Insolvency Law

[By Rupakshi Sharma] The author is a student of Symbiosis Law School, Pune   Introduction: The present article analyses the exclusion of the Aviation Industry from imposition of Moratorium under S.14 of IBC,2016 w.r.t MCA Notification dt. 03.10.2023. It highlights the plausible advantages of this catalytic move while laying due emphasis on the enactment of CTC Bill, 2022 in light of the GoAir Fiasco.  I. Moratorium under S. 14 of IBC, 2016: It is well-founded in law that an application for initiating a Corporate Insolvency Resolution Process (CIRP) can be filed  either by a Financial Creditor (FC)/Operational Creditor (OC) or the Corporate Debtor (CD)itself. Once such application is admitted before NCLT, a ‘moratorium’ is imposed on CD under Section 14 of  the Insolvency and Bankruptcy Code, 2016. . It is a ‘calm period’ where financial and operational creditors are barred from institution of new suits and proceedings or initiation of debt recovery actions against the CD during CIRP. All actions are suspended against the CD to preserve the status quo and revive the CD through a resolution plan. 2 Since the Insolvency and Bankruptcy Code, 2016 regulates insolvency matters in India, a time-bound moratorium period is imposed after admission of CIRP application by NCLT. Under the said section, clause (d) specifically bars an owner/lessor to recover/possess a property which is in the possession of a CD during CIRP as observed in the case of Maharashtra Industrial Development Corporation v. Santanu T. Ray, Resolution Professional & Anr. II. The Juxtaposition of Aircraft Leasing and Imposition of Moratorium: Aircraft leasing is a prevalent industry practice in the Aviation Sector as majority Indian Airline Operators have leased a significant number of aircrafts in their fleet. However, the overwhelming operational costs attached to the sector often poses a great difficulty for long-term sustainability of an airlines. This has a rippling effect on the creditors/lessors whose investment remain at stake due to challenges in aircraft reclaiming during insolvency. Once an application for insolvency of an airline is admitted under IBC, there is a temporary freeze of all actions against the CD, including restriction on lessors’ rights to claim re-possession of their leased aircrafts. This embargo adversely affects the progress of the Indian Aviation Sector as: it discourages lessor companies to lease their aircrafts to Indian Air Carriers; it leads to imposition of higher lease rent for instance, about an extra $1.2-1.3 bn is paid by Indian carriers because of hurdles faced in aircraft re-claiming; it levies stricter terms and conditions on the lessee, which is counter-intuitive for India’s endeavour towards a flexible aviation policy. Moreover, it is the customers who have to ultimately bear the brunt of high lease rentals in the form of high fares. III. Exemption of Aviation Industry under S. 14 of IBC, 2016: A sweeping move by MCA India’s Legal Position before MCA’s Exemption Notification: It is widely known that India is a signatory to the Convention on International Interests in Mobile Equipment or Cape Town Convention (CTC), 2001 and Protocol on Matters Specific to Aircraft Equipment since 31.03.2008. Read and interpreted as a single instrument their primary aim is to address the challenge of obtaining opposable rights to high-value aviation assets, viz. airframes, aircraft engines and helicopters having no fixed location. Alternative A, Clause (2) of Article XI of the instrument requires a contracting state to allow a lessor to re-possess an aircraft after expiration of waiting period as specified in the declaration of that State. Since India has declared a waiting period of 2 calendar months under Article XI, a resolution professional is required to either (i) cure all the defaults of a CD or (ii) give possession of the aircraft to the lessor, within 60 days from the commencement of CIRP. Moreover, the Aircraft Rules, 1937 drafted under the Aircraft Act, 1934 under Sections 30(6)(iv) and 30(7) allows de-registration and re-possession of aircrafts by creditors after issuing an irrevocable deregistration and export request authorisation (IDERA) in the case of default by a debtor. In Awas 39423 Ireland Ltd & Ors v. Directorate General of Civil Aviation & Anr., the Delhi High Court relied on Article IX of Protocol on Matters Specific to Aircraft Equipment and Rule 30(6)(iv) of the Aircraft Rules, 1937, thereby allowing deregistration of aircrafts of SpiceJet Limited. However, enactment of the Insolvency and Bankruptcy Code in 2016 unintentionally sabotaged lessors’ right under CTC as it lacked formal ratification by the Indian Government in the form of a separate implementing legislation due to which the municipal law (IBC) was given precedence over India’s International law obligations w.r.t. CTC. Realising drawbacks of an uncodified regime, an attempt was made by the Ministry of Civil Aviation by drafting Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 to implement the Cape Town Convention/Protocol and give primacy to its provisions assuring lessors de-registration