Insolvency Law

[By Animesh Khandelwal and Surbhi Kapur] Both the authors are lawyers based in New Delhi. Introduction  Pandemics have a potential to be very disruptive, entail a catastrophic effect with a staggering cost on one and all. With Covid-19 being declared as a pandemic, the global community is left helplessly supine with irreparable loss to the lives of the people. All the sectors of the Indian economy have suffered the downturn triggered by this virulent outbreak. The relationship between the deterioration of human health capital and its effect on economic growth and development is shaping both the regulatory design, response, and implementation thereof. Understanding the severity of this relationship, the Government of India in coordination with the state governments has notified several mitigation policies and emergency declarations. Starting with the enforcement of a nationwide lockdown, making social distancing a norm, several key regulatory reforms have been instituted to alleviate the catastrophic effect of the turmoil caused by this virulent pandemic. With companies across the world and in India working from home through online resources, manufacturing has been hampered and economies have been hit badly with early signs of a slowdown and possible recession. This may lead to a high rate of default on loans by corporates pushing them closer to a higher possibility of initiation of insolvency proceedings against them. Both the firms as well as the individuals have been reviewing the contractual clauses for performance of their obligations. The importance of force majeure as a legal doctrine to cover the present outbreak of Covid-19 has become contentious. In this vein, the role as well as responsibilities of an Insolvency Professional (“IP”) in India assumes prominence. In light of the current extraordinary economic situation, it is difficult for the IPs to conduct the corporate insolvency resolution process (“CIRP”) and manage the stressed corporate debtors(defaulting companies) as going concerns. It would be onerous for an IP to ensure the attendance of the members in the meetings of the committee of creditors (“CoC”). The preparation and submission of the resolution plans by the prospective resolution applicants (“PRA”) also seems unviable. The interested resolution applicants may want to pull back or defer their decision on submission of a viable resolution plan. Therefore, the timely completion of various tasks during a CIRP within the timelines specified under the Code seems impractical. Being a creation of the Insolvency and Bankruptcy Code, 2016 (“the Code”) and a manager of the financial distress as such, and currently attributable to the pandemic, an IP is expected to offer workable solutions to steer the corporate debtor (“CD”) through the legal uncertainties into resolution. Measures initiated by the Government The government recently announced two important facilitative steps to be undertaken regarding the insolvency landscape in India. At first the Ministry of Corporate Affairs (“MCA”) increased the threshold for the determination of the default in insolvency matters from one lakh rupees to one crore rupees as the minimum amount of default under Section 4 of the Code. This step was taken to, inter alia, assist and aid the functioning of micro, small and medium enterprises (“MSMEs”), who may be operational creditors, which might face defaults owing to the economic slowdown and unprecedented lockdown. Next in line, the suspension of Sections 7, 9 and 10 (provisions for initiating CIRP) of the Code for a period of six months was announced. Regarding the suspension of initiation of CIRP, the MCA has prepared a proposal for the consideration of the Union Cabinet. Along with this, the Reserve Bank of India (RBI) has also provided for a debt moratorium.[i] Tribulations being faced by IPs in India Some of the issues faced by the IPs are outlined as follows: Human Resource: While most of the employees of the IPs have travelled to their respective homes in adherence to the lockdown, some IPs are finding it difficult to provide a steady income to their team and thus, losing precious team members. This has led the IPs themselves toiling and burning the midnight oil and multi-tasking, thereby increasing their workload and productivity. Commercial Decisions: The prime tasks of an IP is to run the stressed CD as a going concern and also to ensure that viable resolution plans are presented to the CoC. The IPs are finding it difficult to perform both these tasks due to the state of the economy during the ongoing pandemic. The availability of interim finance too seems a distant remedial measure. On the one hand, the already stressed companies are facing further difficulties in day to day operations, on the other, the PRAs are either not coming forward or withdrawing from the already submitted resolution plans. Communication and IT: Since members of the CoC are themselves ‘working from home’, the IPs are constrained to organise the CoC meetings via video conferencing. This is raising not just bandwidth issues but also concerns with respect to cyber intrusion, privacy and data breach, espionage and pilferage.