Insolvency Law

[By Kirti Gupta] The author is a student a Hidayatullah National Law University, Raipur. Introduction The Insolvency and Bankruptcy Code, 2016 (the Code) promises to deal with the mammoth task of stabilising the Indian economy in this era of peculiarly volatile market conditions. The Preamble of the Code, enumerates the objective which strives to reform the insolvency framework and aid the transition from debtor to creditor centric regime. While the Code attempts at stabilising the economy in the times of COVID-19, the author reasonably assumes that there remains a lacuna in the law, which could be detrimental to the stakeholders in the near future. The author has objectively circumscribed the scope of this article to probable disorientation expected to follow the  Gazette Notification dated 24-03-2020 [MCA Notification S.O. 1205 E] (notification). The notification by the virtue of the power vested with the Central Government, vide proviso to Section 4 of the Code, increased the threshold of the default amount to INR 1 crore from INR 1 lakh. The author opines that considering the crooked power dynamics that hovers around the company and its employee’s relationship, the increased threshold shall predominantly deny workmen/employees, a measure of recourse under the Code, thereby defeating the objective of the Code. Legislative Intent Behind the Position of Workmen/Employees Under the Code The Code attempts at reorganisation and insolvency resolution in a time-bound manner without digressing from defined rights of all stakeholders, which reasons the paramount intention behind the position of employee and workman in the resolution framework. It was understood, that in the event of a business failure leading to bankruptcy, the worst affected loft is the workman and employee. This proposition was highlighted in the Joint Committee on the Insolvency and Bankruptcy Code, 2015, where it was significantly observed that the workers are the nerve centre of the company and are affected adversely in the time of insolvency. Therefore, their outstanding dues are entitled to priority. It’s mandatory for the resolution plan to necessarily provide for protections to Operational Creditors (OC), which includes workmen and employees, for the speedy recovery of the due payments, significantly reflected in the Bankruptcy Law Reforms Committee report (the “BLRC Report”). It was highlighted in the BLRC Report, that the provisions for providing protection to the workmen and employees is with an intent to; ‘… empower the workmen and employees to initiate insolvency proceedings, settle their dues fast and move on to some other job instead of waiting for their dues for years together…’ Moreover, The UNCITRAL Legislative Guide on Insolvency Law, elucidates that vulnerable groups such as workmen and employee shall be afforded special protection as a measure against business failure by acknowledging primacy of their rights, while discharging the debt under the insolvency laws. Legitimate Recourse for the Workman/Employee Under the Code Section 8 of the Code allows OC to deliver a demand notice to the corporate debtor (CD) on the occurrence of default, and further, on expiry of 10 days, where CD fails to satisfy the dues or notify of any dispute, OC can file an application to initiate Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code. The application is made w.r.t Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the Regulation), where the application is filed according to prescribed Form 5. It is imperative to note here, that Note to Form 5 provides, ‘Where workmen/employees are operational creditors, the application may be made either in an individual capacity or in a joint capacity by one of them who is duly authorized for the purpose.’ This implies that workmen and employees can file an application in their joint capacity. Diminishing Utility of the Code for Workman/Employee The predicament of the government in devising measures that secure economy and cater to the needs of instrumental stakeholders is understandable, however, it is equally imperative to not decide hastily, which could cause irreversible damage Au contraire. The author opines that an increase in threshold neglects one of the primary stakeholders, i.e. workmen/employees. Increasing the quantum to the maximum permitted limit by the Code, without any consideration for the influenced stakeholders is an inconsiderate and a rushed decision. This is evident by the quantum of average wage earned in this country, which is INR 7410 per month, according to the ILO Report. Thus, it makes it immensely challenging for an employee to initiate CIRP for the payment of his past dues after the increased threshold considering the average wage. Therefore, it is essential to address the question of filing an application conjointly under the regulation, otherwise it becomes nearly impossible to meet the prescribed threshold. In Uttam Galva Steels Limited v. DF Deutsche Forfait AG and Ors.