Insolvency Law

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