Insolvency Law

[By Yasha Goyal and Shreya Ahuja] The authors are students at the Institute of Law, Nirma University. Introduction The Sustainable Development Goal 8 (“the SDG 8”)  “is to promote sustained, inclusive, and sustainable economic growth, full and productive environment, and decent work for all”.[i] The target is to achieve these goals by 2030.[ii] The Covid-19 pandemic that hit the world in 2020 has not only affected healthcare but the economy all over the world has collapsed. The businesses are striving to survive and the failure of business results in the unemployment of a large number of people. The poverty and the income disparity between and within the nations are escalating. Income inequality is soaring and the pandemic has turned into a golden opportunity for the ultra-rich to make fortune. The wealth of billionaires in India increased by 35% during the lockdown and by 90% since 2009.[iii] Whereas, the Micro, Small & Medium Enterprises (“MSMEs”) who play a crucial in the economic growth of the country are hard hit by the pandemic, since 2020 more than 75% of SMEs are incurring revenue losses equivalent to or more than 50%, struggling to continue with their operations.[iv] These reports depict that the target of SDG 8 has become even more distant with the advent of this pandemic. Remarked as the ‘Inequality virus’ by Oxfam International[v], this pandemic calls for action from the government to make laws and policies to protect the people to get grips with the declining economic conditions. There is legislation in place for businesses going in distress like the Insolvency & Bankruptcy Code, 2016 (“ the IBC”). Although, the impact of the pandemic requires reform especially to support the small business. Need of IBC to achieve SDG8 The centre of the SDG 8 is the economic growth that results in the employment of all. To attain the targets of SDG 8 the government of India has formulated policies like Skill India, Mahatma Gandhi National Rural Employment Guarantee Act (“MGNREGA”), Make in India, Start-up India.[vi] To attain economic growth it is of paramount importance that the business of the country prospers. Every business in its lifetime passes through a stage of distress, hence it is important to have a policy in place that rescues the business in distress. If the business winds up it is detrimental to the employees working for it, other businesses connected to it, and the overall economy of the country. Since a prospering business contributes towards Gross Domestic Products, increase in exports and the overall economic growth by running constantly. It is imperative to safeguard MSMEs drowning into winding up. It is in this respect,  the IBC was formulated to rescue the Corporate Debtors (“CD”) in distress and protect the business. Considering the current pandemic wherein the businesses are struggling to survive and are on the verge of winding up the pre-packs emerge as a fruitful process to achieve the SDG8 goals. As these MSMEs are turning into CDs with the loss in revenue hence it is imperative to provide corporate rescue since they employ 120 million[vii] people contributing a share of 30% towards the GDP[viii]. Introduction of pre-packs under the Indian Insolvency regime Pre-pack is a mechanism globally accepted and implemented. Paving a way for resolution of distressed debts by providing a framework of settlement between CD and stakeholders with a formal abdication of law as per the IBC. The prevalent mechanism to constitute a pre-pack is a negotiation between the debtor and buyer before entering in the appointment of a Resolution Professional, who further assists in the passing of a resolution plan. Unlike other nations pre-pack in India is not only about the out-of-court arrangement but is powered by the laws under the IBC till the extent of the existing NCLT supervised resolution process.[ix] However, under CIRP it was a credit in control model with RP in possession. Under pre-packs to retain flexibility with the MSME, the debtor in possession model is allowed. Wherein, the debtor shall remain in possession of the enterprise and continue to run it until the resolution takes place instead of handling the operation to RP as soon as the admission of insolvency proceedings under CIRP. The option under PIRP provides its inclusive set of laws under section 54C-P of the Code providing a basic structure of the IBC and checks against any forthcoming abuse. The mechanism provides the creditor also an option to choose to proceed by way of CIRP. Further, 66% of approval by creditors is necessary for the resolution process.