Insolvency Law

[By Aashka Zaveri & Aditya Panuganti] The authors are students of Symbiosis Law School, Pune and National Law School of India University (NLSIU) respectively.   Introduction India’s first International Financial Services Centre (“IFSC”) was set up in 2015, in Gandhinagar, Gujarat, and christened Gujarat International Financial Tec-City (“GIFT City”). The IFSC was established to transform India into a global financial services hub. While the Union has taken steps to ensure that GIFT City enjoys a predictable and simple regulatory framework, the lack of a robust cross-border insolvency regime in India is a striking lacuna in empowering India’s IFSC.  In this piece, the authors will analyse the current insolvency regime in GIFT-City and highlight the shortcomings inherent in the same. Subsequently, the authors compare the regulatory regimes in Dubai and Hong Kong before arguing for the adoption of a more robust framework in India.   Current Regulatory Regime Section 31 of the International Financial Services Centre Authority Act (“IFSCA”) gives the Union government the power to exempt financial products, financial services or financial institutions in an IFSC from the application of any other Act, Rules or Regulations passed by the Union. Since the IFSCA has not notified any special provisions relating to insolvency or the bankruptcy process, the Insolvency Bankruptcy Code, 2016 (“IBC”) will apply in IFSCs until specified otherwise.   The IBC is not fully capable of addressing the needs of entities situated within the IFSC. Unlike other jurisdictions, the Indian IFSC neither enjoys a designated insolvency court or tribunal that has exclusive jurisdiction over the Centre, nor a robust cross-border insolvency regime, but continues to rely on the IBC process. Sections 234 and 235 of the IBC provide for bilateral or multilateral arrangements with other countries to bring transnational assets belonging to the corporate debtor within the Code’s purview. This is a far cry from the UNCITRAL Model Law on Cross Border Insolvency framework that was recommended by the Insolvency Law Committee. Uncertainty surrounding the treatment of foreign creditors and the discretion-based system of cross-border insolvency that prevails in India may potentially deter cross-border investment, defeating the IFSC’s stated purpose of being a business-friendly regulatory zone.  There has been a consistent call for adopting the UNCITRAL Model since it is a credible framework that has been widely adopted globally. The UNCITRAL Model Law is founded upon the doctrine of modified universalism– a belief that a court should cooperate in the distribution of a debtor’s assets on a worldwide basis in a single judicial proceeding, subject to such proceedings being consistent with territorial law and public policy   The Model Law would bring about a sense of predictability and certainty for both foreign and domestic creditors. A consolidated Insolvency regime that incorporates the UNCITRAL Model law is essential to bring GIFT City on par with other global financial hubs, and perhaps even surpass them.   A Comparative Perspective Dubai The Dubai International Financial Centre (“DIFC”) enacted the DIFC Insolvency Law, Law No. 1 of 2019 to bring about a comprehensive and singular insolvency regime for the DIFC. The new legislation was adopted in the wake of Abraaj Capital’s collapse. The Venture Capital firm, based in Dubai and registered in the DIFC, entered into liquidation in 2019. The firm once managed $14 billion in assets in many emerging markets around the world. After it entered into liquidation in the Cayman Islands, cross-border cooperation allowed the firm to consolidate its assets and preserve their value, ensuring the maximum payout to its creditors.   Dubai adopted the UNCITRAL Model Law in Part 7 of the Insolvency Law in 2019, a year after the Abraaj scandal. It is, however, interesting to note the 2023 Bankruptcy Law applicable to the United Arab Emirates at large, does not include these provisions. This amounts to a situation where the UAE’s onshore insolvency law and its offshore DIFC insolvency regime are different. Such a situation allowed foreign investors and businesses to shed the stigma attached to failed businesses and the insolvency process in the onshore insolvency regime. This allows the UAE to hold off on recognising the principle of comity inherent in the Model Law for onshore insolvency proceedings but ensures that the DIFC enjoys a regulatory regime that improves the ease of doing business and is considered to be a global best practice.   Hong Kong The Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”) is the applicable Insolvency statute in Hong Kong. The region has not adopted the UNCITRAL Model Law and creditors must rely on the courts’ discretion to apply common law principles to give effect to foreign insolvency proceedings. In Re CEFC Shanghai International Group Ltd, the Court laid down the test for recognising cross-border insolvency proceedings, and Hong Kong courts have also recognized cross-border restructuring proceedings, thus adopting the common law doctrine of universalism in liquidation proceedings.  However, courts can aid foreign insolvency proceedings only to the extent that Hong Kong law allows them to do so. In Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd, the administrators of a company sought the recognition of English insolvency proceedings and a stay on the enforcement of securities held by a Hong Kong security trustee. The court affirmed the principles of modified universalism and indicated the courts’ ‘generous’ attitude in recognizing and assisting foreign liquidation proceedings. However, it noted that the relief sought by the UK-based administrators could not be granted. The Court held that since no Hong Kong legislation or common law principle provides an equivalent to ‘administration’, the relief could not be granted. The administrators had not argued their case on the principles of equity but rather sought the court’s recognition and assistance under the principles of modified universalism.   Article 21 read with Article 25 of the UNCITRAL framework provides courts with the power to order a stay on the execution of a debtor’s assets upon a request by a foreign representative. Had Hong Kong adopted the Model Law, Madison could have been decided differently- an outcome that would have given effect to the principle

