Insolvency Law

Section 12A of the IBC: Facilitating Collective Withdrawals and Balancing Creditor Interests

[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

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IBBI Recommends Mediation: Integration of ADR with IBC Laws

[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

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Imposition of Moratorium: Analysing the Need for A Broader Interpretation

[By Aditya Vaid & Anvita Sharma] The authors are students of Jindal Global Law School.   Introduction  In a significant ruling in the case of Ansal Crown Heights Flat Buyers Association (Regd.) v. Ansal Crown Infrabuild Private Limited and Others (“the case”), the Supreme Court of India recently delineated that the implementation of a moratorium as stipulated in Section 14 of the Insolvency and Bankruptcy Code (“IBC”) does not hinder the enforcement of a decree against directors or officers of entitles undergoing Corporate Insolvency Resolution Process (“CIRP”) under the IBC.   A complaint was filed by the Homebuyers Association (“Appellant Association”) against the developers of the project, Ansal Crown Infrabuild Pvt Ltd. (“Developer Company”) before the National Consumer Disputes Redressal Commission (“NCDRC’). Subsequently, a petition under Section 9 of the IBC was filed before the National Company Law Tribunal (“NCLT”) seeking the initiation of CIRP against the Developer Company. Thereby, the NCLT commenced CIRP proceedings against the Developer Company and implemented a moratorium as per section 14 of the IBC. Thereafter, the Appellant Association filed an executive application before the NCDRC seeking the implementation of an order against the CD, i.e., the Developer Company and the Directors and Officers of the Company. The NCDRC refused to execute the said order due to the moratorium enforced under section 14 of the IBC. This order of the NCDRC was challenged before the SC, to which the Apex Court opined that the moratorium under the IBC is only available to the CD and not to the promoters, directors or other officers of the company.   Through this post, the author contends that the moratorium as outlined in section 14 of the IBC which prohibits the initiation of new proceedings or the continuation of existing ones, only applies to the Corporate Debtor (“CD”) and does not offer protection to the promoters of a financially distressed company. The author contends that the provision outlined in section 14, which constitutes the essence of IBC, should be interpreted expansively to ensure that the intended purpose and objective of the provision, as well as the code as a whole, are fully realized.  Legal Evolution: Analysing Past Precedents  In Anjali Rathi and others vs Today Homes and Infrastructure Pvt. Ltd and Ors, the agreement entered into by the parties was not duly complied with by the developer company. Consequently, the creditors raised a claim against the promoters and directors which was allowed by the SC as the moratorium imposed by the NCLT did not extend to the promoters and directors and was only limited to the CD. Through this judgment, the SC clarified that a party through a separate petition may choose to move against the promoters/directors or other officers of the CD, even though a moratorium was imposed under section 14 of the IBC. The Apex Court placed reliance on a judgement passed by a three-judge Bench of the SC in the case of P. Mohanraj V. Shah Bros. Ispat (P) Ltd.  Through the aforementioned ruling, the SC laid down the precedent regarding legal actions under sections 138 and 139 of the Negotiable Instruments Act, 1881. The same delineated that such actions would be covered under the ambit of the moratorium provision outlined in section 14 of the IBC.  However, the ruling emphasized that the moratorium applied solely to the CD and not to its management, Therefore, any ongoing proceedings against the management could proceed, and new proceedings could be initiated against them.  The decision of the SC in the present case allows the creditors of the CD to initiate proceedings against the management of the company, thus going against the underlying objective of section 14(1) of the IBC. The authors suggest that exempting key managerial roles such as promoters and directors from the moratorium not only endangers the creditors’ interests but also compromises the operations of the CD’s company.  The primary reason behind the same is that promoters or directors of a company handle all major decisions relating to the functioning of a company, and further litigation rounds could result in the loss of assets or properties, essentially rendering the objective of CIRP futile and making the moratorium under section 14 irrelevant.  Analysing the Provisions under the IBC  The provisions under section 13 (1) (a) of the IBC enable the Adjudicating Authority (‘AA’) to enact and enforce a moratorium on the CD. The moratorium period would be effective from the date of admission until the completition of the CIRP. Section 14(1) of the IBC prohibits the imposition of a moratorium on specific actions, including the recovery of property by an owner or lessor, as long as the CD possesses the said property. The primary objective of these provisions is to prevent Directors of a corporate entity from withdrawing or accessing available funds.  Furthermore, the IBC safeguards the assets and properties of the CD and guarantees the prompt conclusion of insolvency resolution proceedings by preserving the continuity of the corporate entity.    At first, it may seem like the legislature’s main goal was to restrict the extent of the moratorium delineated in section 14(1) of the IBC, which would be advantageous to the CD, its assets, and creditors. The underlying objective of section 14, which imposes a moratorium on the CD, is primarily to prevent the depletion of the CD’s assets during the CIRP. Simultaneously, it aims to keep the company operational as a going concern throughout the CIRP as doing so optimises the value for all stakeholders involved.   However, the continuation of this approach may have some gross defects that might work to the detriment of the interests of the CD. First, the underlying purpose of CIRP is to help the CD recover from financial difficulties and subsequently resume normal proceedings. Further proceedings against the CD may exacerbate their financial situation due to increased litigation expenses. Second, if the courts are faced with the conundrum of whether a proceeding benefits or harms the CD, then it may result in the judiciary making a decision based on a preliminary understanding of

