally do not get the full return of the debt given to the corporate debtors, especially the operational creditors. Since, the Pre Package Scheme provides lesser time for the market to react, accordingly creditors might have a higher chance to make the most out of the assets. Challenges to the Implementation of the ‘Pre-Package Scheme’ One of the most prominent challenges to the implementation of ‘Pre Package Scheme’ is Section 29A of IBC. This provision was introduced by the Insolvency Bankruptcy Code (Amendment) Act, 2018, and it states the disqualification criteria for persons who want to be a resolution applicant. A resolution applicant is defined under Section 5(25) as a person who submits a resolution plan to the resolution professional. The quintessence characteristic of a Pre Package Scheme is that the corporate debtors themselves try to negotiate with the creditors before any legal proceedings under the IBC. However, Section 29A(c) of the IBC explicitly disqualifies the following persons: firstly, has account classified as NPA, secondly is a promoter of a corporate debtor the account of which has been classified as NPA, thirdly is in the management of a corporate debtor the account of which has been classified as NPA, lastly is in control of a corporate debtor the account of which has been classified as NPA. In simple words, Section 29A was brought with an intention to stop the backdoor entries of the defaulting promoters back to the management. Further, in the case of Jaiprakash Associates Ltd. and Ors. Vs. IDBI Bank Ltd. and Ors.,[i] it was held that strict adherence to Section 29A is mandatory. Therefore, because of the strict application of Section 29A, corporate debtors would not be able to formulate a resolution plan with the creditors as these section prohibits the same. Even if the Scheme is implemented, a question on the resolution’s credibility and transparency will always arise. As the directors/promoters/management are involved in the resolution, there is a high chance that the debtor’s related party creditors might end up getting all the assets. On the other hand, some of the remaining creditors will definitely challenge the concerned resolution, thus adding more time to the process, which will vitiate the essence of the Pre Package Scheme. Conclusion: Points to be considered during the implementation of the Scheme Pre Package Scheme as a tool for resolution has been very successful in countries like the USA and UK. Moreover, keeping in mind the characteristics of the Scheme, Singapore, in its insolvency laws, introduced the ‘Pre Package Scheme’ in 2017. Similarly, India also

[By Arshit Kapoor and Kartikey Bhalotia] The authors are students at National Law University, Odisha. Introduction This article enumerates the role of a Resolution Professional (“RP”) in carrying out the Corporate Insolvency Resolution Process (“CIRP”) as an independent umpire, as provided by the scheme of the Insolvency and Bankruptcy Code, 2016 (“IBC”). This is done in the context of the National Company Law Appellate Tribunal (“NCLAT”) recent decision the case of State Bank of India v. M/S Metenere Ltd. (“Metenere”) which directed substitution of the Interim Resolution Professional (“IRP”) stating that he is an ex-employee of the Financial Creditor and thus creating an apprehension of inclination towards the financial creditor. This article analyses the said NCLAT’s decision in contrast to the various provisions of the IBC which inherently creates an inclination of the RPs towards the financial creditors and hence, makes their collusion inevitable. The article also looks into the very scope of the NCLAT’s jurisdiction in giving the said order and tries to analyse whether it was merely a desperate attempt for instilling the importance of the independence of a Resolution Professional without considering the statutory backing for the same. Resolution Professional: Guardian of the Bankrupt The Bankruptcy Law Reforms Committee in its Report of 2015 (pg. 86) stated that an RP/IRP is the caretaker of the corporate person undergoing the CIRP. It has been stated in the Report that he is not only a supervisor of the bankrupt entity but also a negotiator between its creditors and the debtors in order to assess the prospective scope of keeping the said entity as a going concern. Taking these observations into account the legislature passed the IBC which explicitly provided for the duties and responsibilities of an RP/IRP. For instance, sections 18 and 25 of the IBC provide for the duties of the IRP and the RP respectively. As per these provisions, an IRP has the duty to carry out all the key tasks essential in setting the insolvency process into motion, which primarily includes inter alia collation of claims and formation of the Committee of Creditors (“CoC”). Once, this is done the RP