and re-possession of their aircrafts, in case of default by the lessee. Reciprocal provisions under Section 15(1) and Section 19(5) & (7) were incorporated in the Draft Bill, 2022 with respect to de-registration and re-possession respectively. Moreover, the proposed bill had an overriding effect over any other Indian Law for the time being in force under Section 31(1). However, as no concrete steps have yet been taken for its enforcement, the insolvency code will have an overriding effect under Section 238 until the enactment of the Bill. India’s Legal Position after MCA’s Exemption Notification: Taking into the consideration the adverse effect of mandatory imposition of moratorium on aircraft lessors which had corollary consequences on air-carriers due to increased lease rentals and pass-through effects on end-users (air-passengers), the Ministry of Corporate Affairs in its Notification S.O. 4321(E) dated 03.10.2023 notified exemption of aviation industry from application of moratorium provisions under Section 14(1) of the Insolvency and Bankruptcy Code, 2016. It stated that as  India has ratified the Cape Town Convention and its Protocol, any transactions, arrangements, or agreementsrelating to aircraft, aircraft engines, airframes and helicopters under it shall be exempted from the application of Section 14(1) of the

[By Pratishtha Shrivastava] The author is a student of Institute of Law, Nirma University.   Introduction In the ever-evolving world of corporate insolvency jurisprudence, a recent decision by the National Company Law Tribunal (NCLT), Kolkata Bench, has cast a spotlight on the intriguing interplay between two significant legal frameworks: the Insolvency and Bankruptcy Code, 2016 (IBC), and the State Financial Corporation Act, 1951 (SFC). The case of Pankaj Tibrewal v. the West Bengal Industrial Development Corporation (WBIDC) is an interesting statement on the hierarchy of laws and the protection of creditor and debtor rights in the complex realm of corporate insolvency resolution. The verdict contributes to legal certainty and predictability in the corporate insolvency resolution process as it assures stakeholders, including RP, creditors, and debtors, that the IBC’s provisions will prevail and guide the proceedings. This blog will dive deep into the intriguing legal battle that unfolded and dissect the NCLT’s verdict, exploring its far-reaching implications. It will also analyze the provisions of IBC and State Financial Laws that were in conflict and were employed by the Court to reach its decision. Background of the Case The Resolution Professional (RP) filed an application under the Insolvency and Bankruptcy Code, 2016 (IBC) against the WBIDC, a State Financial Corporation (SFC), seeking possession of the factory premises and assets of the corporate debtor. The RP contended that the WBIDC’s refusal to hand over possession of the factory premises was hindering the smooth conduct of the Corporate Insolvency Resolution Process (CIRP) of the corporate debtor. The RP argued that the IBC provides the jurisdiction to issue appropriate directions to the WBIDC to extend assistance and cooperation in the CIRP. On the other hand,  WBIDC, being a public limited company governed by the State Financial Corporation Act, 1951 (SFC Act), argued that the application was not maintainable under the provisions of the IBC. The respondent claimed that the relief sought by the RP did not fall within the provisions of the IBC. The WBIDC also contended that it had provided a term loan to the corporate debtor for the expansion of its existing Rice Bran Oil Refining Plant. The terms and conditions of the loan were embodied in a Term Loan Agreement. They asserted that they had a right to the assets of the corporate debtor as per the agreement. The court held that the provisions of the IBC would prevail over the provisions of the SFC Act in this case. The court referred to Section 238 of the IBC, which states that the provisions of the IBC have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Legal Battle Unfolds: SFC v. IBC Section 46B of the SFC Act, states that the provisions of the Act shall have effect notwithstanding anything inconsistent contained in any other law for the time being in force or the memorandum or articles of association of an industrial concern or any other instrument having effect under any law other than the SFC Act. On the other hand, Section 238 of the IBC explicitly states that the provisions of the IBC shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect under any such law. The key difference between the provisions of the SFC Act and the IBC lies in the scope of their non-obstante clauses. While Section 46B of the SFC Act limits the reach of its non-obstante clause, the non-obstante clause in Section 238 of the IBC has a broader and unlimited reach, ensuring the primacy of the IBC over any other law. Judicial Precedents  Judicial Precedents have established that the IBC prevails over other laws. Section 238 of the IBC states that the provisions of the Code have effect, notwithstanding anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law. The