Insolvency Law

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University, Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) contemplates the initiation of insolvency proceedings only by financial and operational creditors under Section 7 and Section 9 respectively. Section 7 (5) (a), in particular, triggers the insolvency process for financial creditors, once the Adjudicating Authority (“AA”) decides the existence of debt and default. The Supreme Court’s (“SC”) recent judgement, in Vidarbha Industries Power Ltd. v. Axis Bank Ltd (“Vidarbha Industries”), rendered the aforementioned provision discretionary. The ruling disturbs settled law and could significantly impact India’s insolvency and credit recovery mechanism. Facts The appellant, a power generating company, was contracted for implementing a Group Power Project (“GPP”) by the Maharashtra Industrial Development Corporation (“MIDC”). In 2016, the appellant filed an application before the Maharashtra Electricity Regulatory Commission (“MERC”) demanding the actual fuel costs for the Financial Years 2014-2015 and 2015-2016. MERC rejected the appellant’s request, disallowing a major proportion of the demanded fuel costs while also capping the tariffs for the Financial Years 2016-2017 to 2019-2020. This was challenged before the Appellate Tribunal for Electricity (“APTEL”). Allowing the appeal, APTEL directed MERC to allow the actual costs incurred by the appellant to purchase coal for the plant’s first unit. It also temporarily imposed a limit on the fuel costs for the second unit. According the appellant, Rs. 1,730 crores were due to it as a result of the APTEL’s order. Subsequently, the appellant filed an application before the MERC for implementing the APTEL’s order. However, MERC filed a civil appeal before the SC which remained pending. The appellant claimed that it was unable to implement the directions in the APTEL’s order due to MERC’s pending appeal before the SC and that it faced a fund shortage. An implementation of the said order, the appellant argued, would help it discharge its outstanding obligations. In 2020, Axis Bank, the financial creditor, initiated CIRP against the appellant under Section 7 of the IBC before the National Company Law Tribunal (“NCLT”), Mumbai. Upon being challenged, NCLT, Mumbai declined the appellant’s plea demanding a stay on the CIRP, ignoring the pending amount realizable by the APTEL’s order, adding that disputes between the appellant and MERC were irrelevant to the concerned issue. The National Company Law Appellate Tribunal (“NCLAT”) affirmed NCLT’s observations, also adding that if the latter is satisfied about the existence of both debt and default, that itself would be sufficient to trigger CIRP. The appellants, aggrieved by the order, approached the SC for relief. Decision Section- 7(5)(a)- Discretionary or Mandatory? While deciding the nature of the provision, the Court acknowledged that although no extraneous factor should impede a speedy insolvency resolution under the IBC, it importantly held that aspects particular to the case, such as a pending appeal and the appellant’s financial condition cannot be termed ‘extraneous. The SC categorically stated that the NCLAT incorrectly observed that it merely has to ascertain the presence of a debt and default as sufficient conditions to trigger CIRP. The Court opined that the NCLT must apply its mind and consider relevant factors and examine the corporate debtor’s arguments against admission on its own merits, before admitting a CIRP application. Notably, it pondered on the connotations of ‘may’ in Section 7 (5) (a) observing that had the legislative intent been to construe the aforementioned provision as ‘mandatory’, then it would have used ‘shall’ instead of ‘may’. The Court reasoned that the object of the IBC is not to penalise solvent companies who temporarily defaulted on their dues. Therefore, CIRP, in the Court’s opinion, does not arise unless the concerned entity is insolvent or bankrupt. These observations led the Court to hold that Section 7 (5) (a) is a discretionary provision and that the NCLT is not compelled to admit a financial creditor’s CIRP application even when the corporate debtor has defaulted on its dues. The SC noted that the admission in the cases of financial creditors may be suspended indefinitely, till the extraneous matter is sorted. However, spelling out different standards for operational creditors, the Court observed that if such a creditor files a CIRP application, then it is obligatory for the AA to admit it, provided it is satisfied about the existence of a debtor’s default. Analysis Troubling consequences for the insolvency regime This is a concerning judgment that can potentially hamper the IBC’s effective application and dilute the robustness and efficacy of the prevailing insolvency culture. Firstly, the legislative scheme prescribed by the