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Deemed Resolution Professionals: A Judicial Step-Back?

[By Kanha Shrivastava] The author is a student of University of Petroleum and Energy Studies.   Introduction  The NCLT in SBI v. Teena Saraswat Pandey, IRP of Indison Agro Foods Ltd. effectively appointed the Interim Resolution Professional (hereinafter “IRP”) as the Deemed Resolution Professional by directing the IRP to continue performing the functions of a Resolution Professional (hereinafter “RP”) as a “Deemed RP” and barring any further applications for replacement. This has come against a backdrop of precedents by the NCLAT that provide for directly appointing the IRP as the RP. This case comment aims to critique the aforementioned judgment regarding its legislative backing, the applicability of judicial precedents, and its procedural irregularities, analyzing its applicability as a precedent. This also attempts to answer the question, “Whether deemed RPs can end prolonged corporate insolvency resolution processes due to the non-appointment of Resolution Professionals?”  Judicial Pronouncement  Since the enforcement of the Insolvency and Bankruptcy Code, in 2016, several cases have arisen where the financial creditors in a Committee of Creditors (hereinafter “CoC”) have been unable to reach a consensus in multiple meetings and achieve the required majority. A primary reason for such a deadlock is that66% of the voting shares are required to either appoint the IRP as the RP or replace the IRP with another RP under Section 22 of the IBC. Another reason behind this deadlock is that the IBC does not envision replacement of an IRP with another IRP.replacement.  In SBI v. Teena Saraswat Pandey, SBI had 61.87% of the voting shares in the first meeting of the CoC and proposed the replacement of the IRP, to which the rest of the two creditors objected. In the revised list of claims submitted in the second meeting, the voting shares of SBI were brought down to 51.43%. Therefore, SBI again proposed the replacement, which failed, resulting in a situation of deadlock. Consequently, an application was moved before the NCLT, whose judgment effectively appointed the IRP as the deemed RP by directing the IRP to continue as deemed RP and stating that it shall not entertain any application for replacement.  Background  There are a few precedents of the NCLAT which seem to not have been followed in the instant case, making its validity questionable. Specifically, Indiabulls Housing Finance Ltd. v. Sandeep Chandna (hereinafter “Sandeep Chandna”), wherein the NCLAT held that if a proposal has been rejected by a majority of members of the CoC, no member is empowered to approach the tribunal for replacement of the IRP under Section 22, imposing an additional condition apart from the voting share requirement, i.e., the consent of the financial creditors in the CoC. Accordingly, the application should have been outrightly rejected for lack of locus standi. It also did not utilise Anil Kumar v. Allahabad Bank (hereinafter “Anil Kumar”) wherein the NCLAT held that in case of a deadlock between the financial creditors, the appointment of an RP to break the stalemate is expedient. Therefore, under Rule 11 of the NCLT Rules (inherent powers), the RP was appointed, who was different from the IRP. Thus, in the instant case, even if the application was not rejected, a different person, ought to have been appointed as the RP.  Analysis   While the instant case did not follow the aforementioned judgments, it cannot be declared bad in law due to the principle of per incuriam which provides exceptions to the binding nature of judgments passed by superior authorities. Specifically, when a judgment provides a mere direction without laying down any principle of law, it is not a precedent as per the case of State of U.P. & Ors v Jeet S. Bisht & Anr. The Anil Kumar case merely stated the appointing of an RP as expedient, thereby making expediency the basis for passing the judgment. This reasoning was followed in the instant case as well because the IRP had acted in a bona fide manner and had already made the resolution plan.   It is also not against the principle laid down in the Sandeep Chandna case because of dual reasons. Firstly, the facts of the case are different, as SBI did not propose any name when it submitted the application and simply prayed for the NCLT to appoint any other person as the RP, rather than a specific person. Hence, a distinguishing interpretation of the Sandeep Chandna case can be seen here, such that it now disempowers only those applications which seek replacement with a specific person whose name has been rejected. Secondly, multiple provisions of the NCLT Rules, 2016 and the Companies Act, 2013 have stated that the NCLT shall be bound by the principles of natural justice, which includes Audi Alteram Partem. Hence, merely hearing and deciding a case on merits and then dismissing the application in any way does not go against the essence laid therein.  This case has also interpreted various provisions, namely, Regulations 17(3) and 16(3) of the CIRP Regulations, along with Section 16(3) of the IBC which state that the IRP shall perform the functions of the RP from the 40th day of the commencement of insolvency until an RP is appointed, tacitly providing for the existence of a deemed RP.   Regarding these provisions, on the one hand, it can be argued that the existence of the deemed RP  is conditional on the ultimate appointment of the RP. On the other hand, it can be argued that a mandate has been placed on the IRP to perform the functions of the RP after 40 days of non-appointment of the RP. Thus, the provision itself contemplates a situation where the RP may never be appointed and reiterates the importance of the underlying principle of the IBC i.e., completing the CIRP within a time-bound manner under 180 days. Following the latter interpretation, the judgment noted that discretion had been provided to it regarding the replacement of the IRP by appointing any other insolvency professional through precedents, but it was not expedient to do so as the IRP had already placed the resolution plan for the consideration of the CoC, and doing so at that stage would have no rational foundation.  In answering whether the appointment of a deemed RP can assist