Hon’ble Apex Court in various cases has affirmed the overriding effect of the IBC over other laws. In the case of Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., the court noted that the IBC will override anything inconsistent contained in any other enactment, including the Income Tax Act. Furthermore, in the case of Indian Overseas Bank v. RCM Infrastructure Limited, the Hon’ble Apex Court categorically held that the IBC shall have an overriding effect over any other law. It stated that once theCIRP is commenced, there is a complete prohibition on any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property. These judicial precedents establish that the IBC prevails over other laws, ensuring its primacy in insolvency and bankruptcy proceedings. Implications The NCLT’s decision to prioritize the provisions of theIBC over the State Financial Corporation Act, 1951 sets a clear legal precedent. The verdict reinforces the critical role of a Resolution Professional in the corporate insolvency resolution process. It ensures that RPs have the right and power to take over the possession of assets, even in cases where a financial corporation like WBIDC may have certain rights under the SFC. Further, it establishes that in cases of conflict between different statutes, especially when a specific later statute has a non-obstante clause, the later statute will prevail. This way it contributes to legal certainty and predictability in the corporate insolvency resolution process. Moreover, Financial corporations like WBIDC may need to reassess their involvement in insolvency cases and adapt to the precedence set by this case. They need to cooperate more effectively with RPs and acknowledge the RP’s authority in taking over assets during the resolution process. Conclusion  This case not only settles a legal dispute but also contributes to the legal evolution of corporate insolvency. At its core, this case represents the delicate and sometimes contentious interplay between two vital legal frameworks: the IBC, and the State Financial Corporation

[By Keshav Vyas] The author is a student of National Law Institute University, Bhopal.   Introduction The Memorandum of Association (MOA) and Articles of Association (AOA) are fundamental documents that outline the company’s objectives, scope of work, internal management, and rules. They form the foundation of a company’s constitution and are crucial for its functioning. The decision to modify the Memorandum of Association (MOA), Articles of Association (AOA), or other core constitutional documents during insolvency proceedings requires meticulous evaluation. While such changes could align with the Corporate Insolvency Resolution Process (CIRP) objectives and evolving business needs, they entail substantial risks. Amid resolution urgency, altering these documents might divert attention and resources from financial recovery. Regulatory complexities, potential delays, and the need for stakeholder consensus could impede CIRP progress. Deciding on this step demands understanding of the company’s context, stakeholder dynamics, and balancing immediate restructuring needs with long-term interests. This research examines the procedural aspects and implications of modifying MOA, AOA, and other constitutional documents during CIRP for a corporate debtor. It analyzes the legal framework, challenges, and the delicate balance between restructuring and stakeholder interests. The study provides insights into navigating this complex situation within the CIRP framework, outlining the process for amending the documents in question. Altering Corporate Debtor Documents During CIRP: Process & Recommendations:- In the intricate landscape of corporate insolvency and restructuring, the alteration of foundational documents such as the Memorandum of Association (MOA), Articles of Association (AOA), and other constitutional documents of a corporate debtor holds a significant role. These documents outline the fundamental structure and guidelines governing the operations of a company. However, the question arises: what legal processes are involved in changing these crucial documents during the Corporate Insolvency Resolution Process (CIRP), and is such a step advisable in the midst of the insolvency proceedings? As we go by the stated laws legal procedure to make changes in the MOA, AOA, or constitutional document of a company is governed by Section 13 of the Companies Act, 2013. According to this provision, the proposed changes must first be presented before the board of directors for their approval. Subsequently, an Extraordinary General Meeting (EGM) should be convened, and the proposed changes should be approved by the shareholders. Once the approval is obtained, the amended MOA, AOA, or constitutional document must be registered with the Registrar of Companies (ROC). This involves filing Form-14 along with all the necessary documents at the ROC office within 30 days of passing the special resolution. To effectuate the amendments, Section 117 of the Companies Act, 2013 mandates the filing of Form MGT-14 (Filing of Resolutions and agreements to the Registrar