[x] The duration of the entire proceeding has to be done within a period of 90 + 30 days from the initiation as opposed to the CIRP process granting 330 days from initiation. [xi] The advantage of pre-packs over the existing formal regime of insolvency is that the pre-packs would cause the minimum disruption to the business of the debtor as the CD continues with the existing management unlike in the CRIP proceedings where the management is shifted to the Resolution professional. Further, this is time and cost-efficient as the pre-pack enables the faster resolution that is within 120 days as prescribed in the Ordinance and non-requirement of IP to manage affairs save the cost inclusive of a fee. Moreover, this alternative has the potential to reduce the burden on the courts and tribunals. The advantages of the pre-pack arrangement that rescues the business would help to attain SDG 8 that is stable economic growth and retain the employment of the people. Relevance of Pre Packs The insolvency regime is indeed evolving with multiple amendments coming its way until 2021. The BLRC believes pre-pack is the next step for India towards its natural evolution and need of the hour amongst the pandemic. The creditors were provided rescue under the Insolvency framework of the IBC. However, under the current formal regime of CIRP, the RA is required to rescue a failing company through a resolution plan. In a time when every company is reeling from stress, the possibility of

[By Nimisha Sharma and Uddhav Tiwari] The authors are students at the National Law Institute University, Bhopal. INTRODUCTION Moratorium under Insolvency and Bankruptcy Code, 2016 (“IBC”) has been subjected to multiple legislative amendments and judicial enhancements.  Recently, the Hon’ble Supreme Court (“SC”) in P. Mohanraj & Others v. M/s. Shah Brothers Ispat Pvt. Ltd.[i] solved the conundrum about the applicability of moratorium under §14 of IBC to proceedings under §138/141 of Negotiable Instruments Act, 1881 (“NIA”). FACTUAL BACKGROUND The respondent filed two criminal complaints against the corporate debtor (“CD”) and its three directors (appellants) under §138 read with §141 of NIA. Meanwhile, an application under §9 of IBC was allowed by the Adjudicating Authority (“AA”), which resulted in the initiation of the Corporate Insolvency Resolution Process (“CIRP”) and imposition of moratorium upon the CD. The AA stayed further proceedings under the pending criminal complaints. The National Company Law Appellate Tribunal (“NCLAT”) reversed the order of AA and held that §138 of NIA, being a criminal law provision, cannot be held to be a proceeding within the meaning of §14 of IBC. The sole issue that arose in this matter was whether the initiation or continuation of a proceeding under §138/141 of NIA would be covered by the moratorium provision. OBSERVATIONS AND REASONING The analysis given by the court can be summarised under the following heads: Interpretation of Section 14 – Noticeably, the expression “or” occurs twice in the first part of §14(1)(a) – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor…”. The usage of the word “or” before the word “proceedings” by the legislature makes its intention clear regarding the treatment of “institution of suits or continuation of pending suits” and “proceedings against the corporate debtor” as distinct categories. The word “proceedings” under §14(1)(a) is ‘all-inclusive’ on account of the usage of expressions such as “any judgment, decree or order” and “any court of law, tribunal, arbitration panel, or other authority”. The proceeding under §138 of NIA, being criminal in nature and conducted as per the mandate under §6 of CrPC, is a ‘proceeding’ in a court of law regarding transactions inclusive of debts owed by CD. [ii] The object sought to be achieved by §14 of the IBC is to see that there is no depletion of CD’s assets during the CIRP so that it can be kept running as a going concern during this time, thus maximizing value for all stakeholders.[iii] The same has been reiterated in Swiss Ribbons (P) Ltd. v. Union of India.[iv] Considering this objective, a ‘proceeding’ under §138 of NIA would adversely affect the assets of CD, because the defaulter would have to compensate for the ‘institution, continuation or execution of a decree in a civil suit for recovery of debt or any other liability. Thereby, making the protection granted to CD under §14(1)(a) and (b) futile and affecting the object of §14 which enables the CD to rehabilitate itself as a going concern. Application of the Noscitur A Sociis Rule of Interpretation and ejusdem generis – The Noscitur A Sociis and ejusdem generis, being rules as to the construction of statutes, cannot be applied to restrain the ambit of expressions if they are specifically designed to provide a wide sense. Importantly, in the event where a residuary phrase is used as a catch-all expression to subsume within it the reasonable comprehension of the provision, regard has to be sort to its object and setting. These rules should be used cautiously and should not color an otherwise wide expression, which trammels and frustrate the object of a statutory provision. The objective of Section 14 – Section 14 and other moratorium provisions in IBC – When the language of §81, 85, 96, and 101 of IBC are juxtaposed against the language of §14, it is conspicuous that the scope of §14 is wider. The protection of moratorium through §85 of IBC is only in respect of ‘debts’, whereas the moratorium in §14 is in respect of ‘transactions’, being provided by §14(3)(a). The word “transaction” is a broader concept than “debt”, and inclusive of it. With the exclusion of the word “legal” as a prefix to “proceedings” in §14(1)(a) as used in the moratorium provisions qua individuals and firms, the intention of the legislature is quite clear. §138 is a legal proceeding “in respect of” a debt. “In respect of” is a phrase that is wide and includes anything done directly or indirectly.