Insolvency Law

[By Divya Mann and Anubhav Chaudhary ] The authors are students at the National Law University, Lucknow. Introduction Today, it is a common business practice in India for companies to establish their subsidiaries and associate companies. While some of these big conglomerates’ companies may establish them for commercial interest,[i] Others are established to supplement the sister concerns. The assets and liabilities of these group companies are so intricately intertwined[ii] that once they are declared insolvent and the Corporate Insolvency Resolution Process (“CIRP”) under Insolvency and Bankruptcy Code (“Code”) is initiated, the stand-alone resolution is neither cost and time effective nor an idol solution for the creditors. Therefore, in order to have a feasible insolvent group insolvency, the CIRP should be initiated against all the companies operating under a group as subsidiaries and associate companies in front of a common adjudicating authority and by clubbing the assets and liabilities of the group companies. This is where the need for the consolidation of CIRP of the group companies’ rules in. Indian Jurisprudence with Regard to Consolidation  CIRP Consolidation of the Videocon group is a landmark ruling by National Company Law Tribunal (“NCLT”), Mumbai on group consolidation in India. Even though consolidation is not provided in the Code either expressly or impliedly, the NCLT stemmed its power to order for consolidation by relying on the United States case of Re Vecco construction industries[iii] wherein it was held that bankruptcy courts may order for consolidation while exercising its equitable powers. In addition, US Bankruptcy Code provides the court with the power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provision.” [iv] However, the Hon’ble Supreme Court in the case K. Sashidhar v Indian Overseas bank[v] categorically held that NCLT and National Company Law Appellate Tribunal (“NCLAT”) are not Courts of Equity, thereby the basis on which Videocon judgment was passed by NCLT Mumbai lacked merit as it does not have the power to order for Consolidation claiming it is a court of equity. In addition, on the conjoint reading of section 196 (Power and Functions of the Board) and section 240 (Power to make regulations) of the Code, it is quite evident that the Insolvency and Bankruptcy Board of India (“IBBI”) is permitted to merely “carry out the provisions of this Code” and “not to carry out the purpose of this Code”. Therefore, such an explicit distinction in the provisions is to be noted and conclusively, it can be said that the IBBI cannot supplant its authority by bringing any amendment in the regulations.[vi] Other Relevant Provisions Section 60(5)(c) of the Code (Adjudicating Authority for Corporate Persons) allows the NCLT to deliberate on questions of law arising out of insolvency proceedings while Rule 11 of NCLT Rules[vii] entrust them with the inherent powers to pass any order as may be deemed necessary to meet the ends of justice. The above-mentioned provisions empower the NCLT with a certain degree of flexibility while adjudging insolvency cases, however, the NCLT and NCLAT being a statutory authority[viii] it cannot read something which is not already present in the statute.[ix] Further, an application filed under section 60(5)(c) of the Code is only maintainable in the situation when the CIRP has been initiated against the Company or when the Company is under liquidation. Working Group on Insolvency The Working group on Group Insolvency[x] constituted on the recommendations of the IBBI reported that at this stage India lacks the required technical know-how and infrastructure to carry out the consolidated resolution of group companies and the working group stems its view from the parliamentary debates on group insolvency. Thus, the NCLT cannot supersede the legislature and make something a law while exercising delegated legislation when that is expressly against the legislature’s opinion. Benefits of Consolidation The consolidation automatically results in extinguishing the inter-corporate claims[xi], subsidiary equity ownership interests[xii] and duplicative creditor claims[xiii] thereby maximising the assets of the company. Additionally, as was highlighted during the Lavasa corporations’[xiv] insolvency resolution, a consolidated resolution plan is an attractive proposition for the resolution applicant as opposed to a stand-alone resolution plan. Further, the consolidation among the group entities brings together information relating to the assets, creditors, obligations and business of the companies on one table[xv] and allows the courts the bigger picture in one glace therefore, putting aside multiple negotiations and making a feasible purchase option for the potential purchasers. Conclusion Consolidated insolvency resolution law in India will not only make the resolution process expeditious and profitable for the group companies but it will also allow the adjudicating authorities to pierce the corporate veil[xvi] and hold these group companies working as a single- economic unit[xvii] accountable for the manoeuvre of its subsidiaries and associate companies. However, at present, the NCLT is incapacitated in passing an order for consolidation until the same is incorporated in the Code along with a detailed procedure as to the formation of the consolidated committee of creditors, the appointment of a common resolution professional. Till the time amendment is brought to the legislation, procedural coordination can be practiced under rule 11[xviii], which bestows the NCLT with the power to issue an order for procedural coordination, while keeping the assets and liabilities of each individual entity distinct, thus preserving the substantive rights of all the creditors.