[ii] Indian Computer Emergency Response Team (“CERT-In”) has cautioned of the perils of unguarded use of digital platforms, given its vulnerability to phishing and cyberattacks. Work Allocation: After completion of the pending work in CIRPs, the IPs are not finding much more to be done since new assignments cannot be undertaken. Timelines under the Code: Regulation 40A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides a model timeline for the conduct of CIRP as per the provisions of the Code. One of the biggest issues faced by the IPs could be with respect to adherence to the timelines specified under the Code. Since time and speed are of essence under the Code, disciplinary action may be initiated against the IPs for not following those timelines. Efforts by the Insolvency and Bankruptcy Board of India (IBBI) IBBI has been pro-active and taken due consideration of the concerns of the IPs and other stakeholders. It has suspended the enrollment for the limited insolvency examinations till 3rd May, 2020 and has also allowed the Insolvency Professional Agencies (“IPAs”) to conduct

[By Ishita Soni and Sanjana Karnavat] The authors are third year students of Symbiosis Law School, Pune. Introduction The Insolvency and Bankruptcy Code, 2016 (“the Code”) consolidates India’s insolvency laws under one comprehensive scheme to ensure value maximization of an insolvent debtors’ assets for the benefit of all stakeholders.[i] The Code classifies all creditors as either financial creditors or operational creditors based on the kind of debt Corporate Debtor owes them. Whereas, the former give consideration in the form of cash (in return for an interest), the latter extends debt in the form of goods or services. This distinction is of essence because the Code extends certain exclusive rights to the financial creditors, namely, the right to initiate the corporate insolvency resolution process (“CIRP”) without sending any demand notice, the right to be a member of the committee of creditors (“CoC”), and the guarantee of receiving at least the liquidation value under the resolution plan.[ii] This creates an unequal balance of powers between the two types of creditors, solely on the basis of the type of debt that is owed to them. The status quo of homebuyers under the Code is a vehemently debated issue since their role as financial creditors has been claimed and subsequently challenged innumerable times. Real estate allottees are persons to whom an apartment or plot in a real estate project has been allotted or sold.[iii] Consequently, certain ‘homebuyers’ give an advance to the developers and fund the cost of the project in return for a house.[iv] Since this advance is a means of raising finance, it is deemed to have “commercial effect of borrowing” under Section 5(8)(f) of the Code.[v] Therefore, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 included homebuyers under the category of financial creditors for all intents and purposes of the Code. The IBC Amendment, 2020 The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“the 2020 Amendment”)[vi] was introduced as a Bill on 12th December 2019 in the 17th Lok Sabha Session, post which it was referred to the Standing Committee on Finance for recommendations and suggestions. The Committee discussed several issues surrounding homebuyers, however, after perilously disregarding the same, the 2020 Amendment made the following modifications in the implementation of the Code, by adding a proviso in form of Section 7(1) before the Explanation in the Code.[vii] The same reads as under: Financial creditors under Section 21(6A)(a) & (b), whose debt was in the form of securities or deposit, are allowed to file an application for initiating CIRP jointly with not less than 100 such creditors or 10% of their number, whichever is less. Financial creditors, who are real-estate allottees are allowed to file an application for initiating the CIRP jointly with not less than 100 such allottees or 10% of such allottees under the same real estate project, whichever is less. The pending applications for CIRP that were filed by the aforesaid two categories of creditors must be altered to comply with the minimum threshold requirements within 30 days of the commencement of the 2020 Amendment Act. A failure to do so would deem the application to be withdrawn before its admission.[viii] Loopholes and Patent Irregularities in the IBC Amendment, 2020 I. Undue restriction in initiating the CIRP Section 7 of the Code prescribes three distinct modus operandi through which a financial creditor is permitted to file an application for initiating a CIRP against a defaulting Corporate Debtor. Accordingly, the financial creditor is allowed to apply: By itself, Jointly with other financial creditors, or With any other person on behalf of the financial creditor, as may be notified by the Central Government. Since homebuyers are equivalent to all the other financial creditors whose debt falls under the classification of Section 5(8)(a)-(e), they must be treated identically in every aspect of the insolvency proceeding under the Code. Albeit all financial creditors have the discretion to approach the NCLT via any of the aforesaid means. However, by virtue of the 2020 Amendment, a homebuyer is deprived of the right to file an application himself/herself i.e. ‘by itself’. Insertion of the 2nd proviso explicitly contradicts and violates the beneficial construction