[v]Thereby, attracting application of §138 of NIA in a legal proceeding regarding any debt and allowing any indirect legal proceeding relating to debt. Also, the moratorium under §14 provides protection to the CD against the transactions mentioned in clauses (a) to (d), inclusive of transactions relating to debts, as are contained in §81, 85, 96, and 101. The interplay between Section 14 and 32A of IBC – Referring to the recent judgment of SC in Manish Kumar v. Union of India[vi] and the ILC Report of February 2020,[vii] the court observed that §32A and 14(1)(a) are independent of each other. §32A primarily aims at extinguishment of criminal liability of the CD, from the date of approval of resolution plan by the AA, in order to give a fresh start to the CD. Declaration of moratorium under §14 just casts a shadow on the proceedings that have already been initiated, which could be resuscitated once the moratorium period comes to an end. It was further observed that the expression “proceedings” under §32A(1) refers to criminal proceedings filed through a First Information Report or complaint filed by investigating authority and not to complaints filed by private persons. If the quasi-criminal proceedings such as those under §138/141 of NIA are initiated against CD, they would defeat the object of imposition of the moratorium and the object of §32A, barring all criminal proceedings against the CD. Nature of proceedings under Section 138/141 of NIA – The court observed

[By Christina D’Souza] The author is a third year student at RMLNLU, Lucknow. It has been almost a year since the Notification dated 24.03.2020([i]) (“Notification”) was notified by the Ministry of Corporate Affairs to increase the amount of default from 1 lakh rupees to 1 crore rupees for filing applications under Part II of the IBC. Even today, an issue is raised before NCLTs regarding the admissibility of claims less than 1 crore rupees where date of default is prior to the date of Notification. In May 2020, in the case of Madhusudan Tantia vs Amit Choraria ([ii]), the NCLAT clarified that the Notification is  prospective in nature. It also went on to note that the Notification will not apply to the applications where default occurred prior to the date of Notification. However, in July 2020, the Delhi High Court in the case of Pankaj Agarwal vs Union of India ([iii]), passed an interim stay on the order of NCLT accepting an application for a default of less than 1 crore where default occurred prior to the date of Notification. The Delhi High Court noted that there was an error by the NCLT in accepting the application, as the Notification was clearly applicable. Kerala High Court([iv]) and Madras High Court([v]) have taken similar positions. Recently, in February 2021, the Delhi High Court, in the case of Hari Singh vs Dynamic Aura LLP([vi]), directed the parties to the NCLT to have this issue of admissibility of claims prior to the date of Notification resolved. The NCLT took a divergent approach on this issue. Even after agreeing that the Notification has a prospective application, the NCLT went on to dismiss the application for which the date of default was prior to the date of Notification. NCLT’s Observations in Hari Singh Case Prospective or Retrospective application of the Notification not an issue NCLT accepted that the Notification has a prospective effect, but it went on to note that the issue is not whether the Notification is retrospective or prospective in nature. The issue is whether the right to file an application is a statutory right or a vested right. Right to file an application under IBC Code is a statutory right In this regard, the NCLT went on further to note that monetary jurisdiction is a statutory right, not a vested right. It reasoned on the lines that elements of vested right are altogether different from the statutory right. The Right of filing a case is a statutory right, not a vested right, when statute goes, that right also goes. The jurisdiction under the IBC is one of the remedies the creditor has. If the creditor cannot meet the requirements to initiate insolvency proceedings, then it is always open to the creditor to proceed before the DRT under SARFAESI Act or the Civil Courts under the Civil Procedure Code. Therefore, the parties shall not remain under the notion that it is a vested right to