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The Supreme Court Revisited the Conundrum of Insolvency Set-off 

[By Prathmesh Agrawal] The author is a student of WBNUJS, Kolkata.   Introduction A Set-off is a concept which basically refers to setting of monetary cross-claims between parties which produces a balance amount. It has wide application in different sections of law. In this article, we will deal with the concept of set-off in an insolvency proceeding and the legality of it, which was discussed by the Supreme Court in a recent case, Bharti Airtel v. Vijaykumar V. Iyer. The Apex Court has dealt with the post-IBC regime, where the courts have in numerous instances earlier, taken the position of disallowing set off in any Corporate Insolvency Resolution Proceedings (“CIRP”) considering section 14 of the Insolvency & Bankruptcy Code (“Code”), which imposes the moratorium. There is an absence of any mandate which upholds the applicability of set-off in a CIRP. Generally, the set off can be given five different meanings, being – 1) statutory set off; 2) common law set off; 3) equitable set off; 4) contractual set off, and 5) insolvency set off. Insolvency Set-off The concept of insolvency set-off, particularly, stands on the premise of ‘mutual credits’ and ‘dealings’, which were undertaken prior to insolvency proceedings. This proposition has also been observed by the House of Lords in the case of Re.: Bank of Credit and Commerce International SA (No. 8)[1]. Let us take an example to understand, where a company A has a debt of Rs 100 towards company B along with list of other companies. And, company B also has a reciprocal (mutual) debt of Rs 50 which is payable to company A. So, applying setting off rules would mean that company A has a balance debt of Rs 50 towards company B. But the problem in case of insolvency arises because company A does not necessarily have the capacity to repay the whole debt to all the creditors (secured or unsecured). So, say company A only has a quantum of Rs 500 to repay all of its creditors, whereas it has a total debt of Rs 1000. Then executing a set-off with company B will imply a repayment to company B, atleast the set-off amount. And, this is being performed before the distribution of any amount to any other creditors, which triggers the contravention of Pari Passu principle. Succinctly, the insolvency set off will mitigate the Doctrine of Pari Passu, which the Indian courts are hesitant to uphold. Although, in a UK case, National Westminster Bank v. Halesowen Presswork & Assemblies[2], the court clearly underscored the mandatory nature of set-off and implicated that right to set-off co-exists with moratorium during administration. Previous and Current Insolvency Regime in India Before the introduction of the Code in 2016, there was an explicit provision for insolvency set-off under section 56 of the Provincial Insolvency Act, 1920 (“1920 Act”), which is now repealed. This specific provision was in consonance with a similar provision in the Insolvency Rules, 2016 of the United Kingdom, which is currently in effect. Additionally, the Apex Court in Official Liquidator of High Court of Karnataka v. Smt. V. Lakshmikutty had also permitted the insolvency set-off applying the aforementioned provision of the 1920 Act. In the present regime, section 36(4) of the Code deals with the exclusion of assets that do not form part of the liquidation estate, which delineates the apportion of assets which could be subject to set-off on account of mutual dealings. This provision is further supplemented by Regulation 29 of the IBBI (Liquidation Regulations), 2016, which provides for consideration of mutual credits and set-off. The problem with the aforestated present legislation is, it only applies to a liquidation proceeding, as under Chapter III Part II and not the CIRP process which is present in Chapter III Part II of the Code. Nevertheless, there is subsistence of a neutral and clear provision for set-off, which has to be provided in the written statement under Order VIII Rule 6 of the Code of Civil Procedure (“CPC”). Ruling of the Case The Supreme court in the instant case categorically repudiated the presence of any legislative intent of including set-off in a CIRP, which was buttressed with the conjoint readings of section 30 and section 53 (which lays down the waterfall mechanism) of the Code. It rejected the applicability of section 36 of the Code or the Regulation 29 on a CIRP. It reasoned those to be solely concerned with the liquidation proceedings and devoid of any role in a CIRP, forcing which might lead to anomalies. Thereafter, it also discarded the ruling of the Supreme Court in Swiss Ribbon, which sustained the exercise of insolvency set-off in a resolution process. Airtel contended the subsistence of clause (ii) of section 30 (2) of the Code, which corresponds the process of distribution followed in a liquidation process to the resolution process. The court rejected this contention and refuses the applicability of Section 36(4) (supra) and Regulation 29 (supra) in a resolution process, which it observed will solely come into play in a liquidation proceeding. The court buttressed its observation by upholding the mandate of section 25, which stipulates the powers of the Resolution Professional to take control of the assets of the insolvent company. The court, although, failed to correctly contemplate, the essence of the Code, and the prejudice the decision will cause to the creditors in a CIRP. Since, a CIRP is conducted to restitute the business of a company, the court should rather promote the concept of setting-off to expedite the process and interest of the stakeholders. The court, has although, forged two exceptions to the norm of non-applicability of the insolvency-set off under aforesaid Regulation 29(supra) or statutory set-off under Order VIII Rule 9 (supra) of the CPC:- Contractual Set-off – It is only applicable where the parties are entitled to the contractual set-off, which is in effect before or on the date of the commencement of CIRP. Transactional Set-off- It is triggered when the claim and counter-claim in the fashion of set-off