[xix] This can be done by creating a two layer of COC[xx]. Analogous provisions can also be found in the Chapter 11[xxi]of the US Code that permits the Trustee to appoint such additional COC as it deems appropriate, and the German legislation statutorily highlights the role of group COC in assisting the individual COC while facilitating coordinated handling of proceedings.[xxii] Endnotes: [i] Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613. [ii] State Bank of India v. Videocon Industries Ltd., (2018) SCC Online NCLT 13182. [iii] In Re Vecco Const. Industries, Inc., 4 B.R. 407 (Bankr. E.D. Va. 1980). [iv] United States Bankruptcy Code, 11 U.S.C. § 105 (1978).. [v] K. Sashidhar v. Indian Overseas

[By Umang Pathak] The author is a student at the Jindal Global Law School. On 18th December 2020, the National Company Law Appellate Tribunal (“NCLAT”) in Rajnish Jain v. Anupam Tiwari & Anr., held that, neither the Resolution Professional (“RP”) nor the Committee of Creditors (“COC”) have the sufficient vires to determine disputed claims of creditors. Only the National Company Law Tribunal (“NCLT”) has the judicial authority to adjudicate upon the claim of a creditor – whether the debt falls under s. 5(8) as financial or s. 5(21) as operational debt under the Insolvency and Bankruptcy Code, 2016 (“I&B Code”). Ex Facie, the decision seems to simply clarify the roles of an RP and COC, but on a deeper scrutiny, it also reveals how a legal lacuna can be misused to strip off legitimate rights of a creditor and ultimately, “game” the system. Thus, the article attempts to first, present the law with respect to the role of RP and COC. Second, the article shall expound upon the facts of Rajnish Jain case which shows how the legal lacuna was being exploited by the RP and the promotor of the corporate debtor. Finally, the article shall conclude with few remarks by the author and a possible suggestion that can be implemented to tackle the issue. Introduction – Role of RP S.25(2)(e) of the I&B Code read with Regulations 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (“CIRP Regulations”) entrusts the duty of maintaining an updated list of claims that includes verification and determination upon the RP. Furthermore, the above-mentioned regulations also limit the role of RP to that of an administrative authority, to verify and collate claims. Under s. 18(1)(b) of the I&B Code, the interim RP is to receive and collate all the claims submitted by the creditors pursuant to the public announcement regarding insolvency of the corporate debtor. The interim RP is also entrusted to constitute the COC after receiving these claims under s 21(1) of the I&B Code. S. 28 enumerates the occasion when the RP requires approval of the COC for certain matters, mentioned under sub-sections (1) clauses (a) to (m). Also, 66% of voting share is required in the COC meetings to pass a proposed resolution plan. Thus, on perusal of the aforementioned statutory provisions under the Code, the role and responsibilities of RP is non-judicial and limited to administrative functions essential to the insolvency resolution procedure. This has been reiterated in the landmark decision of Swiss Ribbons Pvt. Ltd. v. Union of India, where the court whilst upholding the constitutionality of the provisions, held that the RP is really a facilitator of the resolution process, whose administrative functions are overseen by the COC and by the adjudicatory authority. However, the complications arose on the interpretation of “collating” and maintaining an “updated” list of claims, and in Dipco Pvt. Ltd. v. Jayesh Sanghrajaka, where the appellate tribunal held that the decision of RP for collating claims of creditors is of quasi-judicial nature, and therefore, the adjudicatory authority lacks jurisdiction to re-determine the claims. Thus, the legal issue is with respect to the vires of the RP – whether an agitated creditor is supposed to file his claim before the adjudicatory authority, the COC or the RP. Case Review – Facts This lacuna has left the essential catalysts of the resolution process i.e., the creditors in utter dismay. However, it has also provided an opportunity for the RP to manipulate the system in their favor that has been demonstrated in the Rajnish Jain case. The facts are fairly simple – before constituting the COC inter alia the interim RP within 7 days of the public announcement has to verify and collate the claims of the creditors. One of the creditors named M/s BVN Traders filed its claim as ‘financial creditor’ (“FC”) which was duly admitted by the interim RP. After appointment of the RP by the NCLT, Rajnish Jain who is the suspended promotor of the corporate debtor, filed an application under s. 60(5) of the I&B Code stating that M/s BVN Traders is not a FC. The RP was then directed