under section 117) with the Registrar of Companies (ROC). The filing should be completed within 30 days of passing the special resolution and must include the following documents: Duly attested True Copies of the Special Resolutions, accompanied by the corresponding elucidatory documentation. A reproduction of the Meeting Notification dispatched to the shareholders, inclusive of all accompanying attachments. A printed rendition of the Amended Articles of Association. Compliance with these requirements enables changes to be made in the MOA, AOA, or Constitutional Documents of the company during the CIRP. But, it is important to note that during the Corporate Insolvency Resolution Process (CIRP), this legal procedure cannot be followed to make changes to the MOA, AOA, or constitutional document of the company. The CIRP process is focused on resolving the insolvency of the company within a specified time frame, and altering these foundational documents is generally not advisable or feasible during this process. During CIRP During the Corporate Insolvency Resolution Process (CIRP), the board of directors of the corporate debtor is suspended, and the powers vested in them are transferred to the Insolvency Resolution Professional (IRP) and subsequently to the Resolution Professional (RP) in accordance with Section 17(1)(b) of the Insolvency and Bankruptcy Code, 2016 (IBC). Under such circumstances, it becomes crucial to consider amendments with great precaution  in the Memorandum of Association (MOA), Articles of Association (AOA), or Constitutional Document of the company. Section 28 of the IBC specifies actions that require prior approval from the Committee of Creditors (CoC), including changes in documents such as the AOA and amendments to the company’s capital structure. Therefore, any changes to these documents must receive approval from the CoC. CIRP: RA’s Authority to Amend MOA/AOA/Constitutional Docs:- As in the case of “Indian Bank [Financial Creditor] versus NSR Steels Private Limited [Corporate Debtor through Resolution Professional] 2018 SCC Online NCLT 25560” The authority has determined that the “Resolution Plan” submitted with the application complies with the requisites of Section 30(2) of the Insolvency and Bankruptcy Code, 2016, along with Regulations 37, 38, 38(1A), and 39 of the IBBI (CIRP) Regulations, 2016. It has been confirmed that the “Resolution Plan” does not contravene any provisions of Section 29A of IBC. Additionally, the Resolution Professional has certified that the “Resolution Plan” approved by the Committee of Creditors (CoCs) is in accordance with the relevant provisions of the I & B Code, 2016, and the associated regulations. Given the unanimous approval of the “Resolution Plan” by the CoCs with a 100% voting share, it is now approved and binding upon the Corporate Debtor, its employees, members, creditors, guarantors, and all other stakeholders involved in the Resolution Plan, including the Resolution Applicant. Furthermore, Tribunal in the present case granted permission for amending the Memorandum of Association (MOA) and Articles of Association (AOA) and for filing the same with the Registrar of Companies (ROC) as required by the law. Hence, the Resolution Applicant (RA) is empowered to make changes to the Memorandum of Association (MOA), Articles of Association (AOA), or Constitutional Documents of the company during the Corporate Insolvency Resolution Process (CIRP). This authority is granted to the RA upon the presentation and approval of their Resolution Plan by the Committee of Creditors (CoC) and in accordance with the requirements stipulated by the Insolvency and Bankruptcy Code, 2016 (IBC). Upon meeting all the necessary requirements and receiving the

[By Dhruv Kohli] The author is a student of Gujarat National Law University.   Introduction In its judgment dated 9th September, 2022, the principal bench of NCLAT has held that a “Deed of Hypothecation” executed in favour of a third-party creditor is not to be construed as a “financial debt” under the IBC. As a corollary, the bench noted that such a third-party secured creditor shall not be eligible to file its claims as a “financial creditor” and hence neither file an application to initiate CIRP nor be a part of the Committee of Creditors. Interestingly, the bench came to this conclusion on the basis that the deed did not carry an explicit clause to the effect that it is a “guarantee” and hence cannot be construed as a “financial debt”. The author in this article makes an attempt to argue that the judgement of NCLAT is flawed and suffers from non-application of mind. Facts The Appellant (Doha Bank) in the present case had extended a loan facility to Reliance Infratel (Corporate Debtor/CD). The CD along with Reliance Communications Infrastructure (RCIL), Reliance Communications (RCom) and Reliance Telecom (RTL) (collectively who were referred to as “RCom entities”) had further availed loan facilities from various other lenders (referred to as the “indirect lenders”). As a part of the latter facility, all the RCom entities had pooled in all of their assets and created a first pari