Insolvency Law

[By Ankit Sharma]  The author is a student at the Jindal Global Law School, Sonipat. Introduction The withdrawal of resolution plans under The Insolvency and Bankruptcy Code 2016 (“Code”), had always been a contentious issue, with the NCLTs and NCLAT taking conflicting positions in the past. In the recent case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited (“Ebix Singapore”), the Supreme Court settled the conundrum and held that if a resolution plan had been approved by the Committee of Creditors (“CoC”), then modifying or withdrawing it would not be permissible. While a time-bound insolvency process is certainly an objective of the Code, to disregard certain circumstances which may warrant a successful resolution applicant to backtrack from his commitment, would not be prudent. This article seeks to analyse the Supreme Court’s judgement, in view of the precedents set and contends that the legislature must provide for certain exceptions wherein the withdrawal of a resolution plan may be permitted. Background Interestingly, no provision in the Code explicitly permits the withdrawal or modification of the resolution plan. Yet in Panama Petrochem Ltd. v. Aryavart Chemicals Private Limited (“Panama Petrochem”), the NCLT remarked that although such withdrawals must not be encouraged, they may be accepted due to the “totality of the circumstances.” In the case, the same included another resolution plan being approved by the CoC and the backing out of the resolution applicant’s joint investor, who had agreed to invest in the corporate debtor. Further, in Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP (“Metalyst Forging”), the NCLAT noted that the resolution applicant had been provided with misleading information about the production capacity and the feasibility of the corporate debtor, when the plan was approved by the CoC. It was observed that the Code did not offer the NCLT any means to compel the specific performance of a resolution plan by an unwilling resolution applicant. Since the resolution professional was required to present the true and updated information, the plan itself contravened Section 30(2)(e) of the Code. Accordingly, the resolution plan was allowed to be withdrawn. In Suraksha Asset Reconstruction Ltd. v. Shailen Shah(“Suraksha Asset”), the NCLT held that if a resolution plan was not approved by the Adjudicating Authority within a reasonable period, then the resolution applicant could withdraw the resolution plan under Section 60(5)(c) of the Code. This would have balanced the interests of all the stakeholders and mitigated their difficulties. However, the judgement was soon overturned in Committee of Creditors of Wind World (India) Ltd. v. Suraksha Asset Reconstruction Ltd., in view of the Ebix Singapore case. Notably, contrasting views had been taken by the tribunals as well. In Kundan Care Products Ltd. v. Amit Gupta, the NCLAT opined that the Code did not have any provision that could enable a successful resolution applicant to take a “U-turn” and thwart the entire exercise of the CIRP. The move could have devastating consequences, as the CIRP period may be nearing its end, which could push the corporate debtor into liquidation. In the case of Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd, the NCLAT noted that the resolution plan, once approved by the CoC, cannot be withdrawn. Further, the Supreme Court in Maharashtra Seamless Limited v. Padmanabhan Venkatesh, stated that the NCLT cannot withdraw a CoC approved resolution plan and can only assess it under Section 31(1) of the Code. The Ebix Singapore Case The Apex Court was hearing a batch of three appeals, wherein the resolution plans submitted to the NCLT in three different Corporate Insolvency Resolution Processes (“CIRP”), were sought to be withdrawn. On a careful analysis, it was held that when the CoC approves a resolution plan, it cannot be modified or withdrawn by the successful resolution applicant, even though it may be pending for approval before the Adjudicating Authority. In its verdict, the court delved into several aspects of the Code. With regards to the purpose of the insolvency law, the Supreme Court observed that it could not create a substantive or procedural remedy that the Statute had not specified, for it would not only be encroaching upon the legislature’s domain but also harming the delicate co-ordination under the Code. On the aspect of the nature of resolution plans, the Supreme Court held that it was not the same as traditional contracts. This was on the grounds that the Code governed to a great extent, the insolvency process, the mode, and effect of approval, and the fact that it could bind such parties who had not consented to it. Since the resolution plans were brought into existence by the framework provided under the Code and were not described as contracts therein, they also did not qualify as statutory contracts. With respect to the withdrawal of resolution plans, the Supreme Court noted that the Code only provided for the withdrawal of applications to initiate the CIRP under Section 7, 9 and 10 of the Code, through its Section 12A. As such, the lack of any exit route for a successful resolution applicant under the Code indicated that the same should