file cases below the threshold limit of one crore, even after that statutory right is not in existence in the statute. Thereby, unless a statutory right is exercised within time, i.e., before 24.3.2020, it cannot be construed as a vested right to file a case. Class Concept for monetary jurisdiction The NCLT recognized a class of creditors for the purpose of the jurisdiction of the Tribunal in light of the Notification. As per the same, the class of creditors who cross the threshold of one crore rupees to file cases, shall be able to invoke the jurisdiction of the Tribunal. The NCLT grouped all kinds of creditors in only one class because the Notification pertained to section 4 of the IBC and section 4 is applicable to all classes of creditors. Thus, the creditor filing an insolvency application shall belong to this class, i.e., must have crossed the threshold of one crore under section 4 of the IBC. The increased threshold applies to non MSME cases as well While interpreting the text of the Notification in a literal sense, the NCLT noted that “if at all the Government intention was only to apply this threshold to MSME cases, Government would mention that specifically”. NCLT further noted that they are required to go by the plain language of the Notification and not otherwise because there is no ambiguity in understanding its language. Nevertheless, even if the Notification was only for providing a relief to MSMEs, the Government at its level cannot create such a classification because that would be a legislative policy work, which cannot be done by the Government alone, without the approval of the Parliament through Legislation. Analysis of the Decision Interestingly, in the Hari Singh case, the Delhi High Court itself directed the NCLT to determine the legal point raised by the petitioners. The position that the Notification is applicable prospectively is more or less settled and the NCLT was right in not delving into the same. What sets this decision apart from all the previous decisions on this issue is the fact that even after accepting that the Notification is applicable prospectively, the NCLT still went on to dismiss the application because the threshold was not met, and the date of default was prior to the date of Notification. To support its decision in this regard, the NCLT did give some strong reasons and at the same time it made the applicants aware of an alternate remedy which they could pursue instead. An interesting question comes up regarding the precedence of Hari Singh case as the NCLAT in Madhusudan Tantia case has given a different observation in this regard. Even though both the Delhi High Court in Pankaj Agarwal case and the NCLT in Hari Singh case have reached a similar conclusion, the NCLT has taken a divergent view while coming to its conclusion, which is evident from the reasoning which is first of its kind. While the Delhi High Court in Pankaj Agarwal case was of the opinion that the objective of bringing

[By Damini Chouhan and Vinisha Jain] The authors are fourth-year students at the Institute of Law, Nirma University, Ahmedabad. Introduction The Indian Insolvency Law Committee (hereinafter “ILC”) believes that pre-pack models must be introduced as an alternative to Corporate Insolvency Resolution Process (hereinafter “CIRP”) to ease the insolvency process. ILC formed the Sub-Committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process (hereinafter “sub-committee”). This sub-committee proposed a pre-pack model to the government in October 2020. A pre-packaged insolvency resolution process can be encapsulated as follows. First, it will be available for insolvency resolution as a supplementary method along with CIRP but it shall not run parallel to it. Second, the process commences when the promoters submit a base plan after completion of other formalities. In order to upgrade the value of the Corporate Debtor (hereinafter “CD”), a model of Swiss Challenge has been introduced wherein the base plan submitted by the promoters may or may not be opened to a bid. To begin with, the base plan will have to be necessarily opened to Swiss Challenge if it does not propose to pay the Operational Creditors (hereinafter “OCs”) of the CD in full. On the contrary, if the base plan proposes to pay the OCs in full, the Committee of Creditors (hereinafter “CoC”) is free to decide according to its commercial wisdom whether or not this base plan shall be opened to a Swiss Challenge. Evidently, the optional approaches of the Swiss Challenge are the deciding factors for the outcome of the entire process. These approaches in turn are dependent on the payment proposed to be made to the OCs. Though protection has been imparted to OCs, the protection is hinged upon certain assumptions. This article, therefore, analyzes this provision in light of its probable fallouts and the importance of OCs. The Proposed Swiss-Challenge Model Swiss Challenge is a bidding process where each applicant makes a better offer