[By Yash Raj] The author is a student of Dr. Ram Manohar Lohiya National Law University.   Introduction India has witnessed an unprecedented surge in startup activity, with the ecosystem booming across the country. The exponential growth of startups in India can be attributed to various governmental schemes and initiatives like the Startup India Action Plan (SIAP) and the National Initiative for Developing and Harnessing Innovations (NIDHI) launched by the Government of India. Today, India has the world’s third-largest startup ecosystem after China and the US.  The Vulnerability of IP-Driven Startups In the rapidly changing business environment, startups nowadays often rely on intellectual property (IP) as their key asset, with trademarks, copyrights, patents, and other forms etc. forming the foundation of their business model. Every business, no matter how ambitious, is vulnerable to financial instability. A significant number of startups are now IP-driven startups dealing with proprietary tech, software, and various other forms of intellectual property to gain a competitive advantage in the market. Take, for example, an ed-tech company that may rely on its copyrighted content, while biotech firms could hold patents on drugs or medical devices. When such startups face insolvency, how their intellectual property is to be treated becomes a crucial issue and raises various questions regarding valuation, protection, and broader applications for the innovation ecosystem in India. The value of these companies is tied intrinsically to their intellectual property, making it a critical asset for the startup in any financial assessment done to the firm. Reports emphasize that a growing number of DeepTech startups in India rely on IP, especially patents, with over 900 patents filed by DeepTech startups since 2008. The focus on technology-driven sectors like artificial intelligence, healthcare, and blockchain has fueled this surge in patent activity, underlining the importance of IP in fostering innovation   Insolvency of companies in India is governed by the Indian Bankruptcy Code (IBC) 2016, which is applicable all over India with some exceptions relating to J&K. However, the Indian Bankruptcy Code does not have any specific provisions that deal exclusively with intellectual property (IP) rights during insolvency. It treats intellectual property as any other asset, forming part of the insolvency estate. In a significant case, Enercon (India) Ltd. v. Enercon GmbH, the importance of protecting IP rights during insolvency proceedings was highlighted. The dispute was between a German wind turbine manufacturer and its Indian subsidiary regarding the ownership and use of trademarks during Enercon India’s insolvency proceedings. This case highlights the importance of having clearly defined and well-drafted IP agreements to avoid potential disputes and protect the interests of the IP owner during insolvency.  The Problem in IP Valuation Unlike physical assets, IP assets are intangible, making their value difficult to estimate often leading to undervaluation. Undervaluation reduces creditor recovery, leading to losses and making them less likely to invest in similar startups. The ASSOCHAM and PwC reports on the Insolvency and Bankruptcy Code (IBC) highlight the poor recovery rates generally in India’s insolvency cases, attributing much of this to the absence of timely resolutions and specialized handling of intangible assets like intellectual property.  The absence of clear guidelines for valuing IP assets can result in undervaluation during insolvency, undervaluation can result in lower recovery for creditors, diminished returns for founders, and a loss of long-term growth potential, affecting the broader innovation ecosystem. When a business goes into liquidation and its assets are sold, the IP could drastically lose its value if it is not managed correctly. This is a critical issue for startups, whose most crucial value often lies in their intellectual property. New startups usually fail to acknowledge this value due to a lack of awareness and proper guidelines, leading to significant economic setbacks.   Countries like the U.S. and U.K. have specific rules in their bankruptcy laws that treat intellectual property (IP) as a unique asset. For example, the U.S. Bankruptcy Code allows licensors to maintain their licensing rights during bankruptcy (under Section 365(n)), protecting the value for startups and investors. Japan also has guidelines for valuing IP during insolvency, suggesting different strategies depending on the asset type. These approaches could serve as models for India to develop its own IP valuation frameworks.   Reforms to Address the Insolvency Challenges of IP-Driven Startups A proper approach is necessary to effectively resolve the insolvency challenges faced by IP-driven companies in India. Specific Provisions in the IBC for IP Assets The Indian Bankruptcy Code (IBC) lacks explicit provisions regarding the treatment and valuation of intellectual property during insolvency proceedings. Addressing this issue is critical for protecting the interests of both startups and creditors. A dedicated section in the IBC could bring much-needed clarity by recognizing IP as a distinct asset category with specific valuation and management protocols. The reforms should focus on:  IP as a Separate Class of Asset: Including provisions that treat IP as separate assets rather than grouping them with physical and other assets. This will allow for more tailored handling during liquidation and insolvency proceedings. Jurisdictions like Japan treat IP as a distinct asset, allowing for specialized handling separate from physical assets. Countries like the U.S and the U.K. also provide some special considerations for IP, but Japan’s approach emphasizes preserving the value and operational integrity of IP throughout the insolvency process.  Expert valuation: Mandating that intellectual property be valued by qualified IP experts during insolvency cases. This will prevent the undervaluation of these assets and ensure that creditors receive fair compensation.  Safeguarding Ownership Rights: The IBC should incorporate provisions that protect the ownership rights of intellectual property holders during insolvency. This will ensure that critical IP assets are not lost or diluted in insolvency, particularly in patent or trademark licensing cases.   Establish an IP Valuation and Insolvency Oversight Committee: This committee will guide courts and insolvency professionals on managing and valuing IP assets. Modeled after the U.S. Patent and Trademark Office (USPTO), this committee would standardize valuation practices, reduce undervaluation risks, and improve creditor recovery outcomes during insolvency. Development of Standardized Valuation Frameworks A significant

[By Hamza Khan & Divyanshu Kumar] The authors are students of NALSAR University of Law, Hyderabad.   Introduction In the case of NUI Pulp v. Ms. Roxcel Trading GMBH, the National Company Law Tribunal (“NCLT”) exercised power under Rule 11 of the National Company Law Tribunal Rules, 2016 (“NCLT rules”) to prevent the Corporate Debtor from alienating or encumbering any disputed assets during the pre-admission phase of the Corporate Insolvency Resolution Proceeding (“CIRP”). This effectively established a temporary moratorium until the application of CIRP was either admitted or rejected by the Adjudicating Authority (“AA”). Although the National Company Law Appellate Tribunal (“NCLAT”) affirmed this ruling, the possibility of an interim moratorium during the pre-admission stage remains uncertain.  Through a comment on this landmark case, the authors aim to address two pertinent questions: firstly, whether an interim moratorium in the pre-admission phase is desirable, and secondly, whether the NCLT, under Rule 11 of the NCLT rules, possesses the authority to grant such a moratorium for a Corporate Debtor. In pursuit of answers to these questions, the authors will analyse the reasoning provided in NUI Pulp and look for judicial developments following this case. Subsequently, the authors would examine the reports by the Insolvency and Bankruptcy Board of India (“IBBI”) and recommendations by the Insolvency Law Committee (“ILC”) to determine the necessity of an interim moratorium during the pre-admission period. Finally, the authors will juxtapose Rule 11 of the NCLT with Section 151 of the Civil Procedure Code (“CPC”) to determine whether granting an interim moratorium is within the inherent powers of the NCLT.  