Insolvency Law

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant. [Vishal Hablani] The author is a second-year student at West Bengal National University of Juridical Sciences, Kolkata. He may be reached at vishalhablani@nujs.edu. On 11th December, 2017, the High Court of Delhi held that moratorium under the Insolvency and Bankruptcy Code, 2016 (“Code”) would not be applicable to proceedings beneficial to the concerned corporate debtor. However, in case the decree is passed against the corporate debtor, the enforceability of such decree would be covered by the moratorium commenced earlier under section 14(1)(a) of the Code. The write-up aims to critique the judgement passed in the matter of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. In the said case, a financial creditor filed an application under section 7 of the Code against the respondent company. However, when the application was filed, proceeding under section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award passed in favour of the respondent was already pending. The question before the High Court, therefore, was whether the proceeding under section 34 ought to be stayed by virtue of section 14(1)(a) of the Code. The respondent submitted that before suspending the proceedings, the nature thereof must be taken into consideration. If proceedings are in favour of the corporate debtor, granting a stay would defeat its efforts to recover money. Moreover, stay of such a nature would not fall in the embargo of section 14(1)(a). The Court in the instant case had to decide whether the term “proceedings” used in the said section could be read in such a way so as to include “all legal proceedings”, or it should be read restrictively to cover only a specific type of legal proceeding viz., “debt recovery action” which may diminish debtor’s assets during the insolvency resolution period. It becomes pertinent here to discuss the relevant provision in the Code. xxx Moratorium – (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:— (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; xxx The Court placed reliance on Canara Bank v. Deccan Chronicle Holdings Limited to hold that since the word “proceedings” under the provision is not preceded by the word “all”, the provisions of moratorium would not apply to all the proceedings against the corporate debtor. The object of the Code was interpreted and the view was taken that moratorium is implemented with the objective of protecting the assets of the corporate debtor from dissipation. If the proceedings are suspended, it would extend the non-executability of the award which would add to the woes of the debtor. The Court opined that section 14 of the Code would be inapplicable to proceedings which are beneficial for the corporate debtor, as the conclusion of these proceedings would not have any impact over the assets during the insolvency resolution process. Reliance was placed on the report of the Bankruptcy Law Reforms Committee, and it was construed that the objective behind the moratorium is to protect the assets of the corporate debtor from additional stress. Interestingly, the judgment provided that if a counter claim is allowed against the corporate debtor, section 14(1)(a) would come into play and the decree then would not be executed against the corporate debtor. The judgment passed by the Delhi High Court seems to be fallacious, for the Court failed to take into consideration the situation that, if the proceedings are continued and counter claim against the corporate debtor admitted, then, by the effect of this judgement, it would then become impossible for the innocent litigant to enforce the decree against the Corporate Debtor by the subsequent effect of the moratorium. This raises various questions which the Court failed to answer: Is it possible for the litigant then to enforce the decree subsequently against the firm, or an individual whose resolution plan has been accepted, after the moratorium ceases to have the effect, provided the case was still pending while the claims against the corporate debtor were being invited before the acceptance of such resolution plan?   What recourse would be available to this litigant, in case the Adjudicating Authority passes an order for liquidation of corporate debtor, provided the case was still pending while the claims against the corporate debtor were being invited before passing of such order?  The Code provides for completion of resolution proceedings within 180 days, subject to extension for a period of 90 days. However, no statutory time limit has been prescribed for the adjudication of a suit pending before conventional courts. This gives rise to a critical question: What if the resolution proceedings are completed against the corporate debtor and the suit against him is still pending before the Court? Would the suit be automatically terminated then? In this scenario, rights of both the parties to the suit would be jeopardised, and the arbitral award would be rendered useless. There might also be a situation where the court decides the suit in favour of the corporate debtor after the acceptance of resolution plan, or passes an order for liquidation of the corporate debtor. This also gives rise to certain critical questions: Would the firm or an individual whose resolution plan has been accepted have the locus standi for the enforcement of the arbitral award in question?​ If the Adjudicating Authority approves the liquidation of corporate debtor, can the liquidator then enforce the arbitral award against the party which has lost the suit? The author hopes that the questions presented hereinabove would soon be answered by an appropriate forum so as to fill the vacuum.