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Right to claim set-off in CIRP: A Shift in the Landscape

[By Manisha Soni] The author is a student of Gujarat National Law University.   Introduction Recently, the Supreme Court of India, in the judgment of Bharti Airtel Ltd. vs Vijaykumar V. Iyer, solidified the position of the National Company Law Appellate Tribunal (NCLAT) that the arrears can not be set off when a Corporate Debtor is going through Corporate Insolvency Resolution Proceedings (CIRP), under the Insolvency and Bankruptcy Code, 2016 (IBC).   This provided a crucial clarification of the prevailing legal intricacies and upheld the legislative purpose of the code. Through this article, the author aims to simplify the wisdom inherent in the judgment, considering the legislative intent and the potential ramifications of permitting set-offs in the CIRP. The author proposes that set-offs are not inherently contradictory to insolvency law and can be accommodated within the framework of the IBC.  Factual matrix  Airtel entities were engaged in spectrum trading agreements with Aircel entities to seek the right to use spectrum. Aircel entities faced demands from DoT for bank guarantees related to license and spectrum usage dues. Upon request, Airtel agreed to furnish these guarantees on Aircel’s behalf, deducting the same from consideration payable under spectrum transfer agreements. However, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) declared DoT’s demand untenable; and the bank guarantees were asked to be returned.  In the meanwhile CIRP was initiated against Aircel entities. Airtel entities, having paid for Aircel entities, submitted a claim to set-off, asserting it as the net amount owed by Aircel entities for operational charges. Adjudication of such claims of Airtel for set-off during CIRP against Aircel created the challenge for insolvency legislation.   The Resolution Professional (RP) asked Airtel to pay Rs. 112 crores to Aircel, who was undergoing CIRP. This was objected to by Airtel entities in NCLT Mumbai.   The Adjudicating Authority in Mumbai initially allowed Airtel entities the right to set off. However, the NCLAT overturned this decision, contending that such a set-off is antithetical to the objective of insolvency legislation.   Analysis of the Judgment   In common language, the term ‘Set-off’ is an instrument that cancels mutual financial obligations between two parties by allowing one party to reduce the amount it owes to a second party by the amount the second party owes.   Arguments by Airtel  Since the United Kingdom’s Insolvency legislation has served as a model for IBC law in India, the Airtel representative relied on Insolvency set-off provisions in the UK. ‘Insolvency set-off’ applies when demands are between the same parties, even when several distinct transactions exist between them.  The pre-requisites of set-off u/s 323 of the UK Insolvency Act 1986, to claim set-off is when mutual credit and debt arise from ‘mutual dealings’ between the parties prior to the commencement of the bankruptcy. Airtel relied on the UK legislation and the case of HC of Kerela, where the judges allowed set-off and held even different, independent, transactions between parties as ‘mutual dealings’ under the Kerela Insolvency Act, 1955.  