passu charge over them. In order to create the same, RCom entities had executed a “Deed of Hypothecation (DOH)”. Upon initiation of CIRP against the CD in 2017, the indirect lenders had filed their claim with the RP who accepted their claims and the same were categorized as “financial creditors”. However, this categorization was objected by the Appellant on the ground that the indirect lenders had not extended any “direct loan” to the CD and that DOH was extended only as a part of normal contractual practice and the same cannot be construed as a deed of guarantee. The RP rejected the contention of the appellant, holding that upon a combined reading of the entire DOH, it emerges that there is a covenant to pay upon occurrence of any shortfall or deficiency and the same is to be construed as a contract of guarantee. In appeal, the NCLT too rejected the appellant’s contention by upholding the argument as given by the RP. NCLAT’s Judgment In appeal, the principal bench came to the conclusion that the DOH that has been executed by the CD in favour of the indirect lenders while it does create a security interest, the same cannot be construed as a financial debt under IBC. While coming to this decision, the NCLAT held that section 5(8) of the IBC provides for an “exhaustive list” of what can be construed as “financial debt” and that the DOH does not fall within this ambit. Secondly, the NCLAT also held that to construe an instrument as a contract of guarantee, is to be specifically specified in the initial part or object of the agreement or preamble and not somewhere some wordings are mentioned in the agreement. The bench observed that a clause within the agreement stating that the deficiency will be recouped, cannot be the basis to claim that there exists a contract of guarantee. By upholding this, the NCLAT reversed the judgment of NCLT. Analysis A guarantee as defined under the Indian Contract Act means “a contract to perform the promise, or discharge the liability, of a third person in case of his default”. Therefore, the essential element herein is that there ought to be an obligation to fulfil the obligations of a third party. In the present case, the NCLAT erred in holding that the DOH is not a guarantee under Indian Contract Act. Clause 2 of the DOH specifically provided that each of the chargor(s) had covenanted to pay all the amount that is repayable under the loan facilities. Further clause 5(iii) of the DOH provided that in case there is any shortfall or deficiency even after the sale of the hypothecated assets, all of the chargor(s) specifically agreed to provide for amount to cover this deficiency. What appears from these two clauses is that the CD had not merely created a charge on its assets; instead it had specifically undertaken to pay the amount taken under the facility as well as any shortfall/deficiency that arises. As a general rule, the liability of the surety is co- extensive with that of the principal debtor unless otherwise provided by the contract. Clause 2 and 5(iii) of the DOH prima facie imposed an obligation upon the CD to pay even on behalf of other RCom entities. This transforms the DOH from a mere security interest into a contract of guarantee. In Intesa Sanpaola v. Videocon Industries, the Bombay HC had opined that an undertaking to pay is a guarantee. Further, in the case of IL&FS Infrastructure Debt Fund v. Mcleod Russel India, the NCLT categorically came to the conclusion that a ‘shortfall undertaking’ executed by the parent company of the CD can be construed as a guarantee and the same can be further construed as a financial debt under IBC. Interestingly, the NCLT in Mcleod Russel rejected the argument that since the instrument did not carry the term ‘guarantee’ the same cannot be construed as one. Deriving from the same, in the present case the CD had undertaken to pay under the facility. Even if the facility was not directly taken by the CD, its undertaking to pay under the DOH transformed the document directly into a guarantee. The NCLAT also failed to take into consideration the observation as made by the Insolvency Law Committee report of 2020, wherein, it was categorically mentioned that “by creating a security interest in favour of the creditor, the security provider undertakes to repay the debt owed to the creditor to the extent of the security interest, in the event that the borrower fails to do so. Therefore, just