to re-verify the claim to which he submitted that BVN Traders debt falls under operational debt. Before the order of the adjudicatory authority, the matter was placed before the COC which then voted for BVN Traders as a FC. Pursuant to this meeting, the adjudicatory authority also rejected the application filed by the promotor and held BVN Traders to be FC. Again, a resolution was passed to reverse the decision of the adjudicatory authority, which was successfully passed thereby declaring BVN Traders as an operational creditor (“OC”). Another agenda in that meeting was to withdraw the insolvency application under s. 12A that required approval of ninety percent voting, which was vehemently opposed by BVN Traders having 30% voting share. In the final COC meeting, two agendas were proposed – first was to eliminate BVN traders as a creditor and second, to again pursue withdrawal of application under s. 12A. Both of them were approved which led to the present suit by the creditor, as he was stripped off his rights even after the order by the adjudicatory authorities. Case Review – Analysis The facts of the case clearly indicate conspiracy against BVN Traders by the RP and the suspended promotor of the corporate debtor, as also emphasised by the NCLAT. The whole scheme’s objective was to withdraw the insolvency application by the operational creditor, to which BVN Traders was opposing. Therefore, even before the order by the adjudicatory authority regarding the claim, the RP took the route of COC’s approval, which ultimately led to first, stripping off BVN Trader’s position as financial creditor, and second, to completely take away his rightful claim as any creditor during the insolvency procedure. This was caused by the lacuna regarding the vires of the RP – whether maintaining an “updated” list of the claims includes re-determining

[By Sushant Kumar and Vanshaj Dhiman] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow. The contract of guarantee is an essential part of the restructuring process of the corporate debtor. It is a settled position in contract law that the guarantor’s liability arises as soon as the borrower defaults in making payment of the debt. However, the advent of the Insolvency and Bankruptcy Code, 2016 [hereinafter ‘IBC’ or ‘Code’] and some judicial pronouncements of National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) have given rise to a catch-22 situation before the creditors. In this article, an attempt has been made to understand the law governing guarantees of a corporate debtor in the current insolvency regime. The confusion has arisen due to conflicting judicial pronouncements on the issue of maintainability of simultaneous insolvency proceedings in respect of the same debt and certain lacunae in the legislative framework of the Code. Let us first understand the basic principle of a guarantee-contract. A contract of guarantee is entered into between the creditor, the principal debtor, and the guarantor. Here, the guarantor may be a body corporate or a natural person. It is said that the guarantors and corporate debtor sail in the same boat, and therefore, the very objective of securing the guarantee would be defeated if the creditor is forced to first exhaust its remedy against the principal debtor before proceeding against the guarantor. This right of the creditor is the hallmark of a guarantee-contract. It is a trite legal position that the guarantor’s liability is co-extensive with that of the principal debtor. Guarantor’s Liability Before the Maturity of Corporate Insolvency Resolution Process Before we delve into the discussion, it is important to note that the Committee of Creditors (“CoC”) drives the insolvency resolution process (“IRP”). Therefore, the guarantor(s) cannot be allowed to dictate the terms and manner of the proceedings under the Code or seek deferment of the proceeding initiated against them. Though the relationship between the corporate debtor and the guarantor originates from the same transaction, both are separate and independent entities. Since the guarantor’s liability is distinct and separate from that of the corporate debtor, the creditor can proceed against the guarantor and the corporate debtor simultaneously or alternatively. Section 14(3)(b) of the IBC guides this aspect. It states that the moratorium will not apply to the surety in a contract of guarantee. In other words, only the estate of the corporate debtor will be protected by moratorium under Section 14 of the Code, and this benefit shall not extend to the assets of the surety. Further, Sections 60(2) and 60(3) of the IBC reflect the Parliament’s intention to allow concurrent insolvency proceedings against the corporate debtor as well as the personal guarantor. The Parliament, intentionally, has made the personal guarantor to the corporate debtor equally liable to reduce the number of non-performing assets (NPA) for the speedy resolution of outstanding debt and make the promoters liable for their flawed decisions.  