Airtel argued that the concept of set-off was permissible in India pre-IBC. Section 529 of the Companies Act 1956 and section 325 (now omitted) of the Companies Act 2013 did allow for set-off. Section 44 of the Provincial Insolvency Act 1920, contingent on certain conditions, permitted creditors’ right against the corporate debtors to set-off.  Order VIII Rule 6 of the Code of Civil Procedure, 1908, of India provides statutory set-off. To claim set-off under this rule, the amount should be ascertained.   After the advent of IBC in insolvency legislation, set-offs started to derive legitimacy under section 173 of IBC, where set-offs are allowed in partnership and individual bankruptcies. Apart from that, regulation 29 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulation, 2016 provides for set-off on account of mutual dealings.    SC Judgment  The SC held that the nature of corporate debtors changes after the commencement of CIRP. Hence, any claim for set-off cannot be raised after CIRP. The Hon’ble Court rejected the applicability of set-off provisions of CPC in CIRP due to the presence of section 238 of IBC, which states that provisions of IBC override all other laws.   Regulation 29 of the Liquidation Regulations provides for mutual dealing and set-off but does not apply to Part II of the IBC, which deals with CIRP.   The court, however, permitted contractual set-off if the date of such set-off was before the CIRP was initiated. A contractual set-off is a mutual agreement to permit set-off and adjustment. The CIRP does not preclude it.   Set-offs are contrary to the common law doctrine of pari passu and anti-deprivation. Though the doctrine of pari passu is not explicitly mentioned in the IBC, an interpretation of the existence of the doctrine can be drawn from section 53 r/w section 52 of the IBC, as these provisions provide for the hierarchy of creditors during the distribution of value arising out of liquidation. This arrangement gives primacy to an operational creditor over a financial creditor should the operational creditor’s claim of set-off be permitted.  Due to the set-off, the liquidation estate’s value gets depleted, consequently affecting the dividend distribution among the rest of the creditors. The doctrine of anti-deprivation discourages this. This doctrine enumerates that a creditor can not obtain a better position than the law explicitly provides during bankruptcy. SC applied the essence of both doctrines in this matter.   The provisions related to CIRP do not provide for insolvency set-off, and the court refuses to extend it through implication. Unlike contractual set-off, Insolvency set-off is not self-executing in nature.  The creditor who wants to exercise set-off can do so from the assets excluded from the liquidation estate to the extent of the set-off value, u/s 36(4) of IBC. Such creditors are often given preferred status in assets statutorily excluded from the liquidation estate.   No new rights are created due to the rejection of rights to claim set-off, and the moratorium will be operative on the corporate debtor’s assets.   Author’s remarks  Set-off is a globally recognised and widely practised concept. Set-off should not be

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Affirmative or Negative: Evaluating Resolution Professional’s role as a Public Servant