not be permitted. Further, the language of Section 31(1) of the Code could not be interpreted to signify that a resolution plan can be withdrawn or modified prior to its approval by the NCLT. The Court held that by submitting a resolution plan, a resolution applicant is assumed to have gone through the information memorandum and understood the financial risks. A withdrawal or modification of the resolution plan cannot happen later, as it would disrupt the timeline for the insolvency process under the Code and represent a remedy, which the legislature had not provided for. Consequently, resolution plans with clauses for re-negotiations or walk-away rights cannot be implemented. Even the residuary power under Section 60(5)(c) of the Code cannot be utilised for withdrawing or modifying a CoC approved resolution plan. Analysis The Parliament’s Standing Committee on Finance in its recent report observed that 71%

[By Varuni Agarwal]  The author is a student at the National Law University, Odisha.  INTRODUCTION Section 7 of the Insolvency Bankruptcy Code (“IBC”) empowers a financial creditor to initiate a Corporate Insolvency Resolution Process against the Corporate Debtor on account of default. As per Section 5(7) of IBC, a financial creditor means a creditor against whom the Corporate Debtor owes a financial debt. Section 5(8), defining financial debt, has a principal term stating “a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes”, and sub-clauses (a) to (i) stating some credit situations. In July 2021, in the case of Orator Marketing v. Samtex Desinz (“Orator judgment”), the Supreme Court discussed the legal issue of whether a secured creditor, giving an interest-free loan, would qualify as a financial creditor. The article critically analyzes the core findings of the Court and its contradiction with the established judicial precedents. UNDERSTANDING THE JUDGEMENT M/sSameer Sales Pvt. Ltd. advanced a term loan of Rs. 1.60 crores to M/s Samtex Desinz Pvt. Ltd., the Corporate Debtor, without any interest for a period of two years from the date of execution of the Loan agreement to meet its working capital requirement. The creditor went on to initiate the Corporate Insolvency Resolution process through Section 7 of IBC. The NCLT and NCLAT held that the creditor is not a financial creditor.  However, the Hon’ble Apex Court held that Hon’ble NCLAT and NCLT have misconstrued the definition of ‘Financial Debt’ and have read it in isolation and analyzed the definition of ‘Financial Debt’. CRITICAL ANALYSIS OF THE JUDGEMENT FLAWED ANALYSIS OF TIME VALUE OF MONEY The bench has based its decision on 2 findings. Firstly, while interpreting the terms ‘means and included’, it determined that Section 5(8) of IBC has 2 separate categories that are qualified to be called ‘financial debt’. The first one is ‘disbursed against consideration of time value of money, and the second includes those situations that are mentioned in sub-clauses (a) to (i) of the sub-section. Secondly,it had particularly covered the case-at-hand as a transaction under Section 5(8)(f), due to the transaction having “commercial effect of borrowing”, and interpreting the meaning of the phrase. With respect to the first finding, the bench does not seem to have followed the 2020 Supreme Court judgment inAnuj Jainvs. Axis Bank Limited (“Anuj Jain judgment”). The Anuj Jain judgment had categorically held and clarified that “any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of ‘financial debt’ only if it carries the essential elements stated in the principal Clause or at least has the features which could be traced to such essential elements in the principal clause”. This means that while the nature of the transaction may be of any kind, including those as mentioned in sub-section (a) to (i), the same must have an element of the time value of money, mentioned in the principal part of the sub-section. Thus, this deviation from the settled principle of law seems uncalled for. While establishing the first finding, the Court went on to classify the present case as having “commercial effect of borrowing”. It relied on the fact that the loan was taken for fulfilling CD’s working capital requirements, thus having a commercial effect. However, the Court in Pioneer Urban Land and Infrastructure Limited v. Union of India construed the meaning of ‘commercial’ as transactions having profit as their main aim. Further, Explanation 1 of Section 5(8) classifies the real estate projects as having “commercial effect of borrowing” on the pretext that the real estate developer profits on the sale of the apartment, and the flat/apartment purchasers profits by the sale of the apartment. The essence of the argument is that in the case of a loan, the ‘commercial interest’ would exist only when the creditor receives something in return that puts them in a beneficial position than before. Examining the present case, the creditor neither had a security interest over the Corporate Debtor’s property nor was receiving any interest. Thus, the creditor was essentially not receiving any additional amount which would have financially put them in a beneficial position than before giving the loan. On the contrary, without having a provision of the time value of