[By Akshita Grover] The author is a student of Jindal Global Law School.   INTRODUCTION The Insolvency Bankruptcy Code 2016 was essentially a product of India’s efforts about building a competitive stance in the Ease of Doing Business Index of the World Bank Group. The Code consolidates several pieces of insolvency procedures from different legislations to uniformalise the process of Corporate Insolvency Resolution Processes (CIRP). This process is initiated by a Corporate Creditor via Company Petitions under the Code to ensure the revival of the Corporate Debtor. But sometimes this process is halted when the Creditor & the Debtor sign Consent Terms, wherein the Debtor promises to pay the Creditor and the Creditor thus takes down the process of CIRP by withdrawing the Company Petition. But what if after this legally valid agreement, the Debtor defaults on making the payment? Can this Company Petition then be revived by the Creditor as a recourse, especially because the Code is silent on this mechanism.  Thus, the paper attempts to provide an answer to the legal jigsaw at hand. CAUSE OF ACTION REMAINS POST THE EXECUTION OF THE COMPANY PETITION The Gujarat HC in the case of Gujarat State Financial Services vs Amar Polyester Ltd held that the cause of action in the CP does not survive when Consent Terms by the debtor and creditor are voluntarily signed. The court reasoned that Insolvency Proceedings are initiated in the public interest and not to protect the selective interests of any single creditor. While deliberating on this judgement delivered by the Gujrat HC, the Bombay HC in the case of M/S Corporate Couriers Ltd. vs M/S. Wall Street Finance Ltd felt otherwise and dismissed the applicability of this judgement by holding that the cause of action remains the same and holding that “both parties are aware that the proceedings are not closed and that the company petition would revive in the event there is a default in terms of the consent terms. In our opinion, the company cannot take advantage of its own wrong, more so as in this case where the creditor went out of its way even to reduce its claim….. in such a case, there is no change of cause of action. The cause of action is the cause based upon which the Company Petition was filed, and the company petition admitted. Only further proceedings were not taken in view of the consent terms.”   The Court in this case linked the cause of action to the company petition and not the insolvency proceedings. Thus when the company petition signed voluntarily has not been obeyed by the debtor, then the creditor still has the opportunity of knocking the doors of the court/tribunal to ensure the revival of the petition, giving the cause of action is still surviving. Hence, the point of law taken by Bombay HC is that upon admission of the CP and upon the filing of the consent terms, any failure to comply with the consent terms will revoke the revival of the CP. CONSENT TERMS ONCE LAID BEFORE THE COURT BECOME ENFORCEABLE There are a string of judicial authorities that hold that the laying down of Consent Terms granting liberty to the Tribunal to revive the CP is an essential element strengthening the case for the Creditor to revive the Petition. These authorities strengthen the case of the creditor in ensuring that once the Debtor confirms to pay back, then there is no backing out especially when the judicial authorities are recording this confirmation in their court orders. The NCLAT in the case of Krishna Garg & Anr v. Pioneer Fabricators Pvt Ltd explained the importance of filing the settlement terms before the Tribunal and bringing them on record to ensure that the agreement between the parties is an essential part of the order so that in case of a breach of the terms of the agreement, the Tribunal has the liberty to exercise its liberty. The case of SRLK Enterprises LLP v. Jalan Tran solutions India Ltd. provides more clarity on this proposition by giving the following reasoning that, there is a difference between cases where CIRP proceedings are withdrawn without much reference and acknowledgement of the Settlement Terms, versus cases where CIRP proceedings are withdrawn on the basis of the Corporate Debtor agreeing to the Settlement Agreement; wherein the later gives an explicit liberty to the adjudicating authority and thus necessitates revival. In the case of IDBI Trausteeship Services Limited v. Nirmal Lifestyle Limited, the NCLAT held that the settlement between the parties was well within the Order of court and thus the Consent Terms will be a part of the Court Order and enforceable.  In the case of Pooja Finlease v. Auto Needs (India) Pvt. Ltd. the company petition was withdrawn based on consent terms signed between the corporate debtor and the creditor, post which a default in payment was committed, and an application requesting for revival of the company petition was rejected. The Court again held that because this was not a case where “neither settlement terms were filed nor the same were brought on the record ” rather a case where “Consent Terms were filed and also were taken on record by the Adjudicating Authority” the appeal could be allowed revival of the Company Law petition.   NCLAT in Himadri Foods Ltd vs Credit Suisse Funds Ag held that “It appears that the Terms of Settlement providing a repayment schedule was incorporated in the order thereby making it an order or decree of the Court, and once this was the position, giving liberty to the Financial Creditor to come back can be interpreted on no hypothesis other than that the revival of CIRP would be sought for non-compliance with the Terms of Settlement”. Therefore, once the consent terms are executed in the company petition, which is admitted by the NCLT, they become a part of the court order making it necessary for the parties to comply accordingly. REVIVAL CLAUSES IN CONSENT TERMS MANDATE