[By Rahul Pandey] The author is a student of West Bengal National University of Juridical Sciences.   Introduction Based on a plain reading of provisions of the IBC, 2016, it would not be wrong to assume that the Resolution Professional (“RP”) is supposed to act as the backbone of the entire insolvency resolution process. He is envisaged as an impartial party that acts in the best interest of all involved and upholds the highest standards of professional and moral integrity. However, in the unfortunate situation wherein he is alleged to indulge in mala-fide practices that threaten the whole regime of trust-building the code is supposed to stand for, his position remains unclear. Should he be treated as a “Public Servant” performing a duty that is public in nature under the Prevention of Corruption Act, 1988 (“PC Act”)? Or would it be a better fit to exclude him from the purview of the strict standards of prosecution of said public servants to ensure that the constant threat of being faced with these provisions does not act as a barrier for him in the performance of his duties? This piece shall aim to address this concern and provide a balanced view in light of conflicting judgments delivered in recent months by the Hon’ble High Courts of Jharkhand and Delhi as the matter lies pending before the Hon’ble Supreme Court of India.   The PC Act and its expanded Horizon of Public Servants  Aimed at curbing the evil of corruption across all levels of society, the PC Act provided a wide-ranging definition of the term ‘public servant’ in light of the changing economic order to ensure that its provisions not only apply to those working for the government directly but also those that perform any duty that may be ‘public’ in nature.  A common misconception that arises is that RPs are covered under the term ‘liquidator’ as given by Section 2 (c)(v) of the PC Act and Section 21 of the IPC that define Public Servants. However, the same would be a fallacious conclusion as the liquidators mentioned in these provisions refer to those appointed under S.502 of the old Companies Act, 1956, who were directly appointed by the High Court and drew their pay directly from the government. On the contrary, RPs under the IBC are appointed by the Committee of Creditors (CoC) in coordination with the NCLT under S.22 of the IBC and draw their fee on the basis of assets realised or as deemed appropriate CoC based on their commercial wisdom.   Nature of Appointment   In regard to the nature of appointment of the RP as to bring him within the fold of Section 2 (c)(viii) of the PC Act, conflicting opinions have emerged. The Delhi High Court in its judgement in Arun Mohan v. CBI, 2023 SCC OnLine Del 8080 has emphasised that while only the Interim RP initially is appointed directly by the NCLT, the final Resolution Professional who oversees the CIRP till its conclusion is appointed by the CoC and not the NCLT.   The Jharkhand High Court, on the other hand, in its judgement in Sanjay Kumar Agarwal v. CBI, 2023 SCC OnLine Jhar 394, has held that while the direct role of the NCLT is limited to the appointment of the Interim RP under S.16, IBC, the appointment of the final RP under S.22, IBC, the decision of the CoC has to be communicated to the NCLT. Even in the case of replacement of the RP by the CoC under S.27 (3) and (4), IBC, the committee of creditors shall forward the name of the insolvency professional proposed by them to the adjudicating authority which will forward it to the Board for its confirmation. In light of all these factors, the court has opined that it would be incorrect to conclude that the adjudicating body doesn’t play an active role in the appointment of the RP.  The position taken by the Jharkhand HC is in line with previous decisions of the NCLAT wherein the position of the RPs has been held to be equivalent to that of an officer of the court for the purpose of contempt and thus the nature of the appointment of the RP can be said to be completely within the scope of public nature.   Involvement of Public Duty in role of RP  As has been held by the Supreme Court, the character of “public duty” as performed is the prime factor in determining if the said office was that of a “Public Servant” for the purpose of the operation of the PC Act. The words “Public Duty” can have a very wide range of interpretation. This is somewhat in line with the vision of the introduction of the PC Act which sought to leave open the scope of bringing within its fold offices that gain public function as the dynamics and the functioning of the state machinery changes.   In holding that the RP is not a public servant, the Delhi HC has placed reliance on a paragraph in the SC’s judgement in Ramesh Gelli V. CBI where it has been observed that when an office may hold elements of public duty, without the element of ‘public character’, it may not be considered as that of a public servant. To justify this view, the court has gone on to hold that –  “IP metamorphosizes from an IRP to an RP and thereafter as a Liquidator (as the case may be), and due to such metamorphosis, it would be prudent not to characterize the duties, even if assumed to be “public”, as in the nature of “public character”.”  However, it is respectfully submitted that the change in nature of duties from IRP to RP and to liquidator is not enough to justify that the office of the RP as a whole does not hold an essential public nature. While it may be true that the judgments in Swiss Ribbons and Arcelor Mittal describe the role of the RP as a mere facilitator, his neutrality,

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Limitation under Section 61 of the IBC: End of the Interpretation Saga?