Besides, the Code does not prohibit the creditors from proving double proof of the same debt against two separate estates (also known as double-dipping). That means the creditor is entitled to prove its claim against both the principal debtor and the guarantor(s) but cannot claim more than the total debt. The NCLT, in ICICI Bank Ltd v CA Ritu Rastogi, permitted simultaneous initiation of IRPs against both the principal borrower and the guarantor. In State Bank of India v V Ramakrishnan, the Supreme Court clarified that the moratorium does not extend to the surety’s assets thereby accepting the proposition that the IBC does not bar the filing of two insolvency proceedings simultaneously. However, the ratio of the NCLAT, in Vishnu Kumar Agarwal v Piramal Enterprises Ltd, seems to circumvent these decisions by holding that for the same debt, a claim cannot be filed, and proceedings maintained, by the same financial creditor in two separate IRPs simultaneously. Arguably, the proceedings against the guarantors should not be initiated unless the corporate debtor’s liability is not crystallized in the resolution plan itself or until the CIRP has not been completed. However, the CIRP is not a recovery proceeding, but a means to resolve and restructure the corporate debtor’s debt. Having an independent and co-extensive liability, the guarantor cannot claim immunity in the garb of CIRP being underway because his liability is to pay off the entire outstanding debt subject to the guarantee contract. Mostly, the promoters/directors of a corporate debtor furnish a personal guarantee for the sanctioning of a loan to the corporate debtor. If the proceedings against such personal guarantors are stayed during a CIRP, they may file frivolous applications with ulterior motives merely to escape from their liabilities until the CIRP is not completed. Besides, the IBC aims to protect the rights of the creditors and not to reward such personal guarantors by whose decisions the corporate debtor became insolvent in the first place. A Hypothetical Scenario to Understand the Law To better understand how the invocation of guarantee(s) before the CIRP of the corporate debtor matures should play out, let us take an example [hereinafter ‘the example’]. Say, the corporate debtor is CD, corporate guarantor to the corporate debtor is Gc, personal guarantor to the corporate debtor is Gp and that there exist four creditors of the corporate debtor, namely C1, C2, C3, and C4. C1 has the corporate guarantee, C2 has the personal guarantee, C3 has both the corporate and the personal guarantee for the same debt from the same guarantors as C1 and C2, respectively, and C4 has no guarantees. C1 invoked the CIRP against CD. However, before the CIRP could be completed, C3 invoked both its guarantees but the guarantors (both Gc and Gp) defaulted on their respective guarantees. Consequently, C3 filed an application against Gc under Part II of the Code and Gp under Part III of the Code before the same NCLT overlooking the CIRP process due to the amended Section 60

[By Shubham Nahata] The author is a student at the Hidayatullah National Law University. Introduction Post the enactment of the Insolvency and Bankruptcy Code, 2016(“Code”), the credit recovery mechanism in India has witnessed substantial growth in terms of improved resolution opportunities for ailing entities. However, there still exist certain anomalies in its jurisprudential framework which need correction either in the form of affirmative action by the legislature or purposive interpretation by the Judiciary. One such irregularity was addressed by the National Company Law Appellate Tribunal (NCLAT), in its recent judgment of State Bank of India v. Athena Energy Pvt. Ltd. The NCLAT while dealing with an appeal filed by a Financial Creditor against the Corporate Guarantor, settled the law relating to the simultaneous application for the same debt against the Principal Borrower and the Corporate Guarantor under the Code. This post discusses the law laid down by the NCLAT with reference to its previous judgment in Piramal’s Case and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. Facts of the Case The State Bank of India (Financial Creditor) filed an insolvency application under Section 7 of the Code against Athena Energy Ventures Pvt. Ltd. (Corporate Guarantor) for a secured loan to Athena Chhattisgarh Power Ltd. (Principal Borrower), a joint venture company promoted by the Corporate Guarantor. The application against the Principal Borrower was admitted by the NCLT bench of Hyderabad. However, the application filed by the Financial Creditor against the Corporate Guarantor was rejected by the Adjudicating Authority following the dicta laid down in the case of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. In the Piramal Enterprises case, an application was filed by the financial creditor against two corporate guarantors for the same set of debt and default. The NCLAT while dealing with this issue held that under the scheme of the Code there exists no bar to the filing of simultaneous applications against the corporate debtor and the guarantor. However, the Tribunal deviated from the scheme of the Code and held, that once a Section 7 application is admitted against the corporate debtor then it places a bar on admission of the same application against the guarantor on the same set of debt and default. Similarly, a Section 7 application cannot be filed jointly against two corporate debtors on the ground of joint liability unless they are a joint venture company. Hence, while dealing with an application