[By Shraddha Tiwari & Tejaswini Kaushal] The authors are students of School of Law Christ University, Bangalore and Dr. Ram Manohar Lohiya National Law University, Lucknow.   Introduction Infrastructure Leasing & Financial Services Limited (“IL&FS”), a distinguished stalwart in infrastructure financing, boasted a legacy spanning over three decades. Functioning as a shadow bank, this non-banking financial company (“NBFC”) emulated the services provided by conventional commercial banks. With its ownership lying substantially in the hands of esteemed state-backed entities and prominent international organizations and boasting an intricate network of subsidiaries coupled with connections with banks, mutual funds, and infrastructure players, it was recognized as a ‘systemically important’ enterprise. It was, somewhat ironically, classified as “too big to fail.” In 2018, the shadow bank faced a liquidity crisis and payment defaults due to a risky combination of short-term debt and imbalances in long-term assets. Compounded by delayed bond issuance, disputes over government payments, and investigations by the Serious Fraud Investigation Office (“SFIO”)and the Enforcement Directorate (“ED”)for procedural lapses and money laundering, the IL&FS crisis sent shockwaves across the stock market. The company’s market reputation suffered, leading to a downgrade in its debt rating, causing concerns among investors such as banks, insurance companies, and mutual funds about its financial stability and potential ripple effects. As the company experienced delays and defaults on its debt obligations and inter-corporate deposits, it ultimately collapsed, worsening existing issues arising from mismanagement in the banking sector and regulatory shortcomings. Evidently, insolvency was IL&FS’s only chance to limit further economic damage. IL&FS, an NBFC established under the Companies Act (“CA”) 2013, faces challenges in efficient insolvency proceedings due to delays and concerns in implementing the recommended ‘Financial Data and Management Centre’ to monitor systemic risk. The proposed Resolution Corporation, meant for crisis resolution, also encountered opposition, leading to the withdrawal of the Financial Resolution and Deposit Insurance Bill 2017 (“Bill 2017”). These issues hinder the smooth functioning of insolvency proceedings for NBFCs. Under the Insolvency and Bankruptcy Code (“IBC”) 2016, IL&FS wasn’t subjected to the insolvency process despite the Central Government’s authority to invoke its Section 2 to refer financial service providers for resolution since NBFCs themselves cannot resort to the IBC owing to their status as financial service providers. However, IL&FS’s non-financial subsidiary entities, such as power and infrastructure projects, could use the IBC individually. However, the complicated connections between group companies and the uncertainty surrounding group bankruptcies were obstacles for a conglomerate like IL&FS in choosing the IBC route. The inability to bring the ultimate holding company, IL&FS, under the purview of the IBC posed a significant obstacle to the resolution process, and the creditor-driven nature of the IBC did not align with the desires of IL&FS’s promoters to retain control and management. Additionally, prior scholarship suggested that IL&FS primarily faces a temporary liquidity issue rather than insolvency, further dampening the desirability of the IBC as a resolution option. The Alternate Route taken by IL&FS The alternate route that IL&FS undertook was of Sections 230, 231 and 232, CA 2013, which offer provisions for schemes of arrangements and compromises, although infrequently utilized in India for debt restructuring purposes. Unlike the UK and Singapore, the schemes of arrangements mechanism have faced limited adoption in India due to cumbersome procedural requirements, lengthy delays, and creditor resistance. However, for IL&FS, this route presented certain advantages over the IBC, given its broader scope and flexibility to tailor the revival plan to the company’s specific needs, encompassing corporate and credit restructuring. Moreover, promoters can retain control throughout the scheme’s implementation, and unlike the IBC, a particular default is not a prerequisite under Section 230 of the CA 2013. This potentially allowed IL&FS to include financially sound entities within the scheme as necessary. Though the best suited for IL&FS, this crisis underscored that the CA 2013 only offered a potential but imperfect solution through a scheme of compromise or arrangement between a company and its creditors or shareholders to reorganize its financial structure. The CA 2013 route entails securing approval from at least 75 percent of secured creditors or shareholders and the National Company Law Tribunal. While it preserves equity rights and provides flexibility for crafting comprehensive solutions, its drawbacks include the absence of explicit provisions for a moratorium or fixed timelines, and the lack of overriding effect over other laws like the Income Tax Act, 1961 unlike resolutions approved under the IBC. Challenges arise from the absence