of Section 7 of the Code that is extended to every financial creditor, since it mandates solely a homebuyer to take refuge with at least 99 other homebuyers or satisfy the minimum 10% requirement before he/she can apply for the recovery of his/her debt. II. Complete disregard to the amount of debt The Code allows all the financial creditors to initiate the CIRP if the debtor makes a default of Rs. 1 Lakh or more. However, the 2020 Amendment mandates the homebuyers to satisfy the minimum members’ requirement, even if the debt that is individually owed to them exceeds 10 times the amount of Rs. 1 Lakh. Thus, this sinister provision hinders them from reaping the benefits that are available to all other financial creditors. III. Impractical and Unenforceable Provision Every legislation is made keeping in view its practical considerations and hazards involved in implementation. The 2020 Amendment, however, is uncalled for and highly impractical because it is not feasible for a single homebuyer to obtain information, consolidate data, contact other homebuyers and then persuade them to file an application for initiating the CIRP against a Corporate Debtor. This is all the more bizarre when a homebuyer, with a pending application, is obliged to fulfill this requirement within 30 days of enactment of the 2020 Amendment, as per the 3rd proviso of the newly inserted provision. There is only a bleak possibility that one can gather 99 other homebuyers or 10% of their number, given that in most cases, it is the defaulting party i.e. the real-estate developer/builder or the project head that possesses all the details about the homebuyers. Thus, it is extremely unlikely that they would willingly assist the aggrieved homebuyers and handover these details so that they can initiate the CIRP against the defaulter. Since non-adherence to the mandatory provision will result in quashing of the homebuyer’s application, the 2020 Amendment may prevent

[By Urmil Shah] The author is a third year student of Auro University, Surat. Introduction The Ministry of Corporate Affairs on 24 March, 2020 raised the minimum threshold requirement for initiating a Corporate Insolvency Resolution Process (“CIRP”) under Section 4 of the Insolvency Bankruptcy Code (“IBC” or “the Code”) from existing Rs. 1 lakh to Rs. 1 crore by way of Notification S.O. 1205(E) as measure for combating the Covid-19 pandemic. Among other relations and exemptions to companies from routine disclosures and compliances announced by the Government in wake of the recent pandemic, the increase in threshold comes as controversial as the measure has the effect of spurring a conflict between Corporate Debtors (“CD”) and Financial Creditors (“FC”). A similar debate arose when the Central Government reduced the pecuniary jurisdiction of the commercial courts under the Commercial Courts Act, 2015 from Rs. 1 crore to Rs. 3 lakhs in wake of making it more accessible to common people.[i] The effect was that it led to multifold increase in litigation in these courts which was earlier being settled or resolved through alternate modes of resolution. Similarly, the change of threshold requirement for determination of default and triggering insolvency for corporates in the IBC follows both affirmation and depression in itself. The Finance Minister mentioned that such a step is taken due to limited functioning of the MSME sector on account of pan-India lockdown and to avoid large-scale insolvencies as a result of financial distress to such small companies and MSMEs. Such a legislative reform is a welcome relief due to the virtual shutdown of the economy and suspension of business is bound to have domino-effect across contracts entered into between parties and trigger the force majeure clauses in the contracts resulting in either frustration or non-performance of such a contract. Resultantly, the Ministry of Finance announced that the pandemic can be treated as a natural calamity and the force majeure clauses maybe invoked as consequence when required. The critical question to be addressed is whether the change is temporary in nature on account of the pandemic or permanent as it may well be counter-productive to the interest of certain class of small yet significant creditors like MSMEs and home buyers and may defeat the purpose of safeguarding the interest of MSMEs. MSME Sector – A Bouncing Bouncer? The Micro Small and Medium Enterprises Development  Act, 2005 (“MSMED Act”), although does not  provide for a specific mode for recovery on account of insolvency for the MSMEs but addresses the issue by alternative mode of resolution to delayed payments and offers a handsome rate of interest at 18% for such delay. The present notification in no way benefits the MSME sector as 97% of the sector operates as either proprietorship or partnership, the insolvency provisions for which have not been notified yet.