Authorized Person to Issue Demand Notice under the Insolvency and Bankruptcy Code, 2016. [Jai Bajpai] The author is a third-year student of School of Law, University of Petroleum and Energy Studies. The Insolvency and Bankruptcy Code, 2016 (“Code”) arrived at a critical stage where the banking industry was facing credit financing problems and had been looking for an efficient time-bound solution to the same. Having ushered in a new regime, the Code, enacted with the primary objective of compiling laws relating to insolvency, re-organization, liquidation and bankruptcy as regards companies and individuals, is witnessing an evolving jurisprudence in relation to its provisions. Recently, the National Company Law Appellate Tribunal (“NCLAT”) pondered upon the question of the elements that constitute a “demand notice” on behalf of an operational creditor under section 8(1) of Code, which provision deals with the initiation of the insolvency resolution process by an operational creditor. The NCLAT has paid heed to the fact that the provisions of the Code are being casually used and applied by lawyers and chartered accountants. The pertinent question before the NCLAT was whether a demand notice, drafted and sent by a lawyer, could be regarded as a demand notice under section 8(1) of the Code. This question was answered in the case ofMacquarie Bank Limited v. Uttam Galva Metallics[1], wherein it was held that if any person who issues a demand notice on behalf of the operational creditor is not authorized in this behalf by the operational creditor and does not stand in or with relation to the said creditor, the concerned notice would not be termed as a demand notice under section 8(1). Again, in Centech Engineers Private Limited & Anr v. Omicron Sensing Private Limited,[2] the NCLAT made similar observations with regard to a demand notice. In this case, it was brought to the notice of the tribunal that the demand notice was not issued by the operational creditor, but by the Advocates Associates. It was observed that a demand notice not issued in consonance with the requirements enumerated in the Macquarie Bank Limitedcase would deem the notice to be a lawyer’s or a pleader’s notice under section 80 of the Civil Procedure Code, 1908. A demand notice is necessary if an operational creditor wishes to initiate the corporate insolvency resolution process against a corporate debtor. Along with the said notice, the operational creditor is required to deliver an invoice pertaining to the defaulted amount. Moreover, under rule 5(1) of the Insolvency and Bankruptcy Rules, 2016 (“Rules”), it has been provided that the demand notice can only be sent by an operational creditor or a person authorized by him. Therefore, the language of section 8 of the Code could not interpreted in a manner that goes against rule 5(1). Accordingly, in this case, the NCLAT held that the order passed by the Adjudicating Authority appointing an insolvency resolution professional and declaring moratorium was illegal and liable to be set aside. The purpose of the demand notice under section 8 of the Code is to convey to the corporate debtor the consequences that would follow upon non-payment of the operational debt. On the other hand, a legal notice under section 80 of the Civil Procedure Code, 1908 is to notify the other party about the initiation of the legal proceedings against it. The corporate insolvency process is distinct from a normal legal process, as a case filed for claiming debt under section 9 of the Code cannot be disputed by a corporate debtor until there is existence of a prior dispute before the sending of notice under section 8. Thus, a demand notice under section 8 stands different from a legal notice as stipulated under section 80. There have been many instances where the Code has catered to the needs of the creditors but has suffered from ambiguity while doing so. The above-mentioned cases were two such instances where the tribunal interpreted the law so as to give effect to the aim of the legislation. [1] Macquarie Bank Limited v. Uttam Galva Metallics Limited, III (2017) BC 10. [2] Centech Engineers Private Limited and Ors. v. Omicron Sensing Private Limited, Company Appeal (AT) (Insolvency) No. 132 of 2017.