Judicial Analysis of Interim Moratoriums in CIRP: NUI Pulp and its Developments In NUI Pulp, the Operational Creditor substantiated its concern with sufficient evidence, demonstrating that the management of the Corporate Debtor intended to sell assets, pending admission of CIRP application, thereby causing wrongful losses to all creditors, including the Operational Creditor. The NCLAT noted that, given the significant threat, the NCLT was justified in issuing an ad-interim order before admitting the application under Rule 11 of the NCLT Rules.  Following this line of reasoning in F.M. Hammerle, the NCLT granted interim injunctions in the CIRP prior to the admission of the application. In Phoenix ARC Private Limited v. Precision Realty Developers Private Limited, the NCLT noted “To make out a case for grant of injunction and that too at the pre-admission stage, the Applicant is required to make out a strong prima facie case,” thus setting a threshold akin to three-pronged test of grant of interim injunction while rejecting the application for want of evidence.   However conversely, in Go Airways, the court noted the absence of provisions empowering the NCLT to grant injunctions at the interim stage. Thus, while there are rare instances of interim moratoriums being granted, these are exceptions rather than the norm and resemble injunctions more than moratoriums. This reflects a lack of clarity in the jurisprudence, requiring a deeper analysis.  Interim Moratorium: The Need of the Hour According to the section 7(4) of Insolvency and Bankruptcy Code (“IBC”), the AA is required to admit an application within 14 days of its receipt, provided it fulfills the necessary criteria. However, in actuality, this process often takes longer due to various factors. A case in point is Asset Reconstruction Company Limited v. Nivaya Steel, where the application for admission into CIRP remained undecided for over a year.   The IBBI’s study revealed that at pre-admission stage of CIRP, due to the lack of imposition of moratorium, there is a high risk of deterioration of value of asset. The ILC report underscored that such prolonged delays could encourage asset siphoning by promoters and induce creditors to enforce debts. Following the UNCITRAL Guide to address this issue, countries like the UK and the US have incorporated the provision of an interim moratorium in their code. Referring to the same, the ILC recommended granting of discretion to the AA to balance the interests of stakeholders, recognizing potential harm to certain creditors by an automatic interim moratorium pending admission. The committee also recommended AA’s discretion to include the ability to modify or withdraw the moratorium order if unjustifiable harm to a creditor is proven.  The introduction of an interim moratorium is critically essential in India, where there is a shortage of judicial manpower to promptly address CIRP admission. This measure would effectively prevent individual creditors from taking action against the Corporate Debtor, thereby safeguarding its chances of revival. It would also deter the Corporate Debtor’s management from siphoning off its assets. Thus, following the ILC report, the IBC should be amended to incorporate provision for interim moratorium in part II of the IBC as well, and NUI Pulp is a welcome step in recognizing the need for interim moratoriums and seeking to preserve the value of the Corporate Debtor by taking such step. The need for introducing such a measure has been previously discussed and highlighted, yet there is no subsequent development regarding the same.  The scope of inherent powers of NCLT While acknowledging that in certain circumstances, grant of an interim moratorium could preserve the value of the Corporate Debtor and thus become crucial for achieving the very objective of the IBC, it is our opinion that the NCLT does not have the power to do so under Rule 11 of NCLT Rules, and the same is untenable in law.  This has been orally remarked by the NCLT in the subsequent case of Go Airways Interlocutory Application (“IA”) praying for interim moratorium. The NCLT stated, “there is no provision in IBC which grants the NCLT the power to impose interim moratorium”.  An in-depth analysis of the inherent powers given to the NCLT under Rule 11 would clearly substantiate the position taken in Go Airways.  Rule 11, which is under contention deals with the inherent powers of the NCLT to make orders in the interests of justice. This is identical to Section 151 CPC which grants similar powers to the civil court to meet the ends of justice and

[By Arzoo Kedia] The author is a student of Hidayatullah National Law University.   Introduction The insolvency regime in India is governed by the Insolvency and Bankruptcy Code (“IBC”) of 2016 and has been at the forefront of innovation. IBC has spurred several novel ideas, such as specifying only one class of financial creditors voting ignoring the security, and having the operational creditors left out during the vote on the resolution plan, all of them otherwise being protected by their rights pre-insolvency. These provisions are considered to be one of the strongest cross-class cramdown provisions in the world. Apart from this, the other distinctive features of IBC include Section 29A (debar the defaulting promoter), Section 32A (immunity from prosecution for past acts), Section 12A (allowing withdrawal of the Corporate Insolvency Resolution Process [CIRP] upon settlement), and the sale of a company as a going concern in liquidation to ensure that the company is rescued.  However, under these new developments, the lengthy time of CIRP has, in most cases, remained a heavy financial drain on the creditors. A recent order by the National Company Law Tribunal (“NCLT”) Hyderabad in the KSK Mahanadi Power Company case, allowing an interim distribution to the creditors before the final resolution plan, is a welcome development in this light. This article examines the evolution of interim distribution in Indian insolvency law, with specific reference to the KSK Mahanadi Judgment, and discusses its broader implications for insolvency proceedings in India.  The article is structured as follows: It first gives an overview of the historical context and legal basis of interim distribution in India and elsewhere, which then leads to an analysis of the absolute priority rule with a focus on its flexibility in the Indian context. Finally, it goes deep into the specific implications of the KSK Mahanadi Judgment and the emerging trends in judicial discretion in the absence of legislative clarity. The conclusion will discuss whether there might be a need for legislation to be rewritten and contrast the approach taken within the UK insolvency systems.  