[ii] Even the remaining 3% of the MSME sector which are companies, a majority of them are Operational Creditors (“OC”) [iii] themselves[iv] and have utilized the mechanism as a means to find resolution of their dues and not that of the defaulter, thereby going against the legislative intent behind enactment of the Code to have a resolution mechanism in place for insolvent businesses. MSME as creditors: Since the companies within the sector operate at a miniscule level with limited capital requirements, their offerings are not as huge as FCs of other sectors and accordingly the debt rendered by them will be classified as operational debt. The notification of increased threshold will have the effect of nullifying the benefit that these creditors earlier obtained as actionable claim against the default which would have previously been qualified to initiate CIRP as it is impractical to expect a single OC to have a claim as high as Rupees 1  crore,[v] considering the fact that OCs triggered almost 53% of the CIRPs for the quarter Oct-Dec, 2019.[vi] Such a reform goes against the spirit and letter of law as decided in the Swiss Robbins case[vii] to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. MSME as debtors: The amendment comes as knight in shining armor for the limited MSMEs who are CDs as it has been discoursed that the Code does not offer the most effective regime for the insolvency resolution of smaller CDs.[viii] It is in concurrence with the spirit envisaged by the Insolvency Law Reforms Committee that the sector is key driver of economic growth, entrepreneurship and financial inclusion in the country.[ix] The selected CDs of this sector will be benefitted for the time being from unnecessary and excessive insolvencies due to the increased threshold limit. Homebuyers – The Active Creditor Class? An important consideration for homebuyers is that the Real Estate (Regulation and Development) Act, 2016 (“RERA Act”), provides for refund of amount received for carrying out the project including compensation in case of withdrawal by the allottee and monthly interest for delay in possession by the promoter in case of non- withdrawal from the project. Considering this remedy for homebuyers, approaching the insolvency court is only a mode of forum shopping and liquidating happy-going businesses for a meagre sum of default, considering the quantum of claims received by NCLTs and NCLAT, the adjudicating authority and appellate mechanism envisaged under the Code. Since the formation of Code in 2016, homebuyers have been the most active creditor class and have triggered several amendments, including the Second Amendment Act, 2018 which declared them as FCs.[x] However the controversial IBC Amendment, 2019  which introduced a minimum threshold limit of 100 or 10% of allottees in a project or class of investors to approach the Adjudicating Authority for initiating CIRP, is challenged before the Supreme Court. The interest of homebuyers from standpoint of both legislature and judiciary is clear to place their benefit over and above the other creditor class. The present notification however is not likely to have a major implication considering their status under the Code, as the claim of 100 or 10% of the allottees can easily amount to 1 crore. The critical consideration however is that

[By Ankit Tripathi] The author is an associate at Law Chambers of J. Sai Deepak. Recently, in the case of Ishrat Ali v. Cosmos Cooperative Bank Ltd. &Anr[i], the five judge bench of National Company Law Appellate Tribunal (“NCLAT”), departed from an earlier view taken by the three judge bench and held that action taken by a financial institution under Section 13(4) of the SARFAESI Act is not a proceeding before a court of law or a tribunal. Therefore, such proceeding shall not be taken into consideration for excluding the time period under Section 14(2) of the Limitation Act. The reasons for the decision or departure were not detailed by NCLAT. Through the blog post, the author will look into the background and history of the concomitant cases for an effective criticism of this judgment at hand. Background The three member bench of NCLAT in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd and Ors.[ii], held that if the financial creditor has instituted a bona fide application under the SARFAESI Act, 2002, then in such case, while computing the limitation period for filing Section 7 application under Insolvency and Bankruptcy Code, 2016 (“IBC”); as per Section 14(2) of the Limitation Act, 1963 the time which has been exhausted in the above proceedings shall be excluded since it would be held as if the financial creditor has been carrying another civil proceedings with due diligence. The three member bench of the NCLAT headed by then Chairperson during the proceedings of Ishrat Ali v. Cosmos Cooperative Bank Ltd. & Another doubted the correctness of the above judgment and thus referred the said judgment to a larger Bench of five judges to decide and settle the issue. Analysis As a matter of fact, the NCLAT was called upon to adjudicate upon the following three questions of law: Whether the action taken by a financial institution under Section 13(4) of the SARFAESI Act is a proceeding before a court of law or before a Tribunal? If any application is filed before the Debt Recovery Tribunal (“DRT”) against such action in terms of the SARFAESI Act, 2002, whether it can be held to be a proceeding moved before a wrong forum for computing the period of limitation under Section 14(2) of the Limitation Act? Whether the SARFAESI and DRT proceedings extend the period of limitation for filing the Section 7 and 9 applications under IBC? In the course of the present adjudication where the case