[i] (Uttam Galva), NCLAT decided that application by OC cannot be filed jointly, because unlike Section 7, Section 8 and 9 do not provide for such provision. Moreover, it was held in Para 20, that it is impractical for more than one OC to file a joint petition due to the varied amount of default at different dates for each individual. Ascended by another NCLT judgment, Suresh Narayan Singh v. Tayo Rolls Limited[ii] (Tayo Rolls), provides that the Note in Form 5 is not in consonance with provision  Section 9 of the Code as it does not authorise a joint application or joint demand notice by the OC, and therefore, it was requested to be reconsidered by the appropriate authorities. However, this judgment was overruled by NCLAT[iii], where the application was allowed, nevertheless, it was stated in Para 6, that where an individual claim of OC is less than 1 lakh, it cannot be maintainable. Later, Supreme Court (SC) in J.K Jute Mills Mazdoor Morcha v. J.K Jute Mills Co. Ltd.[iv] (Jute Mills) took a slightly different stance w.r.t representational applications. The Bench decided, that a trade union represents its members who are workers and are owed debts by the employer. Thus, it is the authority which has been transferred from all the workmen to one,

[By Akshita Totla and Nikunj Maheshwari] The authors are students at Institute of Law, Nirma University. Introduction The Insolvency and Bankruptcy Code (IB Code) was enacted for the resolution of the corporate debtor so that it continues as a ‘going concern’[i]. The doctrine of clean slate is one of the means to achieve this objective of the revival of the corporate debtor. This doctrine states that post the approval of the resolution plan by the adjudicating authority, the resolution will be binding on all the stakeholders. Thereby, the acquirer will be protected from any undischarged claim against the corporate debtor prior to the completion of the resolution process and would begin the operation with a clean slate. The intent behind this doctrine is to incentivize the acquirer of the stressed company, and to provide scope for the revival of the corporate debtor. This doctrine in Indian laws finds its place under section 31and 32A of the IBC and has been further expanded and interpreted by the Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta[ii] (2019) (Essar Steel). Recently, in Ultra Tech Nathwada Cement v. Union of India[iii](2020) (Ultra Tech) the Rajasthan HC held that tax authorities cannot raise demands of pending tax dues from the resolution applicant subsequent to the approval of the resolution plan. However, the Jharkhand HC in the case of Electrosteel Steels Ltd. v. The State of Jharkhand[iv](2020) (Electrosteel) has overturned the decision of Rajasthan HC with respect to the application of the doctrine of fresh slate in the case of pending tax dues. The juxtaposition of contrasting opinions of adjudicating authorities has created an anomaly as to the scope of the doctrine of clean-slate theory. This article seeks to analyze the decision of the Jharkhand HC vis-a-vis the treatment of disputed amounts post the culmination of CIRP in the light of settled precedents and legislation. Background In the case of Electrosteel, M/s Vedanta Ltd. emerged as a successful resolution applicant, and its application to take over the petitioner company was approved by the adjudicating authority. Albeit, the sums of money owed by the company to its creditors were paid in the required proportions, the dues outstanding with the VAT authorities (tax department) were not considered. As a sequitur, the tax department started sending garnishee orders to the banker of the petitioner company, to transfer a sum of money to the department, in lieu of the outstanding dues of the petitioner. The petitioner thus filed the writ petition to challenge these garnishee orders. The issue raised before the court was whether the approved resolution plan will be binding on the tax authorities. The Court noted that the petitioner tried to frivolously enrich itself, by not paying indirect tax amount to the department which it collected from its customers. The petitioner as required under section 13 of the Code didn’t make a public announcement for inviting the claims of creditors at the location of its registered office i.e. in the state of Jharkhand. For this reason, the Tax authority was unable to submit its claims and thus, it never became the party to the resolution plan. The Court further observed that since the 2019 amendment[v]was promulgated after the resolution plan was finalized, it will not have retrospective effect and thus the tax department will have a claim to get its dues recovered. [Note: The 2019 amendment Act amended section 31 to clarify that position that the approved resolution plan would be binding on all stakeholders including government and local authorities] Analysis of the Judgment Whether resolution plan will be binding on a party who was not involved in the resolution plan? The court interpreted Section 31(1) of the IB Code which states that approved resolution will be binding on “all stakeholders involved in the resolution process”[vi]and concluded that the resolution plan would be only binding on parties that participated in the resolution process.