Historical Context and Legal Basis An interim distribution is a temporary measure that involves distributing a portion of the assets while the case is still ongoing. It can be arranged through mutual agreement between the parties, or either party may request the court to order it. Although quite new in India, interim distribution has its origin in the laws of other jurisdictions, in particular, in the United Kingdom. In the UK, insolvency legislation stipulates that, administrators are allowed to make interim distributions while going through the administration process. This helps manage the cash flow needs of creditors whilst the insolvency process is still on.  The legal basis is strained in India and highly underdeveloped, and the IBC does not expressly provide for it, though the NCLT has occasionally allowed this to ensure that the interests of creditors are protected. The principle was first actually laid down by the National Company Law Appellate Tribunal (“NCLAT”) in the resolution of the IL&FS group. This directive, among several others, was passed by the NCLAT in May 2022, which directed IL&FS to release funds towards public funds, even before the final resolution process of the relevant IL&FS entity. The case of KSK Mahanadi Power Company further made the trend of decisions clear, as in long-drawn insolvency processes, financial relief is almost a rarity. Recently, the NCLT’s Hyderabad bench approved an interim distribution in the case of KSK Mahanadi Power Company, a company that had accumulated a cash balance of over ₹9,000 crores while under the Corporate Insolvency Resolution Process (“CIRP”) for an extended period, surpassing the 270-day timeline. Given the extended duration of the process and the need to protect creditor interests, the NCLT sanctioned the distribution of ₹6,400 crores from the surplus cash among the lenders, even before the resolution plan had been approved.  This decision was driven by the specific circumstances of the Indian market and the extended CIRP timeline. It marks the first instance in which creditors will recover a portion of their dues before the approval of a resolution plan, setting a precedent for future cases. The legal rationale for this decision lies in the necessity of balancing the creditors’ interests with the ongoing operation of the company, ensuring that creditors are not unfairly disadvantaged by delays in the resolution process.  Although the IBC does not explicitly address interim distributions, several provisions implicitly support this practice. Section 53 establishes the order of priority for the distribution of liquidation proceeds, emphasizing that secured and higher-ranking creditors must be paid before unsecured creditors and shareholders. However, this section does not address the treatment of interim distributions, allowing room for judicial interpretation. Section 29A bars delinquent promoters from participating in the resolution process, ensuring that interim distributions are made to credible and eligible parties. Additionally, Section 32A provides immunity to companies and their assets from prosecution for past actions, facilitating smoother interim distributions by removing legal barriers related to the previous management’s conduct. These provisions collectively contribute to a framework where interim distribution can be justified as a means of balancing the interests of all stakeholders, particularly in cases where the insolvency process is expected to be lengthy.  The Absolute Priority Rule and Its Application to India’s Law of Insolvency The absolute priority rule is a fundamental concept in insolvency law, particularly in countries like the United States, where it is strictly adhered to. This rule requires that senior creditors must be fully paid before any funds are distributed to junior creditors or equity holders during liquidation. It is designed to ensure fairness in the distribution of a debtor’s assets, guaranteeing that those with higher priority claims are not disadvantaged during the insolvency process. However, this rule is not explicitly included in India’s IBC. The IBC’s method for handling creditor payments, particularly during the resolution process, provides a certain level of flexibility. This is because the doctrine established by courts and tribunals has been to entrust decisions regarding the distribution of resolution

[By Sparsh Srivastava] The author is a student at National Law University Odisha.   Introduction Earlier this year, the Supreme Court of India was presented with a pivotal question: Does Section 30(2)(b)(ii) of the Insolvency and Bankruptcy Code 2016 (“IBC”), as amended in 2019, entitle a dissenting financial creditor to be paid the minimum value of its security interest? The implications of this question are significant for the treatment of dissenting financial creditors and its rippling effects on the Corporate Insolvency Resolution Process (“CIRP”).  The Apex Court decided that a dissenting financial creditor (“DFC”) who did not agree with the proposed resolution plan is entitled to refrain from participating in the proceeds outlined therein unless a higher amount aligned with its security interest is approved within the resolution plan. In other words, a DFC has right to be paid a minimum amount of its security interest. It is to be noted that the amount to be paid to the DFC must adhere to the amount as prescribed in the event of the liquidation of the corporate debtor under Section 53(1). Essentially, it provided that the is entitled to a monetary value equivalent to its security interest.  It also highlighted that the conflict with section 30(2)(b)(ii) does not arise since it pertains to the minimum payment to be made to an operational creditor or a dissenting financial creditor. The idea behind such provision is to prevent jeopardizing and recognizing the rights and interests as the Dissenting financial creditors do not vote in favor of the scheme, while operational creditors do not have voting rights, therefore their interests must be secured.  The reasoning provided therein prima facie looks good in law, though it fails to look into the practical possibilities that may lead to dire consequences. The author attempts to look at the judgment through different lenses to critically appraise the judgement while drawing inspiration from other jurisdictions.   The Way to DBS Judgement By bare reading of section 30(2)(b)(ii), it is clear that the proposed resolution plan by the resolution applicant shall provide the payment to a dissenting financial creditor, which is not less than the amount payable in the event of liquidation of the corporate debtor. The Supreme Court reinstated the position and held that a dissenting financial creditor is entitled to a minimum liquidation value.  In Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd., the Supreme Court clarified that a secured financial creditor who dissents may enforce their security interest to the extent of their claim. Further, in the recent DBS Bank judgement, the Supreme Court reinstated that a dissenting financial creditor is entitled to at least the value of their security interest.  