involved certain interesting and contentious points pertaining to interplay of the SARFAESI Act, Limitation Act, and IBC, the tribunal had the opportunity to settle the law on the above legal issues. Considering the fact that it was reference bench of five judges, NCLAT had an added duty towards a more careful disposal of the reference with a proper reasoned order. A careful reading of the judgment provides that though NCLAT has conclusively and authoritatively answered the issues, it failed to provide reasoning for the same. Though the judgment cites and relies upon various other judgments of the Supreme Court, it has failed to inherently provide the application of those cases to the facts of the case at hand and answer the questions accordingly. In a way, the judgment does not create any new jurisprudence which it could have. Given that this was one of the most-awaited judgments of the NCLAT on the possible ambiguities arising due to overlap between the three statutes, it should have considered that reason is the heartbeat of every conclusion for producing clarity in an order and without the same, it becomes lifeless.[iii] The apex court has held in plethora of cases that absence of reasons renders the order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum.[iv] NCLAT relied upon the case of Jignesh Shah and Anr, v. Union of India and Anr[v] to hold that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy of a winding-up proceeding. A close-up as well as aerial view of the findings of the NCLAT will highlight the fact that it has nothing new to support the above reference questions or add to existing jurisprudence. While nothing stops the court from relying upon any cases lest it should help in finding the conflict in the reference itself. In the latter part of the judgment, the tribunal laid down the bare provisions of Section 14 of the Limitation Act and Section 13(2) of the SARFAESI Act. Soon after reproducing the abovestated relevant sections, the tribunal blatantly held that the action taken by a financial institution under Section 13(4) of the SARFAESI Act is not a proceeding before a Court of Law and did not bother to substantiate this finding with a reason. To the contrary, it is clear that that there is no provision in IBC which excludes the applicability of Section 14 of the Limitation Act to an application submitted under Section 7 or 9 of IBC. It is understood that the tribunal has relied upon cases like Jignesh Shah and Gaurav Hargovindbhai Dave, but the tribunal should have been careful to the facts of the specific cases and should not apply the ratio blatantly to record a judgment. The facts in the above cited cases were different from the case in question, thus requiring a different contextual interpretation which the tribunal clearly failed to do. Whether SARFAESI proceedings constitute ‘Civil Proceeding’? The Hon’ble Supreme Court via its judgment in Commissioner of Income-Tax, Bombay & Anr. v. Ishwarlal Bhagwandas,[vi] held that a ‘civil proceeding’ is one in which a person seeks to enforce by appropriate relief the alleged infringement of his civil rights against another person, and if the claim is proved would result in the declaration express or implied of the right claimed and relief sought. The term “civil proceedings” as defined by the Apex Court includes all those proceedings in which a party contends a civil right

[By Daksh Aggarwal] The author is a second year student of Campus Law Centre, Faculty of Law, University of Delhi. Prefatory The unification of markets and interconnected commercial transactions has necessitated significant need for common law governing business deals. The United Nations Commission on International Trade Law (“UNCITRAL”) Model law on Cross-Border Insolvency (“Model Law”), adopted in 1997, is designed to harmonise insolvency laws of various jurisdictions of the world and is internationally accepted as a unified restructuring framework by a number of states, including sophisticated economies. The Model Law is applied when the assets of the Corporate Debtor (“CD”) are located in foreign states or where the creditors of the CD reside in states other than the jurisdiction, in which the main insolvency proceedings are taking place against the CD. The major objective of the Model Law is to promote cooperation and coordination between courts and other competent authorities in cross-border parallel insolvency proceedings. The Model Law was substantially implemented in the United Kingdom through the Cross-Border Insolvency Regulations 2006 (“CBIR”). The CBIR, in consonance with Chapter III of the Model Law, intends to provide for the coordination of a British insolvency proceeding and foreign proceedings concerned with the same debtor. Recently, in Michael carter v. Roy Bailey and Keiran Hutchison (as foreign representatives of Sturgeon Central Asia Balanced Fund Ltd) (“Sturgeon Central Asia Case”), the Hon’ble England and Wales High Court (“Court”) interpreted the stated purpose and object of the Model Law and opined that solvent proceedings do not fall within the category of ‘foreign proceedings’ as defined under the CBIR. Apparently, the judgment contrasts with the approach adopted by the United States court which implemented the Model Law and recognised Australian solvent liquidation