money and mandating payment of interest of the repayment, the lender is essentially being put at an adverse level than before, due to general depreciation in the value of money during that loan period. Hence, the “commercial effect of borrowing” clearly did not exist in this case, and reading the provision independent of the principal condition of “disbursed against consideration of time value of money”is a wrong construction. CONTRADICTING FEBRUARY 2021 JUDGMENT ON SIMILAR LEGAL ISSUE On February 3, 2021, the Supreme Court pronounced its judgment in Phoenix Arc Ltd. v. KetulBhai (“Phoenix judgment”), explicitly holding that the secured creditor, having given a loan without interest, will not fall under the definition of financial creditor under Section 5(8). With the Court holding that interest-free loans will also qualify as financial debt, the Orator judgment seems to go in total contradiction of the Phoenix judgment. Interestingly, having been pronounced prior to, and discussing the similar legal issue as, the Orator judgment, the Court had not referred and discussed the Phoenix judgment in the present case, let alone follow the same. Further, the creditors in the Phoenix judgment specifically argued that their case falls under Section 5(8)(b) dealing with credit facility, independent of the concept of time value of money. However, the Court rejected the submission, holding that the loan must have an essence of the principal terms, in order to be qualified as “financial debt”, whereas, the Orator judgment specifically opposed this position. Consequently, since the Phoenix judgment is not even explicitly overruled, this gives in confusion as to what the position of the law stands for Section 5(8) of IBC. CAN WORKING CAPITAL BE USED AS A LOOPHOLE? Working

[By Yash Sinha]  The author is an Advocate based out of Delhi.  The Insolvency and Bankruptcy Code, 2016 (‘IBC’) contains a residuary jurisdiction clause under Sec. 60(5)(c). The Supreme Court has attempted to put in words the inferable scope of the same twice in 2021: once in Gujarat Urja Vikas v. Amit Gupta(‘Amit Gupta’), followed by the very recent judgment in the case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited(‘TATA’). More interestingly, these judgments deal with the boundaries of IBC’s residuary jurisdiction to adjudicate contractual disputes. This article attempts to confirm the validity of these judgments by viewing their rationale through a completely different prism: the limited territorial jurisdiction conferred by the IBC upon the NCLT. The author proposes that Sec. 60(5)(c) dissuades the inclusion of contractual disputes within its purview due to this singular reason. Consequently, given the differences in valid yet separate territorial jurisdictions for contractual and insolvency disputes, the judgment in TATA rightly reads Sec. 60(5)(c) as extremely restrictive. Section I of this article summarises the holdings and the underlying premises of the Supreme Court (‘the Court’) in Amit Gupta and TATA. Therein, the singular focus will be the scope of the residuary jurisdiction clause qua contractual disputes determined by both the decisions. Section II argues and confirms that contractual disputes are best left outside of the NCLT’s ambit, given the jurisdictional scheme of the IBC. It argues that any contrary interpretation leads to disturbing the territorial jurisdiction of the IBC. Therefore, any extra-territorial jurisdiction to the NCLT through Sec. 60(5)(c) is demonstrated as barred by both jurisprudence and rules of interpretation. Supreme Court’s phased analyses A.    The restriction is seeded: Amit Gupta Amit Gupta witnessed one of the contracting parties failing to service its debt to a certain financier, the third party to the contract. Furthermore, the same party failed to discharge its other performative obligations to the second party. The second party claimed this to be a default for the purposes of Sec. 10 of the IBC. The third-party financier intervened by way of an application under the residuary jurisdiction clause. It prayed for an injunction to preclude any termination of the agreement, which was granted by the NCLT.  Consequently, the Supreme Court was approached and posed with determining the validity of the NCLT’s admission of the application filed under Sec. 60(5)(c). The Court upheld the final order of the NCLT, thereby, holding in favour of the financier by advancing two reasons. Firstly, the Court stated that contractual termination was not covered by Sec. 14. That is, the moratorium clause of the IBC does not put a hold on such disputes being raised in spite of an IBC proceeding already underway. This was inferred as denoting the probable application of Sec. 60(5)(c). Secondly, Sec. 238 was read by the Court as re-asserting the IBC as lex specialis, which overrides general legislation. These two factors were collectively taken to interpret the phrase “questions of law or fact arising from or in relation to the insolvency resolution proceedings” occurring in Sec. 60(5)(c), liberally. However, this was disclaimed as a holding specific to the facts of Amit Gupta. Regardless, it was categorically stated that irrespective of the facts of any case in the future, NCLT, while exercising its