The Principle of ‘First in Time, First in Right’ The legal maxim “Qui prior est tempore potior est jure” underpins the Doctrine of Priority, which is relevant in the present context of secured transactions. Section 48 of the Transfer of Property Act stipulates that when rights are created by transfer over the same immovable property at different times, each later created right shall be subject to the rights previously created unless a special contract or reservation binding the earlier transferees is in place.  Applying this doctrine in the present scenario, it can be argued that the liability of the Corporate Debtor and the right of the Financial Creditor to a specific amount arise only when the resolution plan is approved by the CoC, creating new rights and liabilities.   Section 31 of the IBC creates a binding effect on all creditors, including dissenting financial creditors, indicating the legislative intent to prioritize the resolution process. Since the resolution plan applies uniformly, no creditor’s rights can be considered as superior to another’s. Therefore, creditors, whether assenting or dissenting, should stand on equal footing as the resolution plan supersedes previous contracts and establishes new rights and liabilities.  Expert Opinion: Looking into the ILC Report According to the Report of the Insolvency Law Committee 2018, regulation 38(1)(c) of the Corporate Insolvency Resolution Process (CIRP) Regulations mandates that dissenting financial creditors are paid at least the liquidation value in priority to other financial creditors who voted in favor of the resolution plan. The Committee suggested that prioritizing payment to dissenting creditors might not be prudent as it could incentivize financial creditors to vote against the plan, potentially hindering resolution.  The Committee recommended improving the quality of resolution plans through sustained efforts by regulatory bodies rather than altering statutory guarantees. However, this argument is flawed for several reasons. Firstly, discouraging financial creditors from voting against the resolution plan conflicts with their right to dissent and could undermine their interests. Secondly, focusing on better resolution plans does not address the core issue and instead adopts a superficial approach.  Drawing Parallels from other Common Law Countries In the United Kingdom, under Section 901G of the Companies Act 2006, which deals with the sanction for compromise or arrangement where one or more classes dissent, the court can sanction a compromise or arrangement even if a dissenting class has not agreed, provided two conditions are met. The first condition requires that the court be satisfied that dissenting class members would not be worse off than in the event of the relevant alternative, typically liquidation. The other requirement is that the compromise or arrangement has been agreed upon by a majority representing 75% in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative. In case of liquidation, the secured creditors, both would have the option to realize their security interests.  The US Bankruptcy Code contains a similar provision under 11 U.S. Code § 1129, which outlines the requirements for plan confirmation. It states that each holder of an impaired claim or interest must receive or retain property under the plan of a value not less than the amount they would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. This provision ensures

[By Anwesha Nanda & Ankit Raj] The authors are students of National Law University Odisha.   Introduction The essence of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as per its Preamble is to guarantee timely resolution and revival of the Corporate Debtor (“CD”). By adhering to its core principle, it helps build confidence in creditors and minimise undue delay in the process of resolution. However, a recent ruling of the Supreme Court (“SC”) by a three-judge bench led by the Chief Justice of India in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Others (“GNIDA”) seemingly deviates from this objective.  The IBC has a well-defined structure for corporate insolvency resolution, which is led by resolution professionals (“RP”), a committee of creditors (“CoC”), and finally an adjudicating authority for approval of the insolvency resolution plan. Given this context, a critical point to ponder is whether any creditor or person whose interest has not been considered, with due care by the CoC, can approach the adjudicating authority to revisit the approved resolution plan?  The answer to this question was dealt with in the case of GNIDA. The SC framed the issue of whether the adjudicating authority, notably the National Company Law Tribunal (“NCLT”) has the power to revisit their judgement by recalling it. The SC ruled that the NCLT has inherent power to recall the judgement under certain circumstances. While acknowledging the potential advantage of the judgement in certain circumstances where the interests of creditors are hampered, at the same time some loopholes can be misused by unscrupulous parties to re-hear matters or cause deliberate delays. In this article, the authors undertake a critical analysis of the SC’s decision, contending that the verdict diverges from the overarching objectives and preamble of the parent statute, i.e., the IBC.  Factual Matrix In this case, GNIDA filed an appeal against an order issued by the NCLT, which was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”), approving the resolution plan for M/s. JNC Construction Pvt. Ltd. (Corporate Debtor). GNIDA had given land on lease for 90 years for the residential project to the CD in consideration of some premium payable by it. The lease agreement was subject to payment of premium at due time which was breached by the CD. In the meantime, through a company petition, the CD was taken into insolvency under the IBC.  Following the initiation of the Corporate Insolvency Resolution Process (“CIRP”), GNIDA submitted its claim as a secured financial creditor. However, the RP classified the claim as that of an operational creditor and admitted only a portion of it. To further clarify its position, the RP sought a claim in Form B to designate it as an Operational creditor of CD. Subsequently, there was no further communication from the side of GNIDA because of which a part of the claim was acknowledged and incorporated into the resolution plan. GNIDA’s primary argument arose from the incorrect handling of its claim within the resolution plan and concerns regarding the principles of natural justice.  Understanding Recall of an Order or Judgement. The recall of an order or judgement necessitates “reversal” or “revocation” of the order or judgement owing to the defects during the procedure. In the cases of Agarwal Coal Corporation Private Limited v. Sun Paper Mill Limited and Rajendra Mulchand Varma v. K.L.J. Resources Ltd. The NCLAT held that the NCLT or NCLAT lacks the authority to review or recall its judgments due to the absence of specific provisions in IBC. However, this issue was referred to a five-member bench of the NCLAT in Union Bank of India v. Dinakar T. Vekatasubramanian. (Dinakar T. Vekatasubramanian). The bench concluded that while the NCLAT cannot review its own judgments due to the lack of statutory backing, it does possess the power to recall judgments under Rule 11 of the NCLAT Rules, 2016, which grants inherent powers to the tribunal to ensure justice. Additionally, it stated that the power to recall a judgement can be exercised only when any procedural error is committed in delivering the earlier judgement. This interpretation was later upheld by a two-judge bench of the Supreme Court in Union Bank of India v. Financial Creditors of M/s Amtek Auto Ltd. & Ors.  