Innoventive Industries v. ICICI Bank: A Creditor-Friendly Approach in Insolvency Law. [Sakshi Dhapodkar] The author is a fourth-year student of National Law Institute University, Bhopal. The Supreme Court on August 31, 2017 delivered its first substantive ruling under the Insolvency and Bankruptcy Code, 2016 (the “Code”). In the case of Innoventive Industries Ltd. v. ICICI Bank Ltd.,[1] the Supreme Court rejected a determined challenge to the insolvency proceedings put forth by the corporate debtor (Innoventive), and ruled in favour of the financial creditor (ICICI Bank). In doing so, the Court re-emphasized the creditor-friendly nature of the Code. After Innoventive entered into financial difficulties due to labour problems, it agreed upon a corporate debt-restructuring plan with the creditors. On December 07, 2016, ICICI Bank initiated a corporate insolvency resolution process (the “CIRP”) under the Code, and to that response, the corporate debtor took shelter under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (the “Maharashtra Act”) under which Innoventive’s liabilities were suspended by way of moratorium. The National Company Law Tribunal (the “NCLT”) admitted ICICI Bank’s application initiating the CIRP by holding that the Code would prevail over the Maharashtra Act in view of the non-obstante clause under section 238 of the Code. The NCLT also declared a moratorium as obligatory by the Code. On appeal, although the National Company Law Appellate Tribunal (the “NCLAT”) did not disturb the findings of the NCLT, on the point of law, it did not find any repugnancy between the Code and the Maharashtra Act. It is against the order of the NCLAT that Innoventive appealed to the Supreme Court. The main question before the Supreme Court was whether there was any conflict between the Code and the Maharashtra Act. Innoventive argued that given the moratorium already placed under the Maharashtra Act, there was no debt payable and the provisions of the Code will not be applicable. The Court hence focused on the issue of repugnancy and analyzed the case of Deep Chand v. State of UP[2] under article 254 of the Constitution. The Court observed that the Maharashtra Act derives its power from Entry 23, List II (State List)[3] in the Seventh Schedule to the Constitution whereas the Code is attributable to Entry 9, List III (Concurrent List).[4] This made it crystal clear that by giving effect to the earlier State law, the scheme which may be adopted under the Parliamentary statute will directly be barricaded and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional (IRP) prescribed under the Code. It was also stated that the moratorium imposed under section 4 of Maharashtra Act would clash with the moratorium imposed under sections 13 and 14 of the Code to such an extent that the insolvency resolution procedure under the Code might not move forward. The second issue in question was whether Innoventive was under an obligation to pay and, if yes, whether the debt payable was conditional upon infusion of funds by the creditors (which infusion was stipulated in the master restructuring agreement). The Supreme Court observed that the plea of failure to pay on account of non-release of funds was raised in the second application filed by Innoventive, clearly indicating that the argument was an after-thought. Further, the plea was raised beyond the 14-day period, the time prescribed under the Code for determining existence of a default. Substantively, upon analysis of the said restructuring agreement, the Court found that the payment obligations of Innoventive were unconditional and not subject to the infusion of funds by the creditors. Another question before the Court was whether a director of a sick management could bring an application of CIRP under the Code. The Court explained that once the insolvency proceeding was admitted by the NCLT and the moratorium declared, the directors of the company are no longer in management. Hence, it is likely that the directors would have to file objections in their individual capacity as interested “aggrieved persons” rather than as directors of the company. Although the Supreme Court indicated its stand, it did not decide on this specific corporate insolvency perspective. Examining the policy and background of the Code, the Supreme Court adopted a credit-friendly approach. The Supreme Court’s assertion of the creditor-orientation of the Code will arguably strengthen the hands of creditors, whether financial or operational, and incentivize them to take more companies into the insolvency process. At the same time, the question remains whether creditors now have more power to abuse. With reference to the other incidental question pertaining to the 14-day period for determination of default, it must be noted that the Supreme Court has time and again reemphasized on the strict application of time periods prescribed in the Code. As regards the last issue as to who can challenge the proceedings, the Supreme Court made a stand that if the challenges are brought from the corporate debtor’s side, they must be in the name of former directors and in their individual capacity. This judgment provides assurance that there would be stricter compliance of the Code and more credit-friendly decisions in future. [1] Innoventive Industries Ltd. v. ICICI Bank Ltd.,  2017 (11) SCALE 4. [2]Deep Chand v. State of UP,  1959 Supp. (2) SCR 8. [3] Entry 23, List II: Social Security and Social Insurance; Employment and Unemployment. [4] Entry 9, List III: Bankruptcy and Insolvency.

Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016. [Ashish Jain] The author is a third-year student of National Law Institute University, Bhopal. Introduction The Insolvency and Bankruptcy Code, 2016 (“Code“) has been enacted with the objective of bringing efficiency in the insolvency and liquidation process in the country. However, there have arisen disagreements relating to the true meaning and purpose of the various provisions of the Code. One such concern has been raised with respect to interpretation of the terms “dispute” and “dispute in existence” used in the Code. Both the Mumbai and the Delhi benches of the National Company Law Tribunal (“NCLT”) in their various recent judgments have provided different interpretations to the said terms. Relevant Provisions of the Code Section 5(6) of the Code, which provides the meaning of “dispute,” says that the term includes a suit or arbitration proceeding relating to- (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty.[i] Section 8 then provides that the corporate debtor is required to bring notice, within ten days of receipt of demand notice from an operational creditor, of any “existence of dispute” in relation to such debt.[ii] Further, section 9 provides for initiation of corporate insolvency resolution process and states that the adjudicating authority may reject the application for initiation of such process if, before the expiry of the notice period of ten days, the operational creditor has received a notice of dispute from the corporate debtor.[iii] Thus, interpretation of the expression “dispute in existence” becomes significant as it remains the only defence available with the corporate debtor to avoid the insolvency proceedings.[iv] In cases where the debt is not disputed by the corporate debtor (and therefore the tribunal can initiate the insolvency proceedings) or where a suit or arbitration proceeding is already pending (and therefore the tribunal may reject the application), it is easier for the adjudicating authority to take a call. However, problem arises when a dispute regarding such debt has been raised by the corporate debtor within the ten days of delivery of demand notice and no suit or arbitration proceedings are pending in relation to such debt.[v] The question arises whether this would amount to an existing dispute within the meaning of the Code. Conflicting Judicial Interpretations On the one hand, the NCLT Mumbai bench has taken recourse to strict interpretation and held that a debt would be considered disputed only if a suit or an arbitration proceeding exists before the delivery of notice by the operation creditor regarding the debt. It can be argued that this may lead to injustice in matters where there is a genuine dispute in respect of the debt but no suit has been filed. The NCLT Mumbai bench in Essar Projects India Limited v. MCL Global Street Private Limited,[vi] while deciding over an application filed by an operational creditor, held that since the dispute raised by the corporate debtor in its reply to the demand notice was not raised before any court of law or arbitration tribunal, it cannot be said to come within the purview of existing dispute under the Code. Therefore, the Tribunal while allowing the application for initiation of insolvency resolution proceedings held that a simple denial of claims by the corporate debtor without any pending suit or arbitration proceeding would not amount to “existence of dispute” under section 8(2) of the Code. The Tribunal in DF Deutsche Forfait AG & Anr v. Uttam Galva Steel Limited[vii] while further affirming its interpretation observed that the term “dispute” cannot be held to mean mere assertion or denial as it would frustrate the objective of the Code and deny the remedy available to the operational debtor. Further, the Tribunal while deliberating over the meaning of the word “includes” in the definition of dispute under section 5(6), considering the context of the surrounding provisions, observed that the word “includes” must be read as “means”. Therefore, pendency of suit or arbitration proceeding before delivery of demand notice is necessary to take defence of section 9(5)(ii)(d). On the other hand, applying the golden rule of interpretation, the Delhi Principal Bench of NCLT has held that, in order to claim “existence of dispute,” it is enough that the corporate debtor has questioned the default of debt in the reply to notice within the ten-day period. Therefore, an application filed by an operational creditor is liable to be rejected by the tribunal if the corporate debtor claims that a dispute exists regarding such debt and there is no mandatory requirement that a suit or arbitration must be pending. The application in such case will only be allowed if such claim of dispute can be refuted on the basis of evidence provided in the application. The problem with such wide interpretation will be that the corporate debtor may raise a dispute even though no genuine dispute is present and this may lead to rejection of the application filed by the operational creditor. The NCLT Delhi bench while deciding over the application filed for initiation of insolvency resolution process under section 9 in One Coast Plaster v. Ambience Private Limited[viii] and in Philips India Limited v. Goodwill Hospital and Research Centre Limited[ix] interpreted the term “dispute.” In both the cases, the Tribunal observed that since the corporate debtor had disputed the debt in its reply to demand notice, the applications were liable to be rejected. The Tribunal further held that since the word “includes” comes before the word “dispute” in section 5(6), the definition of dispute is inclusive and not exhaustive and, therefore, it must be given a wider interpretation and should not be restricted to mean pending suit or arbitration proceeding alone. The Tribunal also observed that there is “adequate room for the NCLT to ascertain the existence of a dispute” under section 8 of the Code. The NCLAT Decision Recently, the National Company Law Appellate Tribunal (“NCLAT”) had the occasion to deliberate over the true interpretation of the