[vii] On the other hand, the Rajasthan High Court in Ultratech while deciding on the same question held that irrespective of the fact that the creditor or the government participated in the resolution process, once approved the plan would be binding on all stakeholders.[viii] The Supreme Court in the case of Swiss Ribbons v Union of India[ix](2019) was also of the same view that insolvency proceedings are proceedings in rem i.e. would be binding on the public at large.[x]The court in this case misinterpreted section 31 while imposing liability to pay on the petitioner as the resolution plan would have been binding on the tax authority irrespective of its involvement in the resolution process. Furthermore, the SC in the case of Essar Steel observed that “A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping”.[xi]This observation was made in the light of the fact that the acquirer would intend to have a fresh slate without any liabilities of the erstwhile management.[xii]Thus, the ratio of Electrosteel runs counter to the very objective of clean slate doctrine which is to prevent government or any other creditor to intrude in the resolution process. If this position of law is not settled by the SC in appeal, this judgment will have an adverse impact on the prospective applicant who would no longer be willing to acquire any financially distressed company. Whether indirect tax is operational debt? The Jharkhand HC while holding the state government as an operational creditor made a distinction between indirect and direct taxes. The court stated that indirect tax may not be considered as operational debt as the VAT in dispute has already been realized from the customers. Hence, it is not a direct debt of the petitioner company towards the state government so as to make it operational debt under section 5(21). The relevant part of Section 5(21) states that “debt in respect of the payment of dues arising under any law for the

[By Aman Sadiwala] The author is a student at National Law School of India University, Bengaluru Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) provides the insolvency resolution process for corporate persons in Part II. Section 3(7) of the IBC defines “corporate person” and specifically excludes any financial service provider (“FSP”) from its ambit. Section 3(8) defining “corporate debtor” qualifies this ‘corporate person’ as one who owes a debt to any person. Thus, it is evident that a ‘corporate debtor’ as envisaged under the IBC does not include an FSP. Section 4 of the IBC limits the applicability of Part II to corporate debtors, thereby excluding FSPs from its purview. Despite this apparent clarity in the position of law, the judgment of the National Company Law Tribunal (“NCLT”) in Apeejay Trust v. Aviva Life Insurance Co. India Ltd. (2019) has raised questions regarding the relation between the IBC and FSPs. Aviva Life Insurance (“Aviva”), the Corporate Debtor had debt arising from non-payment of license fees, car parking, maintenance charges and service tax. Apeejay Trust (“Apeejay”), the Operational Creditor filed the petition before the NCLT praying for initiation of the Corporate Insolvency Resolution Process (“CIRP”) of Aviva. Aviva argued that being an insurance company, it qualified as an FSP and did not fall within the scope of the IBC. The NCLT noted that the transaction between Apeejay and Aviva was not in the nature of financial services and concluded that Aviva did not qualify as an FSP in this transaction. The NCLT ruled in favour of Apeejay and initiated CIRP of Aviva. Section 3(17) of the IBC defines FSP as “a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator”. Section 3(16) which defines “financial service” covers ‘contracts of insurance’ in sub-section (c). Section 3(18) which defines “financial sector regulator” includes the Insurance Regulatory and Development Authority of India. While Aviva meets the definitional requirements relating to Sections 3(16) and 3(18), the question that arises is whether an FSP as defined in Section 3(17) looks at the nature of debt or the nature of the corporate person. In this piece, I argue that the NCLT erred in its consideration of the nature of debt when instead, it should have looked at the nature of the corporate person. I present a two-pronged argument to support my thesis: first, based on statutory interpretation of relevant provisions; and second, that the judgment is per incuriam and inconsistent with previous National Company Law Appellate Tribunal (“NCLAT”) judgments. Statutory Interpretation of Relevant Provisions First, the definition in Section 3(17) uses the phrase “person engaged in the business of”. To understand the scope of this definition, I rely on rules on statutory interpretation. The Literal Rule requires that words be given their natural and ordinary meaning unless it results in vagueness and ambiguity. Oxford Dictionary defines “business” as “a person’s regular occupation”. There is no indication in Section 3(17) that one needs to look specifically at the transaction in question and identify the nature of debt. The natural meaning of the definition looks at the recurring activity a corporate person is engaged in, thus being concerned with its general nature and not the specific nature of debt in that transaction. The Golden Rule is applied if the literal interpretation leads to absurdity or an injustice. It permits certain alterations to the original words after ascertaining the legislature’s intention. The Mischief Rule also carries out a purposive interpretation and requires a construction which suppresses mischief, while advancing the remedy in accordance with the true intent of the legislation drafters. While I argue that the Golden Rule and the Mischief Rule need not be looked at as the Literal Rule squarely applies, even if one was to rely on either of these rules, it would still follow that the nature of the corporate person needs to be looked at. FSPs were specifically excluded due to the adverse impact that an insolvency process of an FSP under the IBC would have on the economy as well as its numerous consumers. This was also recognized in the Report of the Financial Sector Legislative Reforms Commission. Given that the rationale to exclude FSPs is based on their nature in general and their impact on the economy and its consumers, it is evident that the nature of the corporate person determines whether an entity is an FSP. Moreover, Section 227 of the IBC allows the Central Government to notify FSPs of their insolvency and liquidation proceedings and prescribe its manner. In light of this, the Central Government notified the  Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. These Rules provide a different insolvency resolution process for FSPs compared to those for corporate debtors under the IBC. For instance, any creditor with a claim of at least INR 1,00,000 can institute CIRP against the corporate debtor under Section 4 of the IBC while only the appropriate regulator can initiate CIRP against the FSP under Rule 5(a)(i) of the aforementioned Rules. This stringent requirement under the Rules aligns with the legislative intent and is based on the nature of the corporate person. There exists no rationale for this different standard based on the nature of debt in the transaction. Inconsistency with Precedents Secondly, the NCLT failed to consider judgments of the NCLAT in Randhiraj Thakur v. M/s Jindal Saxena Financial Services Private Ltd. and anr. (2018) and HDFC Ltd. v. RHC Holding Private Ltd. (2019). Admittedly, in both these cases, the debts in the transactions were in the nature of ‘financial services’ and thus, the facts of those cases are not completely analogous to those in the Apeejay Trust case which has an operational debt. However, the analysis and ratio of the NCLAT in both these cases can be relied upon to show that the NCLAT looked at the nature of the corporate person and not the nature of debt. In

[By Poorna Poovamma K.M. and Abhishek Wadhawan] The authors are students at Gujarat National Law University, Gandhinagar Introduction: A Conceptual Understanding The President promulgated The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Ordinance”) on June 05, 2020. The Ordinance has suspended Sections 7, 9 and 10 of The Insolvency & Bankruptcy Code, 2016 ( “Code”) to prevent the corporate bodies facing financial distress from being dragged by the creditors to insolvency proceedings for not being able to meet their financial obligations due to the spread of the COVID-19. In essence, the Ordinance has inserted Section 10A in the Code which provides for suspension of the Section 7, 9 and 10 of the Code for a period of six months (extendable by maximum one year). Further, no application for initiation of insolvency proceedings against any corporate persons for any default arising on or after March 25, 2020 shall be filed. The Ordinance has also inserted Section 66(3) to the Code that states that no application can be made to the Adjudicating Authority for directing the Director of the corporate debtor to contribute to the assets of the corporate debtor, if it comes under the ambit of Section 10A of the Ordinance. The period from March 25, 2020 till the suspension of the Code is often referred to as the ‘Disruption Period’ as all business and economic activities are disrupted due to the pandemic. This Disruption Period has hit the Micro, Small and Medium Enterprises (“MSMEs”) the hardest. To protect the MSMEs in these trying times, the Ministry of Micro, Small and Medium Enterprises revised the definitions of MSME through the Gazette Notification dated June 01, 2020 in order to ensure that more enterprises fall within the ambit of the Micro, Small and Medium Enterprises Development Act, 2006 which provides various economic incentives to the MSMEs. Indeed, through the gamut of the Aatmanirbhar Bharat Package, the Government has introduced various incentives for MSMEs like approval