filed by two Corporate Guarantors, the NCLAT denied simultaneous insolvency proceedings on the same set of debt and default. In the present case, the NCLT relying on the dicta as laid down by the NCLAT ruled, that as the companies were not joint ventures (because of different MoA) they shall not be covered under the exception clause as given under the ratio of Piramal’s judgment. The decision of the NCLT was thus challenged by the Financial Creditor relying on the law laid down by the Supreme Court in State Bank of India v. Ramakrishna & Ors. and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. It was also brought to the notice of the Appellate Tribunal that the judgment in Piramal’s case was stayed by the Apex Court in a subsequent appeal. Judgment and Analysis Financial debt under Section 5(8) of the Code has been defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. It also includes guarantee and counter indemnity obligations as provided under Section 5(8)(h) and (i) of the Code. Under Section 60(2) of the Code, when an insolvency resolution or liquidation process of the Corporate Debtor is pending before the NCLT then an application against a Corporate Guarantor or Personal Guarantor can also be filed before the NCLT. Similarly, when an insolvency resolution or liquidation process of a Corporate Guarantor or a Personal Guarantor is pending before the Court or the Tribunal then the same shall be transferred to the Adjudicating Authority dealing with the resolution or liquidation of the Corporate Debtor. Hence, under the scheme of the Code, an application for insolvency resolution of the Corporate Guarantor can be initiated even when an application has been accepted for the resolution of the Corporate Debtor. The Insolvency Law Committee Report of 2020, also discussed the conundrum surrounding simultaneous proceedings under the Code. The Committee suggested in its report that in case of different applications against the Corporate Debtor and the Guarantor under the Code, the amount of recovery can be revised based on the quantum of Creditor’s recovery in any one of the proceedings. The Committee referred to the NCLAT judgment in Edelweiss Asset Reconstruction Co. v. Sachet Infrastructure Ltd. & Ors., wherein simultaneous applications were allowed against the principal borrower and corporate guarantors under the Code. The Tribunal also referred to the Supreme Court judgment in State Bank of India v. Ramakrishna & Ors., wherein it was held that simultaneous applications can be filed as, under the contract of guarantee the liability of the surety is co-extensive. The Court emphasized that once a resolution plan is approved for the corporate debtor, the same becomes binding on the guarantor and it cannot escape liability under Section 133 of the Indian Contracts Act. Contracts of guarantee are usually governed by the principles as enshrined under Chapter VII of the Indian Contracts Act, 1872. One of the primary principles governing guarantee is that the liability of the surety is “joint and several” and “co-extensive with that of the principal borrower”. In Bank of Bihar v. Damodar Prasad &Anr., the Supreme Court has emphasized that joint and several liability is the key feature of the contract of guarantee. The fact that a creditor has proceeded against the corporate debtor doesn’t preclude him from an alternative remedy against the surety. However, the creditor is also not entitled to recover more than what is due and the amount of claim is adjusted based on the result of one of the proceedings. Conclusion Covenants in the nature

[By Arushi Gupta] The author is a student at the National Law University, Odisha. The Insolvency and Bankruptcy Board of India (hereinafter ‘IBBI’) in a press release dated November 13, 2020, has notified the Insolvency and Bankruptcy Board of India (Liquidation Process)(Fourth Amendment) Regulations, 2020 (hereinafter ‘the Amendment’). The amendment enables the liquidator to assign or transfer a ‘not readily realizable asset’ (hereinafter referred to as ‘NRRA’) to any person after due consultation with the stakeholders’ consultation committee.[1]The article aims to discuss the backdrop and possible implications of the amendment. Background The amendment has been introduced to address the concerns with respect to the increasing delays in the liquidation process due to the non-realization of certain assets that are uncertain in nature and the realization of which takes time longer than the usual time frame for the realization of other assets. These concerns were first highlighted by the report of the Bankruptcy Law Reforms Committee which while contemplating upon the “Rules to close the liquidation” for the code, discussed the issues regarding the probability of recoveries of certain assets forming part of the liquidation estate in the future (i.e after the end of the liquidation). The committee was of the view that the liquidator must close down the case with the permission of the adjudicating authority and create a trust wherein the recoveries would be deposited. Subsequently, due to the rising number of corporate insolvency cases with a long-drawn liquidation process leading to a reduction in the realizable value of such assets, a discussion paper on the Corporate Liquidation Process was floated by the IBBI to address the aforementioned issue. The discussion paper discusses in detail the need for the amendment and the framework for the same. The discussion has also been substantiated with the examples of various International Practices[2] and statutory provisions[3] in the Indian realm, wherein assignment of a cause of action to a third party is allowed. Rationale The code basically envisages the timely completion of the liquidation process so as to ensure that the assets of the Corporate Debtor can be put to use for alternate purposes. As per regulation 44(1) of the IBBI (Liquidation Process) Regulations, 2016, the liquidator is required to liquidate the corporate debtor within a period of one year from the date of commencement of the liquidation.