of a comprehensive framework encompassing all classes of creditors and the untested nature of anonymity of schemes in group insolvency scenarios. Additionally, the CA 2013, lacking a moratorium provision like Section 14 of the IBC, does not offer a time-bound resolution, which it reserves solely for specific creditors, and leaves uncertainty regarding the impact of IBC proceedings initiated during the scheme’s NCLT approval. Effect of the Crisis The IL&FS crisis exposed weaknesses in India’s financial regulatory framework, emphasizing the urgent need for comprehensive reforms to manage risks effectively. The default sent shockwaves, impacting NBFCs significantly as they are primary borrowers from banks. Credit rating downgrades affected even stable NBFCs, eroding credit profiles and damaging the overall economy. Investors lost confidence and withdrew investments, leading to a liquidity crunch. The absence of a specific bankruptcy law for financial service providers made the resolution and liquidation processes cumbersome and costly under the CA 2013. This highlighted the critical necessity of implementing a tailored bankruptcy law for such entities. Post-Crisis Legal Reforms The Central Government, by §227 of the IBC 2016, came up with the Bill 2017, but it was withdrawn due to various loopholes. Against the backdrop of the IL&FC crisis, it formulated the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, for NBFCs. These rules incline more towards the ‘regulator-driven approach’ than the traditional ‘creditor-driven approach’ followed by the IBC. These rules include housing finance companies with asset size of Rs. 500 core or more as per the previously audited balance sheet. The insolvency process

[By Mayannk Sharma] The author is a student of Jindal Global Law School, Sonipat.   Introduction The objective of commencing an insolvency proceeding against a Corporate Debtor is to collate all pending claims against the Corporate Debtor, and institute in rem proceedings against the same. Arbitration on the other hand intends to institute in personam proceedings between the parties. Similarly, Section 14 of the Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”) imposes a moratorium against all pending proceedings against the Corporate Debtor, which includes pending arbitration proceedings as well. This is further complicated by Section 238 (non-obstante clause) of the IBC which overrides any other legislation the IBC comes in conflict with (including the Arbitration Act). Against the backdrop of these competing approaches to dispute settlement, two schools of thought emerge. Should arbitrable disputes continue alongside the Corporate Insolvency Resolution Process (hereinafter “CIRP”) with a view to harmonise proceedings under both the laws; or should arbitration proceedings cease with immediate effect upon the commencement of the CIRP giving absolute authority to insolvency proceedings. I answer this question by relying upon the core and non-core distinction of disputes as followed in the American insolvency regime and how a similar approach is ultimately beneficial for parties to an arbitration. Delineating the emerging pro-arbitration trend in insolvency disputes Over the past few years, the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) have been increasingly trying to harmonise insolvency and arbitration proceedings. The earliest known position on this conundrum was laid down in the landmark Booz Allen case, according to which insolvency matters were absolutely non-arbitrable. About two decades later, in Indus Biotech Private Limited v. Kotak India Venture there was a material shift in the Court’s practices towards arbitrability of insolvency disputes. Essentially, the Court held that the validity of a Section 8 application under the Arbitration Act would not stand dismissed merely upon filing an application for the commencement of the CIRP. In the author’s opinion, the Apex Court theorised an ex-ante and ex-post test towards determining the status of a Section 8 Application under the Arbitration Act where, if the Adjudicating Authority is of the view that there does not exist a default on behalf of the (possible) Corporate Debtor then the pending Arbitration Application does not cease to exist since the dispute remains in personam. Whereas, upon admission, the arbitration proceedings are halted since the dispute now becomes in rem and hence subject to the moratorium period. Similarly, in March 2022, the Apex Court went a step further to harmonise the conflicting jurisprudence by allowing contingent claims[i] to be pursued in an arbitral tribunal pursuant to the completion of the CIRP process. Contingent claims have been habitually written off by the Resolution Professional with a normative value of INR 1/- citing their “inability to estimate a contingent claim’s value” which is a clear abuse of the clean slate theory. By juxtaposing earlier developments, it becomes apparent that Courts have, of late, been deviating from this settled practice. Similarly, the Apex Court in Fourth Dimension allowed the aggrieved creditors to pursue operational dues worth Rs 2400 