Author name: CBCL

[By Lakshmi Babu] The author is a corporate lawyer and currently pursuing LLM from Institute for Law and Finance, Frankfurt. Introduction India is witnessing an economic and consumption slowdown. The liquidity crunch in India’s shadow bank industry has slowly started to affect other sectors as well.[i] The defaults pertaining to IL&FS and the crisis faced by Punjab and Maharashtra Cooperative Bank (“PMC“) suggest the need for a more comprehensive resolution mechanism for financial institutions. The Insolvency and Bankruptcy Code, 2016 (“IBC“), generally deals with the insolvency and resolution of corporate entities, other than those providing financial services[ii]. It is a well-known fact that financial institutions handle public money and functions on the basis of the public trust and confidence placed on them. Even the slightest of distrust in their solvency has the ability to impute negative externalities which can affect the economy as a whole. The inter-connectedness of financial institutions and the inherent systemic risk therein, makes the process all the more prone to financial shocks.[iii] It is due to such considerations that financial institutions have to be treated differently from corporate debtors during insolvency and resolution process. The Government of India introduced the Financial Resolution and Deposit Insurance Bill (“FRDI Bill“) in 2017 which aimed to establish a resolution regime for banks, insurance companies and other financial institutions. However, the FRDI Bill was withdrawn within a year due to public outcry regarding a proposed bail-in clause, as a result of which there is a regulatory void in this regard. In the wake of increasing defaults in the financial sector, including that of IL&FS, DHFL and PMC, many experts believe that it is crucial to revive the FRDI Bill without delay.[iv] The regulation and protection afforded by a resolution legislation is essential to tackle the current financial slowdown that has impaired the Indian economy. In order to frame a healthy financial resolution framework, it is important to look at the standards set by the Financial Stability Board (“FSB“). Key Attributes by the Financial Stability Board FSB was established by the G20 to monitor and draft recommendations about global financial systems. The FSB issued a set of rules called the “Key Attributes of Effective Resolution Regime for Financial Institutions” (“Key Attributes“) in 2011. The core principles were adopted by the G20 in 2014 in order to reduce taxpayer support for solvency following the Global Financial Crisis (“GFC“). As a member of G20, India is committed to implement the Key Attributes into its domestic law. The Key Attributes have specified several factors to be included in such a framework, including: Co-operation with other jurisdictions so that resolution of global groups is eased;[v] Right to enforce temporary stay of early contractual termination rights by the appropriate authority and the enforcement of set-off, netting and collateralisation;[vi] Bail-in clause: A bail-in should be implemented, which respect the order of hierarchy of claims and shall convert all or part of unsecured and uninsured claims into equity (or other instruments of ownership);[vii] Creation of a temporary bridge institution wherein selected assets, liabilities and rights of a failed institution are transferred without the consent of shareholders and creditors;[viii] and Inclusion of branches of foreign firms in the resolution process.[ix] Rules for Financial Service Providers On 15 November 2019, the Ministry of Corporate Affairs (“MCA“) notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (“FSP Rules“) under section 227 of IBC. The FSP Rules prescribe a more exhaustive process of administration and liquidation of financial service providers as opposed to the already existing framework for corporate debtors. By a subsequent notification on 18 November, 2019, MCA clarified that FSP Rules shall be applicable to systemically important Non-Banking Finance Companies (“NBFC“) having an asset size of Rs. 500 crore or more including housing finance companies (“Approved NBFCs“).[x] The FSP Rules prescribe the Reserve Bank of India[xi] as the appropriate regulator for all the Approved NBFCs. It is clear that the FSP Rules shall deal with the resolution and liquidation of notified FSPs and this is applicable, pending a full-fledged insolvency framework for all financial institutions including banks. FRDI Bill and the proposed bail-in clause The Government of India made a laudable effort when it introduced the FRDI Bill in 2017. The Bill was aimed to provide a sound resolution framework for financial institutions, including banks, insurance companies, payment systems, SIFIs, mutual and pension funds, Indian branches of foreign financial institutions among other financial institutions. SIFIs are those financial institutions whose failure would have a significant effect on the economy as a whole owing to its size, complexity and inter-connectedness with other financial institutions.[xii] The Bill aimed to divide financial institutions on the basis of risk, into categories such as low, moderate, material, imminent and critical, based on capital adequacy and other factors. The financial institutions in the material and imminent categories have to submit a restoration plan/resolution plan and would be subjected to subsequent periodic monitoring by the appropriate resolution authority.[xiii] The FRDI Bill was withdrawn due to the inclusion of a proposed bail-in provision. Bail-in is a method to restructure debts of a financial institution. Under a bail-in clause, the appropriate authority will have the power to either cancel the debts owed to creditors or convert such debts into instruments of ownership like equity. This provision is generally invoked where it is necessary that a troubled financial institution continue functioning and a bail-in provision can be used by itself or as a part of a proposed merger or acquisition[xiv]. The public outcry was a result of the fear of using the bail-in provision at the expense of deposit holders. Presently, deposit-holders are subjected to a maximum deposit insurance coverage of Rs. 1 lakh by the Deposit Insurance and Credit Guarantee Corporation of India, which the FRDI Bill intends to repeal. The FRDI Bill has not revised the deposit insurance cover, which was last amended in 1993[xv]. It is pertinent to note that the deposit insurance coverage in

[By Aditya Suresh] The author is a third year student of National Law University, Jodhpur. Introduction The Insolvency and Bankruptcy Code[i] (“IBC”) intends to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate firms. This Code replaced the erstwhile Part VII of the Companies Act, 1956 (“1956 Act”), under which Sections 433(e) and 434 authorized the High Court to adjudicate upon winding-up petitions brought before it by creditors on account of a company’s inability to pay its debts.[ii] However, under Section 434(1)(c) of the Companies Act, 2013 (“2013 Act”) read with the amendments brought in after the passing of the IBC [such as the modification to the earlier Section 271(1)(a) of the Companies Act, 2013, pending proceedings before the High Courts pertaining to winding-up petitions as a result of inability to pay debts, are to be transferred to the National Company Law Tribunal (“NCLT”).[iii] The problem however, arises as a result of the first proviso to Section 434(1)(c), which provides that only proceedings which are “at a stage as may be prescribed by the Central Government” may be transferred to the NCLT.[iv] While Parliament passed the Companies (Transfer of Pending Proceedings) Rules in 2016 (“Transfer Rules”), these Rules did not adequately address the question of the stage after which proceedings may not be transferred.[v] Rule 5(1) provided that petitions under Section 433(e) of the 1956 Act where notice had not been served upon the respondent company, were to be transferred to the NCLT. This was extended by the Supreme Court in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.[vi](“Forech”), wherein the Court expounded upon the need to have all pending winding-up proceedings before High Courts transferred to the NCLT. In this case, the Court noted that on a conjoint reading of Section 434 of the 2013 Act, the Transfer Rules and the IBC, the legislature intended to have all proceedings transferred to the NCLT in order to further the objectives of the IBC, which were to “resuscitate the corporate debtors who are in the red”.[vii] The Court further observed that keeping this objective in mind, even petitions wherein notice had been served and the matter was lis pendens before the High Court, could be transferred to the NCLT upon an application for the same having been made by the creditors. Thus, this decision opened a Pandora’s Box of litigation wherein litigants applied for initiation of the CIRP process under the IBC and a transfer of proceedings to the NCLT. This is because corporate creditors wanted to opt for the contemporized rules under the IBC, which looks at resuscitation as the primary option through the appointment of the Resolution Professional, and the submission of resolution plans which would aim at revival of the company. While expansively dealing with transferability of cases in light of the IBC, the Court in Forech missed answering the important question which has been continually left unaddressed: at what stage in the insolvency process if at all, does such a transfer petition become untransferable? While the Delhi High Court in Tata Capital Financial Services v. Shree Shyam Pulp and Board Mills[viii] addressed this point, the Court here only ruled that the power to transfer is discretionary, and that it is incumbent upon the courts to decide whether transfer is viable at that particular stage in the winding-up process. However, another recent decision of the Delhi High Court provides more clarity on the Indian position regarding transfers after a winding-up order has been passed by the High Court and an Official Liquidator (“OL”) appointed. This next section analyses this decision of the Court. The decision in Action Ispat In Action Ispat and Power Pvt. Ltd. v. Shyam Metallics and Energy Ltd.,[ix] a division bench of the Delhi High Court decided in favour of allowing a transfer of insolvency proceedings to the NCLT even after a winding-up order had been passed by the High Court and an OL had been appointed under Section 448 of the 1956 Act. In this case, wherein the creditors sought transfer of the insolvency petition, the Court delved into an analysis of Section 434 of the 2013 Act, Rule 5(1) of the Transfer Rules as well as the IBC. On a conjoint reading of the aforesaid provisions, the Court found that the power of the Company Court to transfer proceedings to the NCLT is discretionary, and not limited to cases covered by Rule 5(1). Additionally, the Court found that the scope of proceedings under the High Court vis-à-vis that of the NCLT had to be looked into, and their relative benefits analysed. There was a difference in approach taken by the NCLT as opposed to an OL appointed by the Court. The NCLT, at all stages of the proceedings, looks at revival of the company as a primary option failing which the assets are liquidated. As opposed to that, the OL looks to satisfy creditors in a solely monetary sense, by liquidating the assets and letting each creditor have a proportional share. Relying on the judgment in Sudarshan Chits v. Sukumaran Pillai,[x] the Court herein found that winding-up orders were not irrevocable and that even after the winding-up order is passed, the petition could be transferred. Thus, the Court found that looking into the objectives of the IBC and that of the insolvency resolution process as mentioned in Forech, the will of the creditors in transferring the petition has to be upheld, unless there are compelling and irrevocable circumstances justifying a departure from such a transfer. Analysing the Decision of the Court: Objectives of the Insolvency Process Given the expansive analysis given by the Delhi High Court on the objectives of the IBC and the larger purpose of the insolvency resolution process, this decision merits some discussion. The author believes that the Delhi High Court rightly distinguished between the NCLT and the OL with respect to the functions and powers exercised. Section 457 of the Companies Act, 1956, which dealt with the powers of the OL, primarily allowed him

[By Suyash Tiwari and Aditya Prasad] The authors are fourth year students of Hidayatullah National Law University, Raipur and can be reached at tiwarisuyash475@gmail.com. The Insolvency and Bankruptcy Code (“IBC” or “the Code”) recently dealt with a spate of jurisdictional disputes vis-à-vis various other statutes including the Companies Act, 2013; Prevention of Money Laundering Act, 2002; the Arbitration and Conciliation Act, 1996 and the Tea Act, 1953. This article is concerned with such a conflict between the Securities and Exchange Board of India (“SEBI”) and the National Company Law Tribunal (“NCLT”). The present dispute is with regards to the attachment of certain properties by SEBI in an action against illegal mobilization of funds by a company, HBN Dairies. Background In 2015, a SEBI order was passed against HBN Dairies wherein it found floating a Collective Investment Scheme (“CIS”) without duly obtaining registration from SEBI under Section 12(1B) of the SEBI Act (“the Act”) read with Regulation 3 of the CIS Regulations, 1999. On appeal, SEBI’s founding was upheld by the Securities Appellate Tribunal. Subsequently, in 2017, SEBI ordered the attachment of 41 properties of the Company and a recovery certificate was issued to the tune of Rs. 1136 Crores to pay off the investors. However, since the investors under the scheme had not been paid off for several months, a group of 36 investors approached the NCLT preferring an insolvency application under Section 7 of the IBC. On 14th August, 2018, the NCLT admitted the application and declared a moratorium under Section 14 of IBC on the basis that the investors could be considered as financial creditors of the Company. Moreover, it was held that, the provisions of Section 14 of IBC would, by virtue of the non-obstante clause present in Section 238 of IBC, prevail over Section 28A of the SEBI Act which provides for recovery of money from a Company by selling movable or immovable property. The same was upheld by NCLAT on appeal. SEBI has now preferred an appeal before the Hon’ble Supreme Court of India in the case of SEBI v. Rohit Sehgal. [i] Feasibility of a Resolution Process On a prima facie inspection of the facts, we see that there is uncertainty whether the Code is the appropriate machinery under which the investors ought to seek remedy. Should the Supreme Court uphold the NCLAT order, it would be tantamount to defeating the express legislative intent of the Code. The Code seeks to act, not merely on behalf of the creditors, but for the more wholesome endeavour of insolvency resolution, while attempting to maintain or revive the business as a going concern. Reference can be made to Binani Industries Ltd. v. Bank of Baroda & Anr. [ii] which elucidates the above point. The NCLAT in that case made the following observations: The Code in Section defines Resolution Plan as a plan for insolvency resolution of the Corporate Debtor as a going concern. The Code does not allow liquidation of a Corporate Debtor directly, but only on the failure of the Resolution process. Further, the Code prohibits and discourages mere recovery of debt, which might only end up bleeding the Debtor’s resources to its death, as opposed to a resolution which seeks to keep it alive. On perusing the above, we find that the primary objective of any resolution proceeding under the Code is to preserve the business as a going concern; to which the recovery of debts is ancillary. An application under Section 7 of the Code does not entail a mere garage sale of the Debtor’s properties to satisfy his debts, but an earnest attempt to keep the business alive. However, keeping the business alive cannot be a suitable course of action with regard to HBN Dairies whose operations were declared illegal as it is in contravention of Section 12(1B) of the SEBI Act. Accordingly, SEBI ordered HBN to cease collection of further funds and initiated attachment and recovery proceedings against it. What this implies is that the business has effectively been brought to an end and the only remaining course of action left with regard to it is recovery, which as pointed out earlier, is not under IBC’s domain. A Resolution Plan is, thus, an inappropriate remedy for the investors to pursue, more so because the appropriate remedy, that is, the SEBI’s auctioning of HBN’s properties in order to pay back the investors has already been put into motion. Thus, the Supreme Court, in overturning the NCLAT’s order would be upholding the legislative intent of the Code as well as preventing an encroachment of the SEBI’s jurisdiction in investor protection issues. Jural Relationship as a requisite for existence of legal debt The Supreme Court also had the opportunity to shed some light on the question whether these investors may be categorized as financial creditors. In the instant case the investors were classified as financial creditors after relying on Nikhil Mehta & Sons (HUF) v M/s AMR Infrastructure Ltd. [iii] wherein it was held that those who have been committed assured returns on their investment are financial creditors. However, that order pertained to a legally binding relationship between the investors and the investees, whereas in the present case, the scheme run by HBN Dairies under which the returns were assured was illegal ab initio. In Shobha Ltd v Pancard Clubs [iv] NCLT Mumbai dealt with a similar factual matrix involving attachment of properties of a Company who had floated a CIS without registration. When the tribunal was adjudicating about the existence of a financial debt it held that: “There is no jural relationship in between this Petitioner and the Corporate Debtor because the contract purported to have been entered between this Petitioner and the Corporate Debtor is not recognised by any law, indeed there is a prohibition under SEBI Act to collect funds as mentioned under Section 11AA of the SEBI Act unless and until license for CIS has been granted by the SEBI.” Thus, the NCLT stated that the returns promised cannot be