[4] However, the presence of NRRA in the liquidation estate leads to delays due to the uncertain nature of the asset and the indefinite period involved for the conversion of such assets into cash. An NRRA has been defined as any asset which is included in the liquidation asset and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit, and fraudulent transactions.[5] Before the amendment came into the picture, two scenarios could be envisaged: In case of dissolution of the Corporate debtor without realization of the NRRA, the assets would be left unrealized and in an undistributed state. Furthermore, the stakeholders would be deprived of their due recovery leading to the interests of such stakeholders being compromised; or In case the dissolution is kept pending for the purposes of realization of the value of NRRA, it would lead to mounting expenses of the liquidation process and also lead to depreciation of the value of an asset over the pending time period. Furthermore, the liquidator would have to arrange for monetary resources (i.e. funds) to suffice for the costs associated with legal proceedings. Additionally, considering the delay involved in the litigation, the liquidation process might extend beyond the timelines and hence defeat the entire object of timely completion of the liquidation process. In order to address the above-mentioned concerns, the amendment has been introduced. The amendment essentially aims at enabling the liquidator to assign or transfer an NRRA to any person in consultation with the stakeholders’ consultation committee. It is to be noted here that the liquidator must first attempt to sell the assets. In case of failure to sell, the asset may be assigned or transferred to any person after consultation. In a scenario where both the remedies fail, the undisposed assets would be distributed amongst the stakeholders with approval from the Adjudicating Authority. Analysis The discussion paper while contemplating upon the amendment discusses in detail the concept of assignment of rights and cause of action. With respect to assignment, in the case of ICICI bank Ltd. v Official Liquidator of APS Star India Ltd.[6], the Supreme Court held that “rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties”. Hence assignment may be denied on the grounds of (a) a provision in the respective law barring the assignment, or (b) an agreement between the parties placing a restriction on assignment. It is to be noted that the entire discussion upon the assignment and the framework proposed by IBBI does not deal with the consequences or possible alternatives in a case where the agreement between the parties places a bar on assignment. Furthermore, another point of consideration that arises is that there is no express provision in the Code that bars or allows such assignment in the liquidation process. While the code does allow the creditors to assign their claims or interest in favor of the third parties at the resolution stage, there is no such right that has explicitly provided at the liquidation stage. Considering the fact that time is the essence in the liquidation processes, the amendment would serve a dual purpose of ensuring the maximum realization of the NRRA and the closure of the liquidation process within the specified timelines. Furthermore, this move would also lead to the creation of a new market for these assets and consequently better utilization of such assets. Endnotes: [1] https://ibbi.gov.in//uploads/press/2020-11-13-220539-eb6yn-50277513bcc7d94092ce4ee2b6591aad.pdf [2] Practices of UK, Australia, Hongkong and Singapore [3] Transfer of Property Act, Section 132; Code of Civil Procedure, Order XXV [4] IBBI(Liquidation Process) Regulations, 2016, Regulation

[By Anjali Soni] The author is a student at the National Law University, Odisha. Introduction Real estate developers use various mechanisms to raise finance apart from the traditional loans received from Financial Institutions and buy-back agreements are one of such instruments. Buyback schemes are where the developers agree to repurchase the property at a higher price, within a stipulated time, during which the homebuyers generally get some percentage of annual returns. Such offers are usually undertaken to encourage sales. Even though the homebuyers were declared as financial creditors so far as the Insolvency and Bankruptcy Code is concerned, however, homebuyers categorized as speculative investors have no remedy under the IBC. The NCLAT recently in the case of  Shubha Sharma, Suspended Board