IBC provides for a judicial ‘hands-off’ approach by strictly limiting the scope of judicial intervention. The Court clarified this legal position in the landmark Essar Steel judgment wherein it was held that the AA is merely required to ascertain whether the legal requirements under the IBC have been satisfied and that it cannot sit in judgment over the ‘commercial wisdom’ of the CoC. Other than several orders of the NCLTs and the NCLAT, this position was reiterated by the Court itself in a number of well-known precedents like  K. Sashidhar v. Indian Overseas Bank and Vallal RCK v. Siva Industries and Holdings Limited. By requiring NCLT to scrutinize the corporate debtor’s financial health and viability, generally considered to be the domains of the CoC, the judgment in Vidarbha Industries completely goes against this established and settled legal principle, distorting the clearly defined boundaries stipulated both in the IBC and in a litany of judgments. It deprives the CoC of having an authoritative say in matters crucial to their interests while paving the way for greater judicial overreach. Secondly, the Court’s opinion, that the AA is required to examine additional grounds raised by the corporate debtor on merits before admitting a CIRP application, could adversely impact both the IBC’s application and its objectives. Till now, the NCLT only had to consider the existence of a debt and the evidence proving that the corporate debtor has defaulted on honouring the said debt. Once these two elements were ascertained, a CIRP application could

[By Utkarsh Pandit and Samridhi Shrimali] The authors are students at the Institute of Law Nirma University, Ahmedabad. Introduction The key intent of the existence of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘IBC’) is the resolution of companies in distress. The Code prescribes specific timelines for an efficient and swift resolution. However, these timelines are not always met due to delays from both, the bar and the bench. One such cause of delay on the part of the bench is the reservation of order and delayed pronouncement.  Rule 150 of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the NCLT Rules, 2016) provides for the pronouncement of orders. This rule provides for a limited time frame of 30 days to pronounce the order which has been reserved. There still exist procedural inconsistencies when it comes to the implementation of such rules. Resultantly, these issues acknowledged as mere irregularities have given them a flavor tantamount to being insignificant. This article analyzes the dichotomous stance of the courts/Tribunals on the delay in pronouncement of orders and if such delays can be a ground to challenge an order. By definition, pronouncement means to utter formally, officially, or solemnly, to declare or affirm, as pronounce a judgment or order.[i] In other words, pronouncement means to officially communicate the order to the parties after the hearing is concluded. It becomes pertinent to comprehend the trends of the tribunals/courts as the harbinger of rampant delay in pronouncements poses a threat to the ‘speedy trial’ essence of insolvency forums. These trends encounter impediments in the smooth procedural conduction of such NCLT rules, as well as the jurisdiction of the courts/tribunals while hearing petitions/appeals challenging orders on the ground of delayed pronouncement. Kamal K. Singh v. Union of India In this case, the Bombay High Court quashed the order of NCLT Mumbai, as it violated Rule 150 to 152 of the NCLT Rules, 2016. While analyzing the ambit of the pronouncement of the order, the Court observed that mere making known or communicating the order as per section 7(7) of IBC, is not tantamount to pronouncement. It also observed that NCLT being a statutory tribunal is bound by the procedural rules or else the non-adherence would defeat the principles of natural justice and fairness. Thus, it was held that the pronouncement of order is imperative under Rule 150 of the NCLT Rules, 2016. Notably, it was further held that after the conclusion of the arguments, when the pronouncement of the order has to be done, both the parties are to be notified in advance. Though the Bombay High Court did not delve into the issue of adherence to the timeline under Rule 150(1) of the NCLT Rules, it has definitely laid down a way for the aggrieved parties to exercise the jurisdiction of the High Courts in case an order is passed in violation of the procedural rules, specifically the NCLT Rules, 2016. Rajratan Babulal Agarwal v. Solartex Pvt. Ltd. & Ors. The NCLAT PB dismissed an appeal that prayed for setting aside of an impugned order of NCLT Ahmedabad, where inter alia the pronouncement of the impugned order was done six months post the conclusion of the final arguments. The appellants argued that the delayed pronouncement of the order was a direct violation of