jurisdiction under IBC, cannot adjudicate upon disputes which are completely unrelated to the insolvency proceedings. Succinctly put, the termination of the contract may have had some implication on the financier’s rights as a creditor. This alone justified the utilisation of the residuary jurisdiction clause. It is this holding that has come to be affirmed verbatim in TATA. However, this time the Court detailed the underlying premise for its position. B.Better exposition of the restriction: TATA To begin with, TATA saw one contracting party attempting to terminate an agreement for the other’s lapses. The lapse pertained to executing an agreed-upon construction within the stipulated time. The party in breach, however, was undergoing insolvency resolution proceedings from before. Notably, the contract in question was entered into before the initiation of the insolvency proceedings. The contract being a source of future income, the breaching party challenged the attempted termination so that its insolvency resolution was not adversely affected. Failing this, it claimed that the termination would have a direct and adverse impact on the latter. Consequently, it approached the NCLT under the residuary jurisdiction clause challenging the same as well as sought an ad-interim stay. The NCLT and NCLAT having upheld the application, the Court was again asked to verify if Amit Gupta applied. The Court answered the question in the negative and held the corporate debtor’s application to be lacking in the jurisdiction. While the principles of Amit Gupta were re-iterated, the Court went a step further to delineate the boundaries of the residuary jurisdiction clause. It stated that the clause does not cure the patent lack of jurisdiction of IBC courts. This infirmity exists when the subject of such applications is wholly unrelated to the insolvency proceedings. The notices alleging lapses, which preceded the termination notice, had no bearing upon the insolvency proceedings which were underway. Succinctly put, a contracting party may be a corporate debtor to some unrelated insolvency proceedings. However, the Court states, this contractual relationship per se ought not to guarantee the interference of the IBC. Territorial jurisdiction as a bar on an entertaining contractual dispute There exists no categorical assertion by the Court on one aspect of Sec. 60(5)(c): its extra-territorial application. That is, whether it can be applied to override Sec. 60(1) of the IBC to allow any contractual party to initiate/join insolvency proceedings when no registered offices of the corporate debtor exist. The territorial jurisdiction for a court of law in case of a contractual dispute is governed by principles laid down in the case of A.B.C. Laminart Private Limited v. A. P Agencies, Salem read with those in Bhagwandas Goverdhandas Kedia v. M/S. Girdharilal Parshottamdas. Summed up collectively, these precedents state that the place of

[By Aayush Mishra] The author is a student at the Himachal Pradesh National Law University, Shimla.  Introduction Recently, on the 22nd of October 2021, the Supreme Court in the case of V. Nagarajan v. SKS Ispat and Power Limited shed light on the period of limitation to file an appeal against an Order under Section 61 of the Insolvency and Bankruptcy Code of 2016 (IBC, hereinafter). The Court held that the period of limitation shall begin to function as soon as the Order is pronounced and the same shall not have any bearing upon the date on which the said Order is uploaded. Consequently, if any party has failed to file an application to secure a copy of such Order, they shall not be allowed a respite of extension in the period of limitation on the ground of delay in uploading of such Order. In the forthcoming article, the author discusses the uncertainty regarding the limitation period that used to surround the IBC. Thereafter, the confusion concerning the applicability of the Companies Act in place of IBC for the production of a certified copy of the Order is dealt with. A distinction has been made between the circumstances in which the certified copy has to be made available to the appellant in contrast to when the appellant himself is required to apply for the same. Lastly, these uncertainties and distinctions have been succinctly analyzed with the help of relevant precedents and statutory provisions. Confusion Around Beginning of Limitation Period The appeal in the present matter emerged from the impugned order of the National Company Law Appellate Tribunal (NCLAT, hereinafter), as the same had dismissed the plea of the appellant for being barred by limitation. The appellant had filed a miscellaneous application pertaining to a liquidation proceeding before the National Company Law Tribunal (NCLT, hereinafter), seeking interim relief against the invocation of a bank guarantee against the corporate debtor by one of the respondents. However, based on its understanding that performance guarantees do not form a part of ‘Security Interest’ as per Section 3(31) of the IBC, the NCLT refused to grant an injunction in favour of the appellant in its Order dated 31st December 2019. While the appellant had agreed to his presence before the NCLT during the pronouncement of this Order, he highlighted