[By Himanshu Gupta & Nandika Seth] The authors are students of NMIMS School of Law, Mumbai.   INTRODUCTION  The concept of limitation provides a timely framework within which an aggrieved can file a suit, appeal or an application in court. It also empowers courts to dismiss any suit, appeal or application filed after the stipulated period has expired. Therefore, limitation plays a vital role in any proceedings as it can serve as a ground for rejecting a suit even if the plaintiff has a cause of action.  However, a conundrum arises as to which date triggers limitation to commence when the matter is conclusively heard on one day and the order is directly uploaded on the website. The Apex Court for the very first time in Sanjay Pandurang Kalate vs Vistra ITCL India Pvt. Ltd.  (“Vistra ITCL”) answered the aforesaid question.  It held that the period to compute limitation to file an appeal under Section 61 of the Insolvency and Bankruptcy Code (“IBC”) from an order of the National Company Law Tribunal (“NCLT”) commences from the date of upload of the order by the Registry. This ruling ensures that the clock of limitation starts clicking once both parties are aware of the content of the order and therefore, they can act accordingly.  FACTUAL MATRIX  The appeal before the Apex Court arose out of an application filed under Section 62 of the IBC against the judgement of the National Company Law Appellate Tribunal (“NCLAT”). The previous appeal was dismissed by NCLAT on the grounds of limitation. Vistra ITCL applied to initiate a Corporate Insolvency Resolution Process under Section 7 of the IBC against the Corporate Debtor.  NCLT heard the application filed by Vistra ITCL on 17th May 2023, however, no order was pronounced on that day. Though the said order bore the date of 17th May 2023, it was uploaded by the Registry on 30th May 2023.    The Tribunal in the present case dismissed the application of Vistra on the ground that the application was frivolous and lacked authorisation of Board of Directors of the Debtor. The appeal was filed before the NCLAT on 10th July 2023. Through the application for condonation of delay filed by Vistra, they contended to have received the certified copy of the order on June 1, 2023 for which the application was made on May 30, 2023 and therefore, time for computation of limitation should start from the 30th May 2023 since it was on that day, they became aware of the content of the order. The NCLAT held that the appeal was barred by limitation as it was instituted beyond the 45 days limitation period as stipulated under Section 61 of the IBC. It opined that the period of limitation was to be computed from the date the order was pronounced. Therefore, an appeal was filed before the Apex Court challenging the order passed by the NCLAT.  OBSERVATIONS OF THE APEX COURT  The Apex Court set aside the impugned order of the NCLAT which dismissed the application for condonation of delay filed by Vistra. It held that no substantive order was pronounced on 17th May 2023. Besides, the cause list stipulated that the case was listed for admission and not for pronouncement.   Further, the Court held that the period of limitation should trigger from May 30, 2023, the date when the order was uploaded. The 30 days’ limitation period in accordance to IBC would end on June 29, 2023, hence the appeal was within the condonable period of 15 days. The Court ruled that the limitation for filing an appeal would trigger from the date when the order was uploaded and not the date on which the Bench heard the matter.  ANALYSIS  The decision in the present case came at the ripe time resolving yet another conundrum in Pandora’s Box of interpreting Section 61 of the IBC wherein the Court clarified the position of law in cases where the matter is conclusively heard but an order is not pronounced.  It has been previously settled in the cases of Prowess International Pvt. Ltd vs Action Ispat & Power Pvt. Ltd and V. Nagarajan v. SKS Ispat and Power Limited & Ors. that the period of limitation begins to run from the date of pronouncement of the order. However, there remained a lacuna as to the situations where the Court decides not to pronounce an order on a given date before the parties but makes it available directly on the Court’s website on a different date.  Previously, in the case of Pr. Director-General of Income Tax v. Spartek Ceramics India Ltd. it was categorically held that the period of limitation runs from the date when the aggrieved party becomes aware of the order. Contrary to this, in the case of Raiyan Hotels and Resorts Pvt. Ltd. Vs. Unrivalled Projects Pvt. Ltd., NCLAT clarified that the period of limitation under Section 61 of the IBC for filing of an appeal does not commence on the date when the appellant became aware of the content, but it shall commence when the order was pronounced.  A harmonious interpretation of these rulings concludes that the only essential to contemplate the period of limitation is the date of pronouncement of the order. In the present case of Vistra ITCL, the NCLT though heard the interlocutory application on 17th May 2023, did not pronounce any order. Vistra became aware of the contents of the order only when it was uploaded on the website, i.e., on 30th May 2023. Hence, the limitation ought to be computed from the latter date which the Supreme Court rightly did.  Furthermore, in Embee Software Pvt. Ltd. v. Solicon Pvt. Ltd., a matter similar to the present case at hand, the aggrieved party was unable to file an appeal owing to the late uploading of the order by the Court, summer vacation of the Court and demise of a family member. The NCLAT taking a lenient, liberal, meaningful and purposeful view satisfied with the reasons ascribed for the delay

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Revisiting CBIRC-II: A Call for a Group Company Insolvency Regime