proceeding under Chapter 15 of the US Bankruptcy Code. The English court deviated from the well settled international judicial dictum and demonstrated divergence of the United Kingdom and the US on abstruse question of law dealing with cross-border recognition of solvent proceeding as a foreign proceeding. In this blog piece, the author aims to dissect the ‘legally unsound reasoning’ of the UK judgment and its troublesome interpretation of the international insolvency law. Legal scrutiny of the judgment The baffling conundrum that the Court in the Sturgeon Central Asia Case faced was whether a just and equitable winding-up of a solvent company would fall within the scope of a ‘foreign proceeding’ for the purposes of the Model Law and the CBIR. According to Article 2(a) of the Model Law, ‘foreign proceeding’ refers to a collective judicial or administrative proceeding in a foreign State pursuant to a law relating to insolvency, for the purpose of reorganization or liquidation.[i] It must be noted that the Model Law is set out in Schedule 1 to the CBIR and hence the same definition of ‘foreign proceedings’ substantially applies to Great Britain. The perspicuous explanation to Article 2(a) insists that the entity would fall under the said article of the Model Law only if the debtor is insolvent or in severe financial distress.[ii] The true meaning and connotation of ‘foreign proceeding’ has been interpreted by various judicial pronouncements. In In Re Stanford International Bank Ltd Case [2010] Bus LR 1270, the English and Wales Court of Appeal (Civil Division) categorically held that the winding-up of a company on the just and equitable grounds includes insolvency in conventional terms. The court, while considering the liquidation of an Antiguan corporation, also opined that the ultimate purpose of the law governing the process of recognition of ‘solvent proceedings’ as ‘foreign proceedings’ is liquidation. The court also observed that the liquidation of a solvent entity incorporated with the objective to carry on international trade or business on just and equitable grounds would be termed as a foreign proceeding. An even wider interpretation was adopted by the US Court in In Re Betcorp Ltd (2009) 400 BR 266. The court, impliedly, held that even solvent companies could fall within the scope of ‘financial distress companies’. The court also elucidated that the voluntary liquidation of an Australian company under the Australian Corporation Act was a collective proceeding, in that it considered the rights and obligations of all creditors and hence recognised the collective proceeding as a ‘foreign main proceeding’.[iii] However, the Court in the Sturgeon Central Asia Case conflicted with the aforementioned precedents and restricted the scope of foreign proceedings. The Court explicitly held that since Sturgeon (Bermudan incorporated investment corporation) was not insolvent or in financial distress, the solvent liquidation of the company cannot be identified under the wide umbrella of ‘foreign proceedings’ as per the Model Law and the CBIR. The Court, indubitably, employed the purposive approach and narrowed the purview of previously existing “universal rule of recognizing voluntary insolvency proceedings as foreign proceedings”. In May 2019, Hon’ble Mrs. Justice Falk assessed the application made by the liquidators of Sturgeon Central Asia Balanced Fund Ltd and held that recognition of proceedings as foreign proceedings was intended to be made available in circumstances where the insolvency of an entity has not yet been established. However, in January 2020, the Hon’ble Insolvent and Companies Court (“ICC”) Judge Briggs overruled the judgment delivered by Mrs Justice Falk and concluded that the voluntary solvent proceeding which does not aim to restructure the financial affairs of an entity, but is more focused in dissolving the legal status of the concerned entity cannot be recognized as a foreign proceeding for the purpose of Article 2 of the Model Law. The Hon’ble ICC judge passed the judgment without mulling over severe legal consequences. The UK courts now also shoulder responsibility for defining an ambiguous term- ‘financial distress’ or its threshold. The judgment delivered by the Hon’ble ICC Judge raises an essential question of whether the English courts would take up an inquisitorial legal system and investigate into the insolvency of companies when considering future applications for recognition of foreign proceedings to draw a visible line between ‘financial distress’ and ‘solvent liquidation’. The judgment brings up a perplexing problem of law in