that the copy of this Order had been uploaded only on March 12, 2020. Subsequent to this, the appellant pointed towards the COVID-19 nationwide lockdown, due to which the appeal before the NCLAT could be filed only on June 8, 2020. It is also due to this reason that the appellant had filed for an exemption from filing a certified copy of the Order because the same never got issued. Nevertheless, the NCLAT resorted to Section 61(2) of the IBC which allows a limitation period of 30 days, extendable by 15 days, and held that appeal under Section 61 was barred by this limitation period. Herein, this limitation period expired on February 14, 2020 (45 days over NCLT Order). In addition, while acknowledging the absence of a certified copy of the impugned Order in the appeal as mandated by Rule 22(2) of NCLAT Rules, the Tribunal further observed that the appellant had failed to provide any evidence that the certified copy was never issued to him. Overlap in Interpretation of Companies Act and IBC Provisions The major point of cause that the appellant raised was the imposition of nationwide lockdown as a result of the pandemic. Due to the lockdown, the NCLT had halted the clock of limitation with effect from March 15, 2020. Based on this rationale, the appellant claimed that the appeal had been de jure filed within three days of the release of Order, which was on March 12, 2020. Furthermore, the appellant highlighted Rule 14 of the NCLAT Rules that grants a waiver from adherence to any other rules under special circumstances. In addition to this, the appellant presented his interpretation of Section 420(3) of the Companies Act 2013, read with Rule 50 of NCLT Rules, and expressed that a certified copy of the Order is to be sent to concerned parties. In this light, he sought reliance on Sagufa Ahmed v. Upper Assam Plywood Products Private Limited, wherein the Supreme Court had held that the limitation period would start only and exactly from the date on which a copy of the Order is ‘made accessible’ to the aggrieved party. It is also to be necessarily noted that the appellants had placed reliance on Section 12 of the Limitation Act 1963 and claimed that a certified copy is to be made accessible to the aggrieved party and the same has been statutorily mandated. Also, since the Sagufa Ahmad ruling was predominantly under the umbrella of the Companies Act, the appellant had also relied on the case of B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, wherein the court had expressed that all proceedings under Chapter XXVII of Companies Act shall apply to that of the IBC. ‘made available’ – A Key Phrase The Respondents submitted that the IBC by no means directs or implies that the limitation period shall start from the date on which the certified copy of Order has been ‘made available to the aggrieved party. Aggrieved parties cannot possibly be expected to wait indefinitely for the copy of the Order to be provided to them. In any circumstance, it is expected out of a responsible party to make a timely application for the certified copy of the Court Order. Furthermore, the respondents stressed upon appellant’s presence during the pronouncement of the Order and precisely referred to the court observation in Pr. Director-General of Income Tax v. Spartek Ceramics India Ltd., wherein it was held that the period of limitation begins from the date on which the contesting party has attained ‘knowledge’ of Order when pronounced. Highlighting that the IBC is a special statute and time is an intrinsic essence in it, the respondents further relied upon the

[By Divyanshi Srivastava]  The author is a law graduate of Guru Gobind Singh Indraprastha University. The Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”) was enacted to fix an ailing system. Due to the multiple contrary and complex legal arrangements, a simple, coherent, and effective framework was the need of the hour, and the IBC is a denouement of the same. However, despite its exhaustive nature, the journey of the Code, since its birth has been a bittersweet symphony, traversing numerous challenges. While the Code is a specialized and dynamic piece of legislation, given its young age, the jurisprudence around it is still inchoate. In this respect, where Section 5(13) of the IBC provides that “insolvency resolution process costs” would include any fees payable to resolution professional (“RP”) and any costs incurred by the RP in running the business of the Corporate Debtor (“CD”). The section is silent about the success fee. Further, the Code also does not have any provision stipulating that RPs can charge a success fee. In this respect, when in a recent case of Jayesh N. Sanghrajka, erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. Monitoring Agency nominated by Committee of Creditors of Ariisto Developers Pvt. Ltd., the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) was presented with an issue surrounding success fees charged by RP and whether the same formed part of the commercial wisdom of the Committee of Creditors (“CoC”), the NCLAT categorically held otherwise. And further laid down that success fee which is more in the nature of the contingency and speculative cannot be charged by the RP. Conspectus of the Case The judgment