appointed by the CoC (section 22 IBC) takes over and carries out further processes involved in a CIRP like preparing of information memorandum and inviting prospective Resolution Applicants. Apart from the IBC, the Insolvency and Bankruptcy Board of India (Resolution Professionals) Regulations, 2016 (“IBBI Regulations”) under the First Schedule explicitly provides for the ‘Code of Conduct for Insolvency Professionals’. Entries 5 to 9 to the First Schedule lays down certain code of conducts which are pre-requisites for ensuring the impartiality and independence of an RP. Therefore, it can be observed that an RP/IRP is at the centre stage of the CIRP. Moreover, the scheme of the IBC and the IBBI Regulations bring to the forefront the importance of their independence and impartiality. This is essential because a biased RP/IRP would defeat one of the primary objects of the IBC, i.e., “balancing the interest of all the stakeholders”. However, the question that arises is whether the provisions of the IBC read in entirety allow for such unaffected and independent conduct by an RP/IRP during the course of the CIRP. Independent Umpire or A Marionette? An IRP is appointed by the Adjudicating Authority on the recommendation of the financial creditor who files the application under section 7 of IBC. Further, it becomes pertinent to note that the IBC does not provide for any disqualification or eligibility criteria for the Adjudicating Authority to consider while appointing the recommended IRP. This essentially leads to making the Adjudicating Authority a mere rubber stamp in the appointment of IRP. This appointment of the IRP then at a later stage is put before the CoC which in its first meeting either appoints the IRP or any other competent person as the RP of the Corporate Debtor by a majority vote of 66% (section 22). Moreover, the CoC under section 27 has been empowered to resolve to change the RP by a majority vote of 66% at any time before the completion of the CIRP. Therefore, the above provisions make it apparent that the appointment and removal of the IRP/RP directly or indirectly vests with the CoC, leaving very negligible scope for interference by the Adjudicating Authority in this context. In other words, even if the Adjudicating Authority declines to appoint the recommended IRP under the section 7 application, the CoC can sub-silento go against the Adjudicating Authority’s decision by appointing an RP of their choice by a majority vote of 66%. Therefore, the very basis of the independence of an RP/IRP is shadowed because of the fact that their appointment, as well as removal, completely vests with the CoC. This fact clearly acts as a hurdle in giving effect to the NCLAT’s ruling in Metenere in terms of the necessity of an independent RP. Apart from the power of appointment and removal, the CoC also has leverage over an RP on the aspect of decision making. Every vital decision regarding the working of the Corporate Debtor needs to be ratified by the CoC, under section 28 of the IBC. Also, every decision concerning the selection of Resolution Plans or opting for liquidation, in which the RP participates, is protected by the doctrine of ‘Commercial Wisdom’. The Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel v. Satish Kumar Gupta has made it very clear that the commercial decision of the CoC cannot be challenged as it is protected by the doctrine of Commercial Wisdom. The only exception to the doctrine is that the impugned decision of the CoC should not have the effect of violating the very objectives of the IBC. Therefore, it would not be out of place to state that at the vital stage of CIRP, the bias of an RP towards the financial creditors can have a negligible scope of being checked or challenged. Thus, making an RP/IRP more of a marionette of the CoC

[By Ujjwal Agrawal] The author is a student at Maharasthra National Law University, Nagpur Introduction Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) provides for the initiation of the Corporate Insolvency Initiation Process (“CIRP”) by the financial creditors of a corporate debtor. Furthermore, Section 7(3)(a) of the IBC mandates the filing of either ‘record of the default recorded with the information utility’ or ‘such other record or evidence of default as may be specified’. However, recently the National Company Law Tribunal (“NCLT”) passed a notification dated 12 May, 2020 which mandates the filing of default record from Information Utility (“IU”) thus, changing the directory condition as mentioned in Section 7(3) of the Code to a mandatory one. An IU is defined under Section 3(21) of the IBC as a ‘person who is registered with the Insolvency and Bankruptcy Board of India (“IBBI”) Board as an information utility under Section 210 of the Code’. It is a network wherein the information relating to the financial