Furthermore, it is well established in Budhia Swain & Ors. v. Gopinath Deb & Ors. (Budhia Swain) that the criteria for recalling an order are: firstly, the proceedings leading to the order are fundamentally flawed due to a clear lack of jurisdiction; secondly, the judgement was obtained through fraud or collusion; thirdly, there was also a mistake by the court that caused prejudice to a party, and the judgement was delivered without including a necessary party; Additionally, the court clarified that the power to recall a judgement couldn’t be exercised when the pleader had an option available to reopen the proceeding in the original action or where proper remedy by way of appeal or revision was available as an alternative and was not taken into consideration.  Critical analysis The IBC was enacted to assist debt-ridden companies promptly, emphasizing the importance of time in the resolution process. In the GNIDA, it was allowed to recall the order approving the resolution plan even after more than 3 years of the commencement of the resolution process. This effectively gives a second life to the insolvent company. By recalling an order that approved the resolution plan, the SC essentially examined the plan itself and explicitly delegated similar power to the NCLT. This is evident from the SC’s scrutiny of compliance standards and deficiencies outlined in Section 30(2) of the IBC.   The SC allowed the recall application because the resolution plan did not comply with Section 30(2) of the IBC. The grounds laid down in the case of Budhia Swain, do not apply in this situation. By making this decision, the SC has effectively added non-compliance as a valid reason to file a recall application. This could enable dishonest promoters or creditors with ulterior motives to delay the resolution process

[By Soniya Raghuwanshi] The author is a student of Institute of Law, Nirma University.   Introduction The Insolvency and Bankruptcy Code (IBC) of 2016 marked a significant shift from the previous rigid legal frameworks, focusing on a more holistic approach to insolvency. Unlike earlier statutes that concentrated on recovering loans, the IBC emphasizes loan restructuring, aiming to strike a balance between the interests of creditors and corporate debtors. This ensures the survival of the company while also satisfying the creditors’ claims.  The Clean Slate Theory (CST) posits that once Resolution Plan is approved by Committee of Creditors and subsequently by the approval of Adjudicating Authority then, all claims, whether resolved or unresolved, are extinguished. This doctrine ensures that successful resolution applicant can take over the business without any lingering liabilities. The Committee of Creditors (CoC) play crucial roles in enhancing the effectiveness and integrity of the insolvency process. A recent ruling by Justice N. Seshasayee of the Madras High Court in the case of “The National Sewing Thread Company Limited vs. TANGEDCO” highlighted the importance of transparency and full disclosure in the IBC proceedings. The judgment reaffirmed the CST’s application, the CoC’s commercial discretion, fair treatment of creditors, and the need for judicial supervision, ensuring that the principles of the IBC are upheld in practice.   This article therefore, delves into the implication of Clean Slate Theory and examines substantial questions regarding the validity of claims post-approval of a resolution plan, the equitable treatment of operational creditors, and the extent of judicial oversight in insolvency proceedings for ensuring transparency and fairness This case also underscores critical aspects of the Insolvency and Bankruptcy Code (IBC) in India thus brings to light the critical balance between the CoC’s commercial wisdom and the need for transparent and fair resolution processes under the IBC.  Analyzing the Implications of IBC Resolution Plans on Creditor Claims and Judicial Oversight The recent case involving TANGEDCO’s claim for unpaid electricity charges against The National Sewing Thread Co. Ltd. brings to the forefront several critical aspects of the Insolvency and Bankruptcy Code (IBC) and its application. Wherein to determine “TANGEDCO’s Post-Plan Claim Validity under IBC, “The heart of the dispute lies in whether TANGEDCO’s claim for unpaid dues can survive the approval of a resolution plan under the IBC. The petitioner’s stance is that the resolution plan nullifies the claim, while TANGEDCO insists that the resolution plan failed to address its statutory dues. The resolution plan’s binding effect, as per Section 31 of the IBC, suggests that once approved, it should extinguish all prior claims, including those of statutory creditors.  Furthermore, the question pertaining to the compliance with IBC’s Section 30(2) which mandates fair treatment of operational creditors, ensuring they receive no less than the liquidation value of their claims. The resolution plan’s compliance with this section is pivotal, as it guarantees the minimum entitlement due to operational creditors and prevents their disenfranchisement. The need for the judicial review of Coc’s Commercial Decisions is crucial in determining the fairness.   The scope of judicial review over the CoC’s decisions is limited. Courts generally defer to the commercial wisdom of the CoC unless there is a glaring non-compliance with the IBC’s statutory requirements. The judiciary’s role is not to reassess the CoC’s business decisions but to ensure that the resolution plan meets the IBC’s provisions. However, the applicability of The Clean Slate Theory(CST) under the IBC posits that an approved resolution plan should wipe the slate clean for the corporate debtor, negating all previous claims and liabilities This principle is crucial for the resolution applicant to commence operations without the burden of past debts, providing a fresh start.  Therefore, the IBC strives for equitable treatment of all creditors, though it recognizes the distinct roles of financial and operational creditors. The resolution plan must not discriminate unjustly among different classes of creditors, ensuring that each class is treated fairly and equitably within the framework of the IBC  The Judicial Microscope The judgment delves into the M.K. Rajagopalan case, drawing parallels to emphasize the supremacy of the Committee of Creditors’ (CoC) commercial wisdom, contingent on the complete disclosure of information. The omission of electricity dues raised eyebrows, suggesting a deliberate act rather than an oversight.  In M.K. Rajagopalan v. Dr. Periasamy Palani Gounder, the Supreme Court emphasized that the CoC’s commercial decisions must be based on complete and transparent information and must ensure equitable treatment of operational creditors. The ruling highlighted that commercial wisdom of the CoC means a considered decision taken with reference to the commercial interests and the interest of revival of the corporate debtor and maximization of the value of its assets. This decision has introduced a much-needed responsibility to the thought process of the CoC, ensuring that their decisions are made with all relevant information.  