of Director v. Mansi Brar Fernandes ruled that homebuyers with a compulsory buy-back agreement are not genuine buyers but mere speculative investors and hence cannot seek relief under the provisions of the IBC. This article seeks to analyze the judgment and make a case for investors under buy-back agreements. Facts Gayatri Infra Planner Pvt. Ltd. Company, a real estate developer, and Mrs. Mansi Brar Fernandes entered into an agreement/MoU for the provisional allotment of four apartments in a project named “Gayatri Life”. Rs. 35 lacs was paid by the financial creditor at the time of signing the agreement. The agreement had a compulsory buy-back provision which stipulated that upon the expiry of 12 months, the Corporate Debtor was to return the initial amount along with an additional Rs. 65 lacs as premium, failing which the homebuyer was to take possession of the apartments. The Corporate Debtor issued two post-dated cheques in favor of the financial creditor. Upon inquiring, the Corporate Debtor expressed his interest to exercise the buyback but the said cheques were dishonored upon encashment. No amount was returned after repeated extensions nor the possession of the apartments was given. The financial creditor finally filed the application under Section 7 of the IBC. Decision of the adjudicating authority The two primary objections raised before the Adjudicating Authority. First, that the allottee does not come under the definition of Financial creditor, and second, that the amount of default is Rs. 35 lacs and not Rs. 1,02,50,000 as claimed by the allottee. The NCLT did not accept either of the objections and admitted the application on the grounds of the debt being a financial debt in view of the explanation inserted under clause Section 5(8)(f) by the Insolvency and Bankruptcy (Second Amendment) Act, 2018. Aggrieved by this order, the former Director of the Corporate Debtor filed an appeal before the Appellate Tribunal. Decision of the Appellate Tribunal The Honourable Appellate Tribunal while setting aside the impugned order ruled that the MoU signed by the financial creditor and the real estate developer is an agreement to buy back the apartments and not an agreement for sale of the apartments. Since the buyback is an irrevocable and compulsory buy-back agreement, the homebuyer is actually a speculative investor and not a genuine homebuyer. Judicial precedents regarding homebuyers with a buy-back agreement under IBC In the case of Kussum Chadha v. C&C Towers Ltd. the real estate developer launched a ‘Buy Back’ scheme inviting investors but defaulted in payment of the assured monthly returns to financial creditors. Cheques issued in favor of the financial creditors towards the refund and premium due were dishonored, and the CIRP petition was admitted by the NCLT. Similarly, in the case of Narender Kumar v. Aadinath Probuild a buy-back agreement cum guarantee deed was executed in favor of the applicant and after the default in payment, CIRP proceedings were initiated. The Adjudicating Authority categorically laid down that since the amount of money has been raised under a real estate project, it has the commercial effect of a borrowing and comes within the scope of a financial debt. Analysis of the nature of debt under a buy-back agreement In the author’s opinion, homebuyers under a compulsory buy-back agreement should be considered as financial creditors because the debt owed to them fulfills all the prerequisites of a financial debt. Section 5(8) of the IBC provides two primary components for a debt to be classified as a financial debt. First, the debt has to be disbursed against the consideration for the ‘time value of money’ and second, the transaction should fall under any clauses between (a) to (i). The NCLAT in the case of Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd ruled that the first essential requirement of financial debt has to be that the debt is disbursed against the consideration for the time value of money. Black’s Law Dictionary defines ‘time value’ as “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. Essentially, the time value of money is the incentive that the said investor gets after a stipulated time period against the investment. Under buy-back agreements, the real-estate developers give lucrative offers to investors in order to stimulate sales. These offers include assured annual returns at attractive rates and heavy premiums along with the principal amount after the time period is over. The time value of money in such transactions is evident from the monetary benefits received by such investors. With regard to the second requirement, a debt can be classified as a financial debt if it is raised under any transaction having the commercial effect of a borrowing as mentioned in Section 5(8)(f) of IBC. The Hon’ble the Appellate Tribunal in the case of Rajendra Kumar Saxena v. Earth Gracia Buildcon Pvt. Ltd. held that the explanation inserted under Section 5(8)(f) states that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing, making all allottees of real estate as ‘financial creditors’. Finances raised under a buy-back agreement also have the same commercial effect of a borrowing. During times of financial crises, real estate developers resort to raising funds through buy-back agreements