The Insolvency & Bankruptcy Code v/s SICA: A Comparative Analysis. [Charu Singh] The author is a fifth year student of Ram Manohar Lohiya National Law University, Lucknow. Introduction The Sick Industrial Companies (Special Provisions) Act, 1985 [“SICA”] was passed by the Parliament with the objective of “securing the timely detection of sick and potentially sick companies and speedy determination by a Board of experts.”[1] Thereafter, the Act was repealed by way of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, which came into effect on December 1, 2016 and resulted in the dissolution of the Board for Industrial & Financial Reconstruction[2] [“BIFR”]. BIFR’s main responsibility was determination of sickness of industrial companies and to prescription of measures for revival of such companies. However, on December 1, 2016, the President gave his assent to the Insolvency and Bankruptcy Code, 2016 [the “Code”] with the view of “maximization of value of assets and to promote entrepreneurship, availability of credit and balance the interest of all stakeholders[3].” The Code essentially replaces the mechanism for revival of sick companies, amongst other persons, as was provided under SICA. Now, we shall look into the essential differences between the procedural and substantive law contemplated under SICA and the Code. Process of Rehabilitation (1) Sick Industrial Companies (Special Provisions) Act SICA provided for a multi-stage process for revival of sick companies. The first step involved reference of the sick company to the BIFR by the Board of Directors of the Company itself or the Central Government, Reserve Bank of India, State Government, Public Financial Institution, State level institution or a Scheduled Bank. BFIR, consequently, made an enquiry into the sick company within sixty days of such reference. BIFR then had two options, one, passing an order giving time to company to escape insolvency; second, passing an order for preparation of scheme for revival. If BIFR passed an order for preparation of draft scheme for revival, the draft was prepared generally in a span of ninety days choosing from an array of options available under SICA – financial reconstruction, amalgamation, sale or lease of the undertaking, etc. This draft scheme was then published by BIFR in the daily newspapers inviting suggestions for changes or modifications. Upon considering the suggestions, the scheme was then finalized by BIFR. (2) The Insolvency & Bankruptcy Code The Code provides for an integrated “corporate insolvency resolution process.” Upon default, any financial creditor, an operational creditor or the corporate debtor itself may initiate an insolvency resolution process by making an application to the National Company Law Tribunal [“NCLT”]. Upon satisfaction of the existence of a default and non-payment of dues by the defaulter, the NCLT may admit the application. The corporate insolvency resolution process is to be completed within one hundred and eighty days, which can be further extended to two hundred and seventy days only. The NCLT, thereafter, shall declare a moratorium, call for claims and appoint an insolvency professional who shall take over the company. A credit committee of all creditors shall be constituted, wherein each creditor votes. If 75% of the creditors approve the ‘resolution plan’, the plan will be implemented for the functioning of the Company. In case the creditors do not approve a plan, the Company goes into liquidation. There is a waterfall mechanism in place based on order of priority for distribution of assets on liquidation. Key Differences Time The Code provides for a time-bound resolution process. References of sick companies under SICA take around one or two years to get admitted for further investigation. While the Code is still new, there is a barrage of cases from BIFR, Debt Recovery Tribunal and the Companies Act, 1956 that will now fall under the ambit of NCLT. This may lead to delay in completion of the insolvency process within the prescribed limit of one hundred and eighty days. On this point, the National Company Law Appellate Tribunal [“NCLAT”], recently, ruled that the time limits prescribed under sections 7, 9 and 10 of the Code are merely directory and not mandatory, but however, the one hundred-eighty day timeline, extendable to two hundred and seventy days, is mandatory[4]. The ruling, thus, provides a gist of the Tribunal’s view of the objectives of the Code. Trigger Point SICA is only triggered when there is a loss of fifty per cent of a company’s worth. Therefore, it’s already too late, because half of the company’s worth is already eroded by the time BIFR decides to revive or liquidate it. However, the trigger, ironically, for liquidating a sick company is only a default of five hundred rupees. Conversely, the trigger point under the Code is one lakh rupees which can be increased up to one crore rupees, by way of notification of the government. Practice The BIFR and High Courts are reluctant in liquidating a sick company due to fear of loss of jobs, labour unrest, etc[5].  SICA was also misused by the debtor company to protect itself from creditors’ claims. This is not a possibility anymore, since the resolution plan so voted by the credit committee, ensures the creditors’ control over the functioning of the company. The corporate debtor cannot circumvent the process to keep themselves safe in the presence of an insolvency professional and a resolution plan. Distribution of assets The Code provides for a waterfall mechanism for the distribution of assets on the liquidation of a sick company. This provides for a stronger corporate governance mechanism, wherein creditors’ rights are enhanced. The priority starts from securing the rights of secured creditors and workmen to payment of equity, which by its very nature is high risk-return. SICA, however, did not prescribe for a waterfall mechanism. The distribution was based on the provisions of the Companies Act, 1956. Conclusion The Code has revolutionized the process of insolvency resolution in India. While the revival of sick companies was governed by SICA in the past, now it falls under the ambit of the Code. The objective of the Legislature behind passing the Code was