emanated from an appeal filed by the RP (“Appellant”) of Ariisto Developers Pvt. Ltd. (“Corporate Debtor”) against the observation of the National Company Law Tribunal (“NCLT”/ “Adjudicating Authority”). Since in the matter, the Respondent was the Monitoring Committee – a formal party – and the issues were primarily legal in nature, the Appellate Tribunal appointed an Amicus Curiae, as the response of the Respondent was not necessary. In the impugned order, the Adjudicating Authority had approved the resolution plan submitted by Prestige Estates Projects Ltd. for the CD but disallowed the success fees amounting to Rs. 3 Crores charged by the RP as unreasonable. Aggrieved by the same, the Appellant filed an appeal and contended that the approval of the success fees by the CoC was a commercial decision of the CoC, and hence, could not have been interfered with. The Appellant, as ammunition to its argument, referred to an IBBI Circular, dated 12/06/2018 and relied upon Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 stating that the CoC has to fix the expenses which will be incurred by the RP and such expenses include the fee for the RP. The Amicus Curiae per contra, referred to Section 208(2) of the Code and submitted that the Insolvency Professional is required to abide by the code of conduct stipulated in the said section and therefore, has to take reasonable care and diligence while performing his duties. The Amicus Curiae also referred to the said circular and submitted that as per the provisions, it is clear that the remuneration charged by the RP need to be “a reasonable reflection of the work undertaken”. Moreover, the Amicus Curiae contended that reliance upon the said IBBI Circular by the Appellant was misplaced as the same did not provide, prescribe, recommend, promote, endorse or sanctify payment of success fees. The Amicus Curiae even argued that a perusal of the provisions surrounding the subject makes it clear that RPs have to perform their duties objectively. The Appellate Tribunal, at the outset, iterated that the Code or Regulations thereunder have not provided for any fee on a speculative basis and the term “success fee” itself is contradictory to the fundamental principle that insolvency professionals shall render their services for a fee which is a “reasonable reflection of their work.” The NCLAT also noted that irrespective of the stage at which the success fee is claimed, charging such a fee would only have an adverse impact on the insolvency resolution process, as RPs are required to perform their duties under the Code independently and disinterested. Further, the Appellate Tribunal, agreeing with the submission of the Amicus Curiae that a Circular cannot be equated with the Rules and Regulations framed under the provisions of the Code, noted that even the Circular dated 12/06/2018 does not make success fee or contingency fee payable and an indirect reference to the same cannot be understood to mean that success fee is legally chargeable or payable. Furthermore, the NCLAT also approved the Amicus Curiae’s reliance on the decision in Alok Kaushik v. Bhuvaneshwari Ramanathan &Ors., wherein it was held that the NCLAT has the power to determine the fee and expenses payable to a professional; and finally held that success fee in the instant matter could not be charged and “even if it is to be said that it is chargeable, we find that in the present matter, the manner in which, it was last minute pushed at the time of approval of the Resolution Plan and the quantum are both improper and incorrect.” Analysis The said decision of the Appellate Tribunal that success fee which is contingent and speculative is not chargeable, is not only pertinent but also in harmony with the Bar Council of India Rules, 1975. For as per Rule 21of Chapter II of Part VI of the said Rules, advocates are barred from stipulating fees which is contingent on the result of the litigation. Moreover, the Hon’ble Supreme Court in the case of V.C. Rangadurai v. D. Gopalan has held that the relationship between a lawyer and their client is fiduciary in nature, and therefore, lawyers have to act in the best interest of their clients. At the same time, the relationship between the RP and CoC is fiduciary in nature is rather apparent and therefore, incontrovertible; and since the RP has to manage

[By Prarthana Gupta & Tanya Shukla]  The authors are students at the National Law Institute University Bhopal. INTRODUCTION The covid-19 pandemic has severely impacted the entire world, including financial markets. Of these financial markets, the Micro Small and Medium Enterprises (MSMEs) have taken a great hit too. Forming the backbone of the Indian economy, and contributing a whopping 29% to the nation’s GDP[i], the MSMEs constitute 60% of the Indian industry. The nationwide lockdown imposed in the wake of Covid-19 has severely impacted this industry, making it difficult for them to pay off their loans. Over the last year, the defaults in payments have risen steadily, driving a considerable number of them into insolvency. [ii] This article attempts to shed light on the problems that Indian MSMEs have been facing, particularly relating to lack of funding and liquidity, fall in creditworthiness and insufficient