[By Isha Khurana] The author is a student of Jindal Global Law School.   Introduction   The NCLAT in a January 2023 decision, reiterated the need to lift the corporate veil in matters of group company insolvencies. In doing so, it followed the path laid down in the 2021 CBIRC-II (hereinafter, “CBIRC-II Report”). This subject has been long debated in India and has found itself at the center of various working groups and committee reports. The 2019 working group report was the beginning of India’s recognition of the growing need to incorporate a provision for group company insolvencies, noting the shared control and economic interdependence of corporates. This, at the time, was deemed a win since the only preceding authority was the 2018 report of the insolvency law committee, which placed limitations on the growth of the group insolvency process. The 2018 report limited the scope of group insolvencies in India, by observing that since the insolvency code was only introduced in 2016, it may be “too soon” to introduce such a group company complexity in the statute.    Nevertheless, both the 2019 working group report and the 2021 CBIRC-II report have altered the course for group company insolvencies in India. While previous articles have addressed the nuances of group company insolvency, it is essential to consider the pivotal role played by reports such as the 2019 working group report and the 2021 CBIRC-II report. This article aims to revisit the discussion through the lens of the CBIRC-II decision and the January 2023 decision, to delve into the future of group company insolvencies in India. It attempts to incorporate the family-dominated business environment of India in this discussion, to stress the increased need for a group insolvency procedure. Through this, the article flows into an evaluation of whether the alleged conflict between group insolvencies and the separate legal entity doctrine could hamper the adoption of a group insolvency regime.   Contextualizing Group Companies in India   The 2021 CBIRC-II report fared well in establishing jurisprudence on which corporate groups could be deemed as group companies in India and what factors must exist for the same. A perusal of the committee’s deliberations on the definition of a “group” highlights the importance of shared control, common shareholding, and interdependence among members of a corporate group, for them to be termed as a group company structure. It thus becomes clear that an inclusive definition of “group” must be included in India’s insolvency regime and reliance may be placed on either control or ownership to establish the existence of a group company structure.   It is argued here that the business environment in India will be complemented by this definition. India is known to be home to several family-run businesses, both in the public and private sectors. The existence of such family-run businesses opens the doors for situations wherein holding companies exercise control over their subsidiaries (essentially, a vertical relation) and also for members of the same corporate group (a horizontal or lateral relation) to impact one another, through economic dependence. Thus, the insolvency regime needs to address the same, for promoting equity and fairness, and ensuring the protection of creditors.    The focus on control and ownership factors in the leading elements in establishing group company structures in the Indian context. Owing to the fact that it is commonly observed for common shareholding to be present with corporates exercising control over one another’s activities. Additionally, the deliberations of the working group coupled with the decision in Videocon, also open up the possibility of establishing a group company structure through the presence of common assets, pooling of recourses, interlinked financing, and so on. Thus, judicial decisions and committee reports work well with one another to account for a broad range of scenarios wherein a group company structure may be present.   As India’s corporate environment is dominated by family businesses (arguably, more than any other jurisdiction), it becomes all the more important that an efficient group company insolvency and recovery regime is in place. The same stems from the increased likelihood of corporations exercising control over each other’s operations and decisions. Further, given the operation of businesses in India, where significant control and decision-making power are shared, it becomes easier to pierce the corporate veil, and to allow for the institution of insolvency proceedings against a group of companies that are acting together. However, some may be apprehensive about initiating proceedings against a group of companies, as it may violate the separate legal entity principle, by treating different corporate entities as akin to one another. Thus, an analysis of whether the process of lifting the corporate veil for group insolvencies would contradict the separate legal entity principle must be undertaken, through the lens of judicial decisions.    A Judicial Lens to Piercing the Corporate Veil  Scholars and committee reports have repeatedly noted that insolvency laws are based on the principle of corporations being separate legal entities, following the jurisprudence laid down in Saloman v Saloman. The principle in insolvency law has come to be viewed as one that also distinguishes companies from their subsidiaries or holding companies, advancing from the view that a company is distinct from its members. Thus, binding corporate bodies belonging to the same group of companies was thought of as going against the basic tenets of corporate law.   However, jurisprudence which allows courts to lift/pierce the corporate veil has found its place in insolvency law as well. Practice now allows for the veil to be lifted in situations where associated companies are connected in a manner that they come to be treated as a single concern. The CBIRC-II sheds light on when companies may be treated as a single concern or rather, what links must be present for the same. The most commonly observed would be situations where companies have linked operations or finances when they own shared assets, and engage in related party transactions. In such scenarios, carrying out individual insolvency proceedings for one entity would be fruitless as a creditor would not be able to

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