data is stored. Its main objective is to provide a platform for submission and storage of financial information by entities, its authentication as well as access to this information as and when required. As of now, the National E-Governance Services Limited (“NeSL”) is the first and the only registered Information Utility with the IBBI owned by the State Bank of India and the Life Insurance Corporation among others. Section 7(3) IBC – Mandatory or Directory? Section 7(3) of the IBC uses the word ‘shall’ while mandating the requirement of record of default to be submitted along with the application to initiate the CIRP by the financial creditor, but the provision does not mention that it is mandatory to submit such record of default only after procuring it from the IU. The Apex court in the case of Union of India v. A.K Pandey had interpreted the word ‘shall’ as – “it will always be presumed by the court that the legislature intended to use the words in their usual and natural meaning. If such a meaning, however, leads to absurdity, or great inconvenience, or for some other reason is clearly contrary to the obvious intention of the legislature, then words which ordinarily are mandatory in their nature will be construed as directory, or vice versa”. Furthermore, the Supreme Court in 2005 had made a significant observation in the case of Kailash v. Nankhu with regards to the applicability of the procedural rules –   “All the rules of procedure are the handmaid of justice………….Unless compelled by express and specific language of the Statute, the provisions of the CPC or any other procedural enactment ought not to be construed in a manner which would leave the court helpless to meet extraordinary situations in the ends of justice”. In the case of Shreenath v. Rajesh, the Apex court had made a relevant finding – “In interpreting any procedural law, where more than one interpretation is possible, the one which curtails the procedure without eluding the justice is to be adopted. The procedural law is always subservient to and is in aid to justice. Any interpretation which eludes or frustrates the recipient of justice is not to be followed”. Thus, it is implied that the procedural requirements are not strictly mandatory in nature and could take a back seat in order to meet the ends of justice. They should not become an obstruction to justice, rather should aid to justice. Furthermore, the word ‘shall’ will not be construed as mandatory in nature in every circumstance but would depend on the intention of the legislature. The intention of the legislature is quite clear over here that the application for CIRP must be furnished along with any record of default and that could be either procured from the IU or any other means so as the default is proved. In 2017, the Apex court in the case of Surendra Trading Company v. Juggilal Kamlapat Jute Mills Co. Ltd. & Ors was faced with an issue that whether the requirement of 7 days to cure the defect in application to initiate CIRP as mentioned in the proviso to Section 9(5) IBC is mandatory or directory in nature, to which the court held that it is a mere procedural requirement and cannot be held as mandatory in nature. Furthermore, in the case of Pioneer Urban Land & Infrastructure Ltd. v. Union of India, the Apex court observed that – “the absence of any consequences for infraction of a procedural provision implies that such a provision must be interpreted as being directory and not mandatory”. Thus it is quite evident that such procedural requirement of filing of default record from IU is directory and should not have been made mandatory as even if furnishing the evidence of default from any other source would not lead to any prejudice to the other party. NCLT’s Authority to issue such notification– Contrary to Parent Provision Section 196(1) (t) of IBC authorizes IBBI to make regulations and guidelines on matters relating to insolvency and bankruptcy but nowhere mentions any such power to be with NCLT or its appellate body. Interestingly, the notification does not even mention the enabling provision through which the NCLT is issuing such an order but it can be presumed that NCLT invoked its inherent power mentioned in Rule 11 of the NCLT Rules, 2016 which authorizes the NCLT to issue such order to meet the ends of justice or to prevent abuse of the process of the Tribunal. However, it is a well settled position of law that any rule making power cannot restrict the provision of the enabling act. The Apex court in the case of State of Karnataka v. H. Ganesh Kamath[i] held that “it is a well settled principle of interpretation of statutes that the conferment of rule-making power by an Act does not enable the rule-making authority to make a rule which travels beyond the scope of the enabling Act or which is inconsistent therewith or repugnant