Rules 150 and 152 of the NCLT Rules, 2016. The appellants further relied on Anil Rai V. State of Bihar, where the Supreme Court laid down the guidelines for pronouncement of judgments and emphasized that for civil matters, the judgment ought to be pronounced within two months post the conclusion of the arguments. The appellants also brought non-adherence to Rule 89 of the NCLT Rules, 2016 to the NCLAT’s notice, wherein the publication of the cause list is to be published one day in advance. In the present case, the publication was done on the same day when the judgment was pronounced. Intriguingly, NCLAT while dismissing the appeal held that “It is true that in the present case, the parties have submitted written submissions on 06.01.2020, however, the impugned order was pronounced on 28.05.2020 i.e. after about five months from the conclusion of arguments which is against the aforesaid rule as well as guidelines laid down by the Hon’ble Supreme Court.  We are of the view that only on this count the impugned order cannot be set aside which is otherwise flawless.” For the violation of Rule 89 of the NCLT Rule, 2016, the NCLAT held that “even if the cause list was published on the same day, the same would be considered as an irregularity but not an illegality.” Thus, the Appellate Authority held that even if the orders are not in coherence with these rules, the same could take a back seat if the order otherwise does not have any other inconsistencies. It is reasonable to infer from the abovementioned case that the defect on account of pronouncement of orders would not impute sufficient ground to set aside such orders. Shaji Purushothman v. Union of India The Madras High Court, in a writ petition filed against the order passed by the NCLT Chennai Bench, observed the nature of NCLT Rules. Placing reliance on Balwant Singh and Others v. Anand Kumar Sharma and Others, Sharif-ud-Din v. Abdul Gani Lone, Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Others, and Pesara Pushpamala Reddy v. G.Veeraswamy and Others, the Madras High Court laid down a test and stipulated that if the law does not provide the consequences of non-compliance of the rule, then it should be deemed to be directory in nature. On the other hand, if the law provides for the consequences of non-compliance, then it should be deemed to be mandatory. While analyzing the nature of the NCLT Rules, 2016, and Rules 150 and 153 particularly, the High Court held that as the rules do not indicate any consequences on the account of non-adherence to the timelines, therefore, they can be considered as directory

[By Neelabh Niket and Sanchita Makhija] The authors are students at the Hidayatullah National Law University. Introduction Recently, the National Company Law Appellate Tribunal (‘NCLAT’) in the case of Mr. Prashat Agarwal, Member of Suspended Board of Bombay Rayon Fashions Ltd. Vs. Vikash Parasrampuria (hereinafter referred to as the ‘Bombay Rayon case’) held that under Section 4 of the Insolvency & Bankruptcy Code (‘IBC’), an operational creditor can club the ‘interest’ with the principal amount to arrive at the threshold limit of Rs. 1 Crore, which is the default limit for filing of applications under Part II of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC’), provided that the interest was perspicuously stipulated in an invoice or an agreement. In doing so, the three-judge bench effectively overruled the law laid down by the National Company Law Tribunal (‘NCLT’) Delhi in CBRE South Asia Private Limited v. United Concept and Solutions Private Limited (hereinafter referred to as the ‘CBRE case’), which had provided a ruling contrary to the Bombay Rayon case by holding that the principal and interest cannot be clubbed together to reach the Rs. 1 crore threshold limit. In this article, the authors seek to analyze the recent judgment of the Bombay Rayon case and its possible implications on similar cases pertaining to the treatment of ‘interest’ as debt. Factual Matrix The Appellant, Bombay Rayons Fashions Limited (hereinafter referred to as the ‘Corporate Debtor’) was supplied goods by the Respondent, ‘Vikash Parasrampuria’, the sole proprietor of the firm ‘Chiranjilal Yarns Trading’ (hereinafter referred to as the ‘Operational Creditor’). For the said supply, the Operational Creditor had raised nine invoices, out of which the Corporate Debtor did not make the payment for five invoices. The remaining principal amount was Rs. 97,87,220 and a condition for payment of 18% interest was made in all the invoices. The Operational Creditor, ergo, filed a Section 9 Application, which was admitted by the NCLT, and the Corporate Insolvency Resolution Process (‘CIRP’), was initiated. Aggrieved by the said order, an appeal was filed in the NCLAT by the Corporate Debtor. Ruling and Analysis The NCLAT analyzed the definition of the term ‘debt’ and subsequently the term ‘claim’ and stated that if interest has been unambiguously stipulated in an invoice or agreement, then it will fall under the ambit of the ‘right to payment,’ which has been anchored in the definition of ‘claim’ under Section 3(6) of the IBC. In doing so, the NCLAT also distinguished the judgment of NCLT Mumbai in Steel India vs. Theme Developers Pvt. Ltd.