[By Vatsal Patel] The author is a fourth year student of Institute of Law, Nirma University. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a game-changer in the field of corporate bankruptcy in India. Though, there is still scepticism, looming over the IBC’s economic significance with a lot of companies going into liquidation as opposed to the intended corporate revival,[i] there is no doubt that the IBC has provided for a clear and robust guiding mechanism during the Corporate Insolvency Resolution Process (“CIRP”).[ii] Recently, the Supreme Court of India in the case of Anuj Jain v. Axis Bank,[iii] commonly referred to as the “Jaypee Case”, further outlined the powers of the Resolution Professional (“RP”) in terms of handling of various claims and transactions submitted by the Committee of Creditors (“CoC”). The Court further clarified the application of different provisions of the IBC which till now had not been suitably expounded. The piece aims to discuss in detail this judgement of the Supreme Court; and explain why the reasoning of the Court is correct and should serve as a guide for all future decisions. Factual Matrix Jaypee Infratech Ltd. (“JIL”), the corporate debtor in the present case is undergoing CIRP due to the committal of a default.[iv] Jaiprakash Associates Ltd. (“JAL”) the holding co. of JIL, has approximately 71.64 % equity in JIL.[v] Before the initiation of the CIRP, JIL, the subsidiary company had mortgaged certain parcels of land in favour of the lenders of JAL, the parent company in furtherance of the benefit to the parent company.[vi] This was despite the fact that JIL was itself undergoing a financial crunch, and was unable to pay up its own debts.[vii] Why was this problematic? The reason it was problematic was because of these transactions, certain creditors of the parent company would be favoured in the distribution of assets as per waterfall mechanism laid down in Section 53 of IBC, wherein their claim would be satisfied before, in the order of priority, as compared to the claims of other claimants who are otherwise similarly placed. The Interim Resolution Professional (“IRP”) i.e. Anuj Jain, bound by Section 25(2)(j) of IBC and armed with the objective of ensuring parity between all the creditors, filed an application seeking to set-aside all these transactions as being violative of Sections 43, 45, 49 and 66 of IBC. While the NCLT ruled in favour of the IRP, the NCLAT reversed this decision in favour of Respondents in the present case,  the primarily lenders of JAL. Analysis of the judgment The judgment of the Supreme Court, for the purposes of this piece, is coherently segmented into two parts – firstly, it discusses the contours of Section 43 IBC and its application it to the facts of the present case; and secondly, it distinguishes the application of Section 43 IBC from that of Sections 45, 49 and 66 IBC. The judgment also adjudicates upon the existence of a financial debt in cases wherein a mortgage is created by a corporate debtor in favour of a third party.[viii] However, the same has not been discussed by the author in this blog post. Contours of Section 43 of IBC Section 43 IBC is concerned with two things – preferential transaction and relevant time.[ix] To simplify, if the liquidator or RP is of the opinion that at a relevant time, a preference has been given by corporate debtor to a particular creditor in certain transactions, the liquidator or the RP shall be bound to make an application under Section 44 IBC for setting aside such a transaction.[x] After going through various interpretations of “preference”,[xi] the Court held “preferential transaction” as: “being the transaction where an insolvent debtor makes transfer to or for the benefit of a creditor so that such beneficiary would receive more than what it would have otherwise received through the distribution of bankruptcy estate.” [xii] In relation to “relevant time”, the Court observed that it is normal to have a longer look-back period in case of a related party, and a shorter one in case of an unconnected party.[xiii] The Court further observed that a strict construction should be given to Section 43 but only after giving of apposite consideration to the underlying principles and objectives of IBC.[xiv] Thereafter, the Court devised a step-by-step process which must be applied by the RP (initially) and Tribunals (upon an application under Section 44 IBC) to see whether a transaction is hit by Section 43. These steps are as follows: Firstly, whether the transfer by way of transaction is for the benefit of the surety or guarantor in furtherance of an antecedent financial liability of corporate debtor [Section 43(2)(a) IBC]; Secondly, whether such a transactions puts the surety or guarantor at a beneficial position than in case of a distribution of assets as per Section 53 IBC [Section 43(2)(b) IBC]; Thirdly, whether the transaction was made two years prior in the case of a “related party”[xv] or one year otherwise [Section 43(4) IBC]; and Fourthly, whether such transaction is not and “excluded transaction” as per Section 43(3) IBC.[xvi] In its essence, the Court meant for a transaction to be a “preferential transaction” under IBC if the ingredients of clause 2 and 4 of Section 43 IBC are satisfied, and it is not protected by clause 3 of Section 43 IBC. The Court by formulating this test made it easier for the RPs and Tribunals to adjudicate upon the existence of a “preferential transaction”. Now, they need not interpret Section 43 in a broad manner but are only required to mechanically follow the stipulated steps. This brings in a greater degree of certainty in the CIRP. However, what is more important is that the Supreme Court applied it aptly to the facts of the present case. The Court began by holding that the non-existence of a creditor-debtor relationship between the lenders and corporate-debtor is not of significance because the ultimate benefit flowed to its parent co. i.e. JAL,[xvii] who is a “related