capitalisation. Such issues have directly affected the business of the MSMEs, leading them to bankruptcy. The authors have analysed the recent amendment to the Insolvency and Bankruptcy Code, 2016 vis-a-vis the MSME sector to show how effective would it be for these businesses. PROBLEMS FACED BY MSMES IN COVID The lack of liquidity in the financial markets has most severely affected the MSMEs. MSMEs are a major source of providing service and generating employment in the country. Various studies have repeatedly demonstrated that this sector acts as a catalyst for the country’s socio-economic growth. This becomes more essential in light of the government’s stated aim to achieve a $5 trillion economy by 2025. Within this objective, the MSME sector will play a major role, with a contribution to GDP anticipated to exceed 50%. The potential of the Indian MSME sector remains unexplored, which is one of the reasons why government policies are now more convergent on creating a robust ecosystem with more breadth and depth.[iii] Surveys have shown that the pandemic has reduced the earnings of MSMEs by 20-50%. With external funding frozen in the wake of Covid-19, the immediate challenge on MSMEs to meet their legal responsibilities becomes all the more difficult. There is a likelihood of a significant increase in default levels of loans from NBFCs (Non-Banking Financial Companies). In addition to this, there is insufficient recapitalisation and the constant fear of being shut down. A staggering 43 per cent of MSMEs will close[iv] if the COVID-19 lockdown extends beyond the effective end date. Hence, activities are urgently needed in the sector that employs more than 114 million people.[v] The credit crisis being faced by MSMEs will turn the liquidity concerns into solvency problems, create more non-performing loans and raise the sector’s vulnerability to a vicious cycle, which might hamper their actual recovery. In such a situation, seeking a protectionist approach in business before the recovery of local interest suggests a larger risk of the economy becoming caught in a low-interest cycle. Furthermore, the continued exemption of labour regulations jeopardises the revenue of labourers, slowing the repair speed of consumer demands. Support from RBI and policies like the recent exemption granted to banks to maintain cash reserve ratio to first time MSME borrowers for the period of January 1, 2021, to October 31, 2021[vi], will be significant in resisting liquidity crunch and help make more fund available for MSMEs. Nonetheless, the sector is dealing with long-standing issues such as lack of operating capital, complex regulatory and licensing mechanisms, rigorous loan disbursement rules, extensive compliance requirements, embryonic digital adoption, and, last but not the least, a convoluted taxation structure. In order to assuage these concerns, an amendment to the Insolvency Bankruptcy Code (IBC), 2016 was passed last year, raising the default limit for initiation of insolvency proceedings against a corporate debtor from 1 lakh to 1 crore. The government recently took another significant step in the same direction by promulgating the IBC (Amendment) Ordinance, 2021 (“amendment ordinance”), which has introduced the “Pre-Packaged Insolvency Resolution Process” (PRIRP) for Indian MSMEs. Let us now look into what a PRIRP is and how it works. Understanding the Pre-packaged insolvency resolution process The pre-Packaged Insolvency Resolution Process has been gaining worldwide attention and has proved to be successful in countries like the US and UK. As the nomenclature suggests, Pre- Pack is meant to provide an opportunity to the distressed company and its financial creditors to informally pre-arrange a resolution plan, before the plan can go for approval to the court or tribunal and the proceedings can be formally initiated. Pre-Package has been defined by the Association of Business Recovery Professionals as “an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on or shortly after his appointment.”[vii] Chapter IIIA of the Amendment Ordinance mandates the procedure of a PRIRP, intended for defaults ranging from 10 lacs to 1 crore. Approval of 66% (in terms of debt due by the MSME) of the total unrelated financial creditors of the MSME (and unrelated operational creditors in absence of financial creditors) is also required for the application. However, it must be noted that the corporate debtor must not be undergoing a Corporate Insolvency Resolution Process (CIRP) under the IBC, and must not have undergone either a PRIRP or a CIRP in the previous three years (from the date of application for initiating PRIRP). A PRIRP may be administered in a number of ways, including as a standalone process, as part of an Insolvency Resolution Process (IRP), or as part of a voluntary administration process. Now that we’ve gained an understanding of the process, let’s understand how is it different from the existing CIRP model under the IBC. PRIRP vs CIRP: the better option? PRIRPis a novel addition to the Indian financial market. As opposed to the CIRP model, PRIRP imposes a “debtor in control” model whereby the debtor retains control over the assets and business till the process is completed. The primary benefit of the PRIRP