than the existing one,  to secure the contract. It would now be introduced to the insolvency resolution process as well. As mentioned above, the proposed provision which is based on the payment to the OCs presents a binary approach with respect to the Swiss Challenge. The CoC has been made responsible to act in this respect according to the following two situations: first where the base plan proposes to pay the OCs in full and second where the base plan does not propose to make good the entire claim of the OCs. In the first scenario, the CoC has the choice to decide whether or not the base plan will be opened to Swiss Challenge and if CoC feels that it suffices in terms of value, CoC may accept the base plan and not open it to Swiss Challenge. On the other hand, if it feels that the base plan does not give the best value, the CoC applying its commercial wisdom may open it to the Swiss Challenge. Hence, in either case, the entire claim of OCs is protected irrespective of whether the base plan is opened to Swiss Challenge or not. In the second scenario, where the base plan does not propose to make good the entire debt owed to the OCs, the CoC has to mandatorily open the base plan to Swiss Challenge. A single round of bidding would take place and the plan that offers the best value shall proceed further in the process. The promoters shall be given a chance to match their base plan to such a competing plan. It is not necessary that the value escalation in the plan that is finally accepted reaches a stage where the entire claim of OCs is covered. Nevertheless, the OCs have to be paid the minimum liquidation value or no plan will be accepted and the pre-pack would close without consequence. Scope of Improvement In both scenarios, payment of at least the liquidation value to OCs is guaranteed incongruity with the existing CIRP Regulations.[i] Sadly, the liquidation value is generally way too less than what is owed to the OCs. The case of Maharashtra Seamless Limited v. Padmanabhan Venkatesh & Ors is an illustration of such situations where the liquidation value is not even close to the claimed amount. ILC acknowledged this issue in its 2018 Report, but it did not suggest any amendments due to the following reasons. First, even though the liquidation value is the mandate, it was observed that what the OCs actually receive is way above the liquidation value in most cases. Second, when the OCs receive a very less amount, it is in cases where the stress on the CD is extremely high. Third, no representations or evidence that suggest otherwise could be found. Hence, it decided to continue with the status quo, despite the fact that current law provides an inherent scope to the CoC and Resolution Applicants to lawfully leave the OCs with only a meager payout. It seems like ILC is turning a blind eye to a bomb just because it has not exploded. Similarly, just because there is no prima facie evidence of inequitable treatment, does not mean that such treatment is not there. Therefore, even if the faith of ILC in the maturity of CIRP is to be relied upon, the same cannot be said for pre-packs. It would be unwise to continue with the same position of law for the pre-packs regime as well, presuming that pre-packs would work out the same way as CIRP. Moreover, given the role of OCs as suppliers of working capital, in order for a CD to continue as a ‘going concern’, the aim should not just be to protect the OCs but also to incentivize them. Conclusion & Suggestions In both the scenarios of the Swiss Challenge model, the position of the OCs can be further strengthened or they will remain aloof from the value escalation or additional benefits that pre-packs offer. An express provision mandating equitable payouts to all the creditors in cases of abnormal profits or

[By Rozat Akolawala ] The author is a student at the Maharashtra National Law University, Aurangabad. Like any other tribunal, the National Company Law Tribunals (hereinafter ‘NCLT’) across the country, and the National Company Law Appellate Tribunal (hereinafter ‘NCLAT’) have inherent powers that are exercised to meet the ends of justice and prevent the abuse of process of the Tribunal. It is well settled that the Tribunals cannot go beyond the purpose and objectives of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘IBC’), this implies that the Tribunals cannot interfere with the commercial decision of the Committee of Creditors (hereinafter ‘CoC’), unless it is unjust or violates the provisions of the IBC. This principle implies that the NCLTs’ and the NCLAT’s inherent powers cannot go beyond the commercial decision of the Committee of Creditors (hereinafter ‘CoC’) unless it is patently unjust or against the provisions of the IBC. The article focuses on the journey of these “inherent powers” from the year 2016, and the judicial pronouncements that set up the circumstances under which the Tribunal exercises these powers. Background The Central Government has a