The core Principle of Clean Slate Theory is to provide the Corporate Debtor with a fresh start, free from all the past liabilities and claims which ensures the debtor to be released from obligations and transgressions before the approval of resolution plan. The court emphasized that without complete disclosure of information, the core principle of the Clean Slate Theory is compromised. In the realm of insolvency proceedings, the Supreme Court has reaffirmed the critical importance of the Committee of Creditors’ (CoC) commercial wisdom in the evaluation and approval of resolution plans. This acknowledgment is predicated on the condition that such decisions are in strict alignment with the provisions of Section 30(2) of the Insolvency and Bankruptcy Code (IBC). The CoC, primarily composed of financial creditors, is entrusted with the responsibility to judiciously assess the practicality and sustainability of the proposed resolution plans.   Simultaneously, the Court has delineated the limited yet pivotal oversight role of the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT). Their function is to ensure that the resolution plan not only meets the statutory mandates but also dispenses equitable treatment to all classes of creditors, thereby upholding the integrity of the insolvency resolution process.   Moreover, the principle of equitable treatment of creditors, particularly operational creditors

[By Rahul Ranjan] The author is a student of National Law University, Odisha.   Introduction  The Insolvency and Bankruptcy Code (IBC), introduced in 2016, addressed the issue of financial distress for corporate entities, partnerships, and individuals by offering a time-bound framework for resolving insolvency. The 2015 BLRC report highlights that one of the core principles behind the design of the code is to ensure a Collective Process. Thus, the code aims to discourage individual actions that benefit only specific creditors at the expense of broader benefits for all creditors.  ​​​However, despite the inherent design of the code requiring creditor participation in a collective approach to liability restructuring through negotiation, before the second amendment which inserted Section 12A to the IBC, the code did not have any provisions that provided for the withdrawal of the Corporate Insolvency Resolution Process (CIRP) application after its admission before the Adjudicating Authority (AA) by a collective decision of the Committee of Creditors (CoC).  In this post, the author attempts to analyse Section 12 A of the code in the context of a recent NCLAT decision. An argument has been raised for collective decision-making under this section based on a comprehensive understanding of the intent behind the Act and its subsequent amendment.  Recent NCLAT’s decision  In Vijay Saini v Shri Devender Singh & Ors., the NCLAT, recently dealt with a case wherein an application under Section 12A was submitted by the respondent before the CoC. The proposal was supported by 40.15% votes of Financial Creditors in a class and Punjab National Bank which held 12.42% votes. Upon analysis of the results, the Resolution Professional concluded that the total votes in favour of the proposal are 52.57%, falling short of the 90% mark as stipulated under Section 12A. An application was filed eventually before the AA which in turn held that home buyers are to be treated as a class for all purposes including approval of a plan under Section 12A and consequently, the procedure under Section 25A(3A) ought to have been followed.  The question before the NCLAT was the manner in which voting with respect to an application under Section 12A needs to be computed.  At first, the Tribunal referred to the case of Swiss Ribbons Pvt. Ltd. vs Union Of India, wherein the Supreme Court explained the rationale of the 90% threshold and reiterated the Insolvency Law Committee 2018 (ILC) Report which held that reaching consensus among all financial creditors is crucial for permitting individual withdrawals because an ideal outcome is a comprehensive settlement encompassing all parties involved. Thus, a substantial majority of 90% is required to approve such withdrawals, reflecting the collective interest of the creditors. Thereafter, it referred to the provisions under the IBC and held that the proviso to sub-section 3A brought in a different voting process for Section 12A.   ​​​Under Section 25A (3A) it has been provided that the Authorised Representative (AR) under Section 21(6A) shall vote on behalf of all represented financial creditors based on the decision reached by a majority vote (over 50%) of those creditors who participated in the voting process but for applications submitted under Section 12A, the AR must vote as per the provisions of Subsection (3) which in turn provides that AR must act in the best interests of each represented creditor, in accordance with their instructions and vote based on their proportionate voting share, fulfilling the requirement of 90% as stipulated therein.   Scope for Collective Decision Under Section 12A  Though the tribunal rightly acknowledged the effect of the proviso under Section 25A(3A), it missed an opportunity to touch upon the scope of expanding the collective approach under Section 12A.   The rationale behind Act No. 26 of 2018, as outlined in its Statement of Objects and Reasons (SOR), was the need for further refinement of the IBC. This refined approach in the form of Section 12A underscores the shift from a creditor-debtor-specific proceeding to one encompassing all creditors of the debtor, as envisaged by the IBC. By discouraging individual actions for enforcement and settlement that prioritize individual benefits over the collective good, the IBC aims to ensure a more equitable outcome for all creditors. The Lok Sabha debates that occurred before the insertion of Section 25A relied on the 2018 report and explained the rationale behind the amendments brought in through the IBC (Amendment) Bill, 2019 which aimed to ensure the expeditious admission and completion of CIRP cases. Additionally, they seek to address the issue of voting deadlock, which has arisen in certain situations.   Furthermore, upon perusal of the provisions for AR, it can be seen that these have been inserted based on the recommendations of the 2018 report itself which in turn acknowledged that though the Code strives for greater participation by all CoC members in decision-making during meetings, large CoCs present significant logistical hurdles which can thus, be addressed through the use of ARs.  When the AR votes under the Section 12A, they must adhere to sub-section 3. But it should be noted that this sub-section unlike sub-section 3A does not explicitly provide for making decisions reached by a majority vote, however, it does not rule it out either. AR thus, should be able to make the collective decision after considering individual opinions of all creditors as directed under sub-section 3. This interpretation is in line with the principle of the Collective Process of the IBC. When the number of creditors in the CoC exceeds a certain threshold in number, a reduced percentage of votes can be prescribed, being subject to legislative domain.  Thus, upon securing such a reduced percentage of votes, the AR after considering the individual opinions of all the creditors should be allowed to make a collective vote. This style of voting will enhance the effectiveness and efficiency of the withdrawal process as it will enable the swift elimination of resolution plans that do not resonate with a specified percentage of creditors. This allows for more timely amendments and the introduction of new plans that better reflect the inclusive