of equity infusion of Rupees 50,000 crores from the Fund of Funds, Rupees three lakh crore of collateral free loans to the MSMEs for their operational needs among many others. With the suspension of Section 7, 9 and 10 of the Code, initiating insolvency proceedings against any corporate debtor will not be possible and hence the cases of wilful defaults by the corporates might exponentially rise. These increased wilful defaults by the corporate debtors will have a negative impact on the MSMEs majorly as they may face a shortage of cash flow leading to operational difficulties, given the fact that MSME sector enterprises form a major part of the operational creditors. Through this article, the author will try to analyse the potential impact of the Ordinance on the MSME sector of India. The Ordinance and the MSME Sector The promulgated Ordinance gives rise to a number of concerns for the MSME sector to ponder. A few concerns that arise are: The micro and small industries which make up a large part of the MSME sector have recently been accorded new definitions according to which maximum investment in a micro enterprise is rupees one crore and that for a small enterprise is rupees ten crore. Additionally, the Central Government recently acted on the powers conferred on it by way of the proviso to Section 4 of the Code, 2016 and increased the minimum amount of default with relation to the insolvency and liquidation of corporate debtors from rupees 1 lakh to 1 crore. As a result of this, MSME creditors, in reality would not be empowered to file for defaults lower than 1 crore and, considering their altered definitions, it would be next to impossible for the micro enterprises, and highly unlikely for small enterprises to file a claim for default. Issues in this regard that need clarification with respect to the blanket suspension of the Code are: Whether a MSME can file an insolvency petition against a corporate debtor for two separate claims that add up to a total of one crore, provided that the default occurred before the disruption period? Further, in case, a default is continuous in nature and the total value of default is more than rupees one crore, but the default for a part of this transaction occurs during the disruption period, can a creditor still initiate an insolvency proceeding for the default of the entire amount, or even a part thereof? Only an affirmative response by the Adjudicating Authority to these questions can ensure financial stability of the MSMEs. The Adjudicating Authority will definitely be in a dilemma as on one hand it would have the corporate debtors to be saved from insolvency proceedings and on the other hand, the financial soundness of the MSMEs, the wheels of the Indian economy will be at stake. Another concern arising with respect to MSMEs is the suspension of Section 9 of the Code, which provides for the initiationbtw of Corporate Insolvency Resolution Process (“CIRP”) by an operational creditor. This concern is also fuelled by the fact that the Reserve Bank of India came out with a COVID-19 Regulatory Package whereby, a moratorium period of  6 months (till Aug. 31, 2020), for repayment of  loans provided by financial institutions has been provided to be availed by debtors in order to mitigate the disruption caused by the pandemic; operational creditors are not included in such capacity. It is to be noted that MSMEs have been considered to form a major part of operational creditors in the Indian economy. This, in all certainty, might lead to a high possibility of MSMEs not being able to invoke Section 9 of the Code even if the default reaches the minimum threshold of Rupees 1 crore that is prescribed, since Section 10A of the Ordinance has suspended initiation of CIRP during the disruption period. Furthermore, Section 10A in the Ordinance provides that “no application for insolvency can be filed for any default arising on or after 25th March 2020 for a period of six months or further extendable till

[By Utkarsh Mishra] The author is a student at Nirma University, Institute of Law. Introduction The Government of India on 24 March 2020 announced an increase in the threshold of default under Section 4 of Insolvency and Bankruptcy Code (“IBC”) to Rs 1 crore from the previous threshold of Rs 1 lakh. This move was taken by the government to protect the small and medium enterprises (“MSMEs”) from initiation of insolvency proceedings against them. Further, to address the plight of the corporations, the government on 22 April 2020 took the much-needed step of suspending the filing of new cases under Insolvency and Bankruptcy Code for six months. Pertinently, on 17 May 2020, the ongoing suspension was further extended from 6 months to 1 year. Finally, on 5 June 2020 the government promulgated an ordinance which clarifies the suspension of IBC. The said ordinance categorically suspends the IBC for the purpose of initiation of Corporate Insolvency Resolution Process (“CIRP”) for a period of six months for defaults occurring after 25 March 2020. However, when this suspension