rulemaking power under Section 469 of the Companies Act, 2013 and it formulated the NCLT Rules, 2016, and the NCLAT Rules, 2016 under the provision. Both the Rules have similar provisions on the inherent powers of the Tribunal. However, according to Rule 10(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, only selective Rules apply to the IBC, and Rule 11 falls in the left-out category. One can understand that the legislature intended to restrict the implementation of the rules in the IBC, and it is pertinent to note that Rule 11 which invokes the exercise of inherent powers was kept at bay. The reason behind this was the suggestion in the BLRC Report[i]. While dealing with the resolution process of the Corporate Debtor, the commercial decision of the creditors is placed at a high pedestal. The BLRC Report suggested that inherent powers of the Tribunals should be out of the statutory process to limit their interference in commercially viable decisions, to give effect to the commercial wisdom of the CoC. It was clarified in the case of Lokhandwala Kataria[ii] that as per Rule 10(1) only Rules 20 to 26 has been adopted for the functioning of the IBC and Rule 11 was excluded from the same. This was later affirmed by the Supreme Court and further in the case of Uttara Foods and Feeds[iii] it directed the authorities to carry out amendments which shall allow the Tribunals to exercise their inherent powers while dealing with insolvency proceedings filed under the IBC. The NCLAT in the case of Lokhandwala Kataria[iv] held that Rule 11 has not been adopted for the IBC’s purpose and Rule 10(1) adopts only Rules 20 to 26 so far. The Supreme Court later affirmed the same. In the case of Uttara Foods and Feeds[v], the Supreme Court reiterated the decision in Lokhandwala Kataria[vi] and directed authorities to amend the laws and to include inherent powers in the statutory working of the insolvency proceedings. Section 12A was incorporated in the IBC after considering the recommendations in the Insolvency Law Commission Report of March 2018. As per Section 12A if a withdrawal application for initiating insolvency proceedings has been approved by the CoC with a 90% voting share, same can be allowed by the Adjudicating Authority. In further discussion, in March 2018 in the Insolvency Law Commission Report, and after that Section 12A found its place in the IBC. Under Section 12A, the Adjudicating Authority can allow withdrawal of application for initiating CRIRP if approved by the CoC with a 90% voting share. In the case of Swiss Ribbons[vii], the Supreme Court held that the Adjudicating Authority can deal with a withdrawal application till the CoC’s constitution, this fell under the ambit of its inherent powers. Judicial Pronouncements   Judgments revolving around the inherent powers of the NCLTs/NCLAT touch on the following areas- Review Application In the case of Shri Lalit Aggarwal[viii], the NCLAT while adjudicating a Review Application referred to the case of Dr. M.A.S. Subramanian[ix] and observed that power to review is not an inherent power of the court. The NCLAT exercised its inherent powers only to correct typographical errors of the Review Application. Discussing evidence and arguments of the Review Application was beyond the NCLAT’s power. Correspondingly, in the matter of Deepakk Kumar[x], the NCLAT believed that “review” is not an inherent power until and unless it is expressly mentioned in a statute or arises by any necessary implication. A Tribunal’s power to “review” must be a statute’s creation. Commercial Wisdom of the CoC In Sushil Ansal’s[xi] case, two Financial Creditors prayed for invoking Rule 11 of the NCLT Rules, 2016 to terminate the CIRP against the Corporate Debtor as they had agreed to settle the dispute. Relying on the award of Swiss Ribbons[xii], the NCLAT observed that to allow the settlement via their inherent powers, it is necessary to first hear both the parties and check if the CoC’s is formed. The Tribunals often construe the creditors’ decision strictly; however NCLT, Mumbai recently passed a judgment as to the obligations of the creditors. In the Dy. Commissioner of Customs DEEC[xiii] case, the question that arose was whether the Resolution Professional must send notice to the creditors requiring them to file their claim or is it the creditors’ duty to file their claim on the issue of the public notice. It was held that it is the creditors’ responsibility to file the claim, the NCLT, Mumbai refused to invoke its inherent powers to prevent violation of the provisions of the Code. Necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal The arguments in the matter of Univalue Projects[xiv] before the Calcutta High Court was that invoking the inherent powers of the Tribunals is a judicial function and not administrative. The opinion of the Court was that the Tribunals derive their inherent powers from a delegated legislation and ergo, cannot supersede the statutory provisions of the