( ‘Steel India Case’)’ by stating that, unlike the Steel India case, the interest was stipulated in the invoices in the case in hand. Furthermore, the NCLAT sought the support of the case of Pavan Enterprises v. Gammon India and overruled the CBRE judgment into the bargain. In the CBRE judgment, the court, after due analysis of the definitions of the terms ‘debt’ and ‘claim,’ had held that since the definition of claim is common for both Operational and Financial Debts, the definition of both the terms shall be considered to understand the legislature’s intention. After analyzing the definitions of the said terms, the Adjudicating Authority (‘AA’) arrived at the conclusion that Operational Debt does not include interest as the definition of Operational Debt does not explicitly incorporate the term ‘interest’; unlike Financial Debt which clearly specifies the term ‘interest’. It should be noted that the Court in the CBRE case had failed to understand that the connotation of the term ‘interest’ is distinguishable in the case of an Operational Debt and a Financial Debt. The term ‘interest’ is explicitly mentioned in the definition clause of Financial Debt as it is an inherent component of the same. This interest clause as disbursed against the consideration for the time value of money makes the debt a ‘Financial Debt’. (It is another case, however, that the Supreme Court (‘SC’) has rendered this interest redundant for Financial Creditors in the case of Orator Marketing.). Per contra, ‘interest’ in the case of Operational Debt, is not something which is fundamental to the nature of the debt. It can be claimed to be a part of the debt, only if it is contractual in nature and has been clearly stipulated. Thus, ‘interest’ may or may not exist depending upon the clauses enshrined in a contract. The AA had erroneously deemed equivalent the connotation of the term ‘interest’ under both the definitions by placing them on the same pedestal, whilst in reality, they are very distinct. The term ‘interest,’ as has been mentioned in the definition clause of Financial Debt, is almost synonymous with the debt availed, while ‘interest’ in the case of an Operational Debt is a creature of a Contract that arises from a right of payment. The consideration in the case of Operational Debt is ‘the goods or services that are either sold or availed of from the operational creditor’ and there is no time value of money involved in the case of Operational Debt, as was held in the landmark case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India. Therefore, unlike Financial Debt, the concept of ‘time value of money’ is not prevalent in the cases of Operational Debt. As interest is a token of representation of the ‘time value of money’, the same is not indispensable for Operational Debt, thereby rationalizing the omission of the term from the definition of Operational Debt. Implications If the CBRE judgment is strictly followed, then a part of the debt, which has been mutually agreed as interest cannot be levied and collected without a hitch, as it would require an additional case in the Debt Recovery Tribunal, rendering the clause redundant under IBC. For instance, the Real Estate industry which comprises various Lease & License agreements feeds extravagantly on the interest rates, and these amounts usually run in crores. Given that the NCLAT has recently categorized Lease & License debt as ‘Operational Debt’, the landowners would

[By Avik Sarkar] The author is a student at K.L.E. Society’s Law college, Bengaluru. Introduction In order to boost the investment regime in the country, the Government of India has introduced various enactments and amendments. Among them, the Insolvency and Bankruptcy Code, 2016 (‘the Code’) was one such enactment. It was introduced in order to bring the insolvency regime under one umbrella so that the investors could salvage their invested amount without much delay in case of any defaults. The code brought about a paradigm shift in the regime from the existing ‘debtor-in-possession’ to a ‘creditor-in -control’ model. However, the key highlights of this particular code were the fact that it had come with a promise of minimal judicial intervention. In its recent decision of Vallal Rck V M/s Siva Industries and Holdings Limited, the apex court of the country has reaffirmed its already crystallized position with regards to the sanctity of the Committee of creditors’ (‘CoC’) wisdom. The court in the present case held that NCLT and NCLAT cannot sit in appeals over the commercial wisdom of the CoC. Factual Matrix In the present matter, IDBI bank limited had filed a Section 7 application under the code for the initiation of the Corporate Insolvency Resolution Process (‘CIRP’) against Siva Industries (Corporate Debtor). And consequently, the application was admitted and the CIRP process was initiated.  