will be lifted, the tribunals i.e National Company Law Tribunals (“NCLT”) will be flooded with insolvency applications under Sections 7, 9 and 10 because of the already existing economic crisis coupled with the absence of workforce. Therefore, the corporations will not be able to perform with full efficiency, and eventually, they will commit a default. This problem of burdening on the NCLT could be resolved by introducing another mechanism known as ‘Pre Package Scheme’. What is a Pre Package Scheme? In this mechanism, the negotiation of assets of the corporate debtors occurs before the filing of an application under Sections 7, 9 and 10 of IBC. After the negotiation comes to an end, it will only have to be approved by the committee of creditors (“CoC”) and later by the NCLT. Thus, the mechanism acts as a time saving tool for both the debtor as well as the creditors from all the litigation and other legal formalities like invitation to prospective resolution applicants under Section 25(2)(h) of the IBC. The average time taken in an IBC proceeding is of 340 days, and after the above-mentioned suspension gets over, if the ‘Scheme’ is timely implemented, corporates can focus more on reviving themselves rather than getting involved in lengthy legal procedures. Apparently, this procedure is not new; countries like the United States of America (USA) and the United Kingdom (UK) have successfully implemented this procedure in their respective insolvency laws. Additional advantages of Pre Package Scheme: As per the insolvency law in India, one of the significant problems with the appointment of the interim resolution professional (“IRP”) is damage and deterioration to the goodwill and image of the corporate debtors in the market. The whole process ultimately results in a decrease in the market value of the corporate’s assets as new investors will not risk their money. Therefore, when the entity goes into liquidation, it will not get the full value of its assets. On the contrary, if the ‘Pre Package Scheme’ is introduced, then the problem of value deterioration can be bypassed. It is because of the mechanism of the Scheme, as in this, all the negotiation is done privately and before filing of the application. Further, this negotiation cum resolution plan only needs to be approved by the CoC and then by the NCLT, thus, giving lesser time for the market to react. After the completion of the CIRP, creditors generally do not get the full return of the debt given to the corporate debtors, especially the operational creditors. Since, the Pre Package Scheme provides lesser time for the market to react, accordingly creditors might have a higher chance to make the most out of the assets. Challenges to the Implementation of the ‘Pre-Package Scheme’ One of the most prominent challenges to the implementation of ‘Pre Package Scheme’ is Section 29A of IBC. This provision was introduced by the Insolvency Bankruptcy Code (Amendment) Act, 2018, and it states the disqualification criteria for persons who want to be a resolution applicant. A resolution applicant is defined under Section 5(25) as a person who submits a resolution plan to the resolution professional. The quintessence characteristic of a Pre Package Scheme is that the corporate debtors themselves try to negotiate with the creditors before any legal proceedings under the IBC. However, Section 29A(c) of the IBC explicitly disqualifies the following persons: firstly, has account classified as NPA, secondly is a promoter of a corporate debtor the account of which has been classified as NPA, thirdly is in the management of a corporate debtor the account of which has been classified as NPA, lastly is in control of a corporate debtor the account of which has been classified as NPA. In simple words, Section 29A was brought with an intention to stop the backdoor entries of the defaulting promoters back to the management. Further, in the case of Jaiprakash Associates Ltd. and Ors. Vs. IDBI Bank Ltd. and Ors.,[i] it was held that strict adherence to Section 29A is mandatory. Therefore, because of the strict application of Section 29A, corporate debtors would not be able to formulate a resolution plan with the creditors as these section prohibits the same. Even if the Scheme is implemented, a question on the resolution’s credibility and transparency will always arise. As the directors/promoters/management are involved in the resolution, there is a high chance that the debtor’s related party creditors might end up getting all the assets. On the other hand, some of the remaining creditors will definitely challenge the concerned resolution, thus adding more time to the process, which will vitiate the essence of the Pre Package Scheme. Conclusion: Points to be considered during the implementation of the Scheme Pre Package Scheme as a tool for resolution has been very successful in countries like the USA and UK. Moreover, keeping in mind the characteristics of the Scheme, Singapore, in its insolvency laws, introduced the ‘Pre Package Scheme’ in 2017. Similarly, India also