[By Ayesha Nacario Gupta] The author is a student of Amity University, Rajasthan.   INTRODUCTION  The Insolvency and Bankruptcy code, 2016 (hereinafter the ‘Code’) is an important enactment by the legislature which provides for specialized mechanisms for insolvency and liquidation processes of corporate entities. The main highlight of this code is that it provides for the corporate insolvency process (hereinafter the ‘CIRP’) for financially distressed companies which is initiated on the application made to the Adjudicating authority i.e., the National Company Law Tribunal (hereinafter the ‘NCLT’) by financial or operational creditors, or even on the application of the corporate debtor itself by virtue of Sections 7, 9 and 10 of the aforesaid code respectively.  Even though the code emphasizes on providing a revival scheme for corporate entities in a “time bound manner” for “maximization of value of assets”, as stated in its preamble, it was observed that the code was unable to do so due to ambiguity in its text and various other external factors. The IBC laws were unable to provide a comprehensive mechanism to resolve matters relating to insolvency and bankruptcy within a reasonable time frame even though the law provides for it under Section 12. Therefore, in order to address this issue, an expert committee was constituted by The Insolvency and Bankruptcy Board of India (hereinafter the ‘IBBI’) to examine and produce a report regarding the scope of voluntary mediation in relation to various process under the code and also suggest recommendations. Therefore, this article aims to highlight various aspects of the report and its contribution to establishing a new paradigm of Insolvency and bankruptcy laws in India.  ABOUT THE REPORT  On 31st January, 2024, the IBBI published a report titled “Framework for Use of Mediation under the Insolvency and Bankruptcy Code, 2016”. This report was prepared by an expert committee constituted by the board and was headed by former secretary of Ministry of Law and Justice, Shri. T.K. Viswanathan. The expert committee, in its report, proposed that mediation can contribute as a supplementary mechanism to resolve conflicts which are associated with IBC laws.  The report suggests that adopting a non-adversarial approach will not only foster goodwill in business relationships but will also shield the Corporate Debtor from the negative connotations of insolvency, all while facilitating reconciliation of conflicts through amicable settlements.  The report, under the heading “Fundamental Objectives of the Framework” lays down its objectives which encompasses the following-   to expedite the resolution of insolvency cases by means of voluntary mediation,  to reduce pending cases that lie before NCLT,  to provide a specialist mechanism and infrastructure to settle insolvency disputes,  to maintain sanctity of timelines provided under the code,  to promote phased implementation,  to increase awareness of various stakeholders by means of mediation,  to foster insolvency mediation culture and encourage the use of mediation.  Hence, the recommendations made by the committee is vital to address pre-existing challenges of the Code by offering a more efficient, flexible, cost effective and collaborative approach by integrating mediation with IBC laws.  WHAT DOES IT BRING TO THE TABLE?  Firstly, the committee has recommended opting for the path of mediation to be voluntary (with consensus of parties) and a parallel process to the CIRP to make efficient use of time while also protecting the interest of stakeholders. “The essence of the framework is its independence and flexibility to provide room for quick incorporation of implementational learning,” the committee report said. It proposed the incorporation of mediation as an alternative dispute resolution (hereinafter ‘ADR’) mechanism within the existing statutory limitations and timelines of the IBC.  The committee further stated that it aimed to reconcile the objectives of the Code, including the timely restructuring of businesses and the maximization of asset value, while also allowing parties the freedom to voluntarily choose an ‘out-of-court’ mediation process, thereby improving the efficiency of the resolution process.   With the delegation of powers given to the Central Government, it may also prescribe rules for the basic structure if the insolvency mediation framework, the establishment of mediation cells in NCLT, the qualification required for the appointment of mediators and other essential notifications. On the other hand, the IBBI may specify the various procedures for the purpose of appointment of mediators and the method and manner in which insolvency mediations shall be conducted. It may also provide for the “automatic termination” of the insolvency mediation on the expiration of the given timeline.  It further opines the establishment of an internal mediation secretariat within the NCLT which shall be responsible to oversee, administer and manage the enforcement and conduct of insolvency mediation. However, this will also require the appointment of specialized mediators for resolving insolvency mediation disputes. Therefore, the report provided that such specialized mediators may comprise of retired members of NCLT/NCLAT, ex-senior officials in finance sector, insolvency professionals with more than 10 year of experience, and senior advocates to name a few.  Additionally, to prevent mediation from becoming an expensive affair, the committee proposes to provide a designated schedule on the various cost or fees associated with the mediation process and such fees shall be nominal. It also provides for the creation of a budget to reimburse any fee spent by the parties to NCLT. Such budget shall be managed by the mediation secretariat.  The committee also proposes to conduct “paperless mediation” by facilitating e-filing as it is of the opinion that conducting e-meetings would help NCLT achieve operational efficiency. Further, the committee insists on adopting hybrid or online mode for conducting mediation wherever possible.  On account of the above recommendations, it is understood that mediation would be seamlessly integrated into the existing framework of the IBC which will allow parties and various stakeholders to initiate mediation proceedings at any stage of the insolvency process starting from the pre-insolvency negotiations to the resolution and liquidation stage.  AUTHOR’S REMARKS  The committee report represents a commendable initiative by the IBBI to acknowledge the unique characteristics of ADR mechanisms. The framework provided by Shri. T.K. Viswanathan led committee is a right step