During the resolution process, a bid of M/s Royal PartnersInvestment Fund Limited was submitted by the resolution professional. However, due to inadequacy in sufficient number of votes by the CoC, the plan could not be passed. Following this, the resolution professional filed for liquidation before the National Company Law Tribunal (‘NCLT’) under section 33(1)(a) of the Code. It was during this time when the Vallal Rck (‘Promoter’) of Siva Industries filed an application under section 60(5) of the Code for the proposal of a one-time settlement plan (‘OTS’). After a series of discussions and meetings by the CoC, it was decided to accept the OTS offer of the promoter by a sweeping majority of 94.23%. Therefore, once the OTS deal was accepted, the resolution professional filed to the NCLT for withdrawal of CIRP under Section 12A of the Code. However, NCLT rejected the OTS deal based on the reasoning that it seemed more like a Business Restructuring Plan than a settlement plan. Aggrieved by the decision of the NCLT, an appeal was filed to the National Company Appellate Tribunal (‘NCLAT’) by the promoter. However, NCLAT dismissed the appeal. Consequently, miffed by the decision of NCLAT, the promoter further appealed to the Supreme Court of India. Apex Court Dictum Firstly, the court referred to Section 12A of the Code which allowed the withdrawal of insolvency application filed under Sections 7, 9 and 10, provided that, 90 percent of the CoC members through voting agree to withdraw the insolvency application. Further, on perusing regulation 30A of the Code, one would get a succinct idea of the procedure for filing a withdrawal application under section 12A of the Code. Therefore, in order to have a complete understanding of section 12A, it should always be read in juxtaposition with Section 30A Secondly, the court referred to paragraph 29 of the Insolvency Committee Report (March 2018) where it has been clearly  stated that there is nothing in the Code that allows withdrawing insolvency application post-admission. However, the report refers to the objective of the Code enshrined under the BLRC report which states that all stakeholders shall participate and assess the viability of the proposed plan in order to withdraw the insolvency application. Also, it must be ensured that the stakeholders are actively willing to restructure their liabilities. Thirdly, the court referred to Swiss Ribbon Private Ltd Vs Union Of India which upholds the validity of section 12A of the Code. Based on the above deliberation the court held that if 90 percent of the CoC members after due deliberations, “find that it will be in the interest of all the stake­holders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC.” Conclusion This particular judgment by the apex court has reaffirmed its already crystallized position that CoC’s wisdom cannot be meddled with and therefore NCLAT/NCLT cannot sit over appeals from it. This decision of the apex court is said to be in the right direction considering the fact that it is in line with the ‘least judicial interference’ principle. However, the author would like to posit a different view. In the recent past, there has been clamour concerning the conduct of the CoC. The author is of the view that giving such plenary power to the CoCs can have detrimental effects in the future which can affect the efficiency of the Code. Now, the latest report released by the Insolvency Bankruptcy Board of India (‘IBBI’) for the quarter of January to March has come up with harrowing revelations.  It has been found that the value of the assets that are with creditors against which they have granted loans to various entities are lesser than the liquidation value of the entities themselves. This means that during the insolvency process, the creditors will tend to opt for liquidation than passing a resolution plan as it would help them salvage the majority of their borrowings. Therefore, in such scenarios, if the CoC is granted plenary powers, the majority of insolvency proceedings would lead to liquidation which would be against the objective of the Code i.e., to revive a distressed entity from its current state. Further, in the past, there have been various instances where the conduct of the CoC has been highly contentious.  During the resolution process of Bhushan Steel Pvt Limited, the resolution professional had paid Rs 12 crore towards the fees of the legal counsel of the lender. However, as per a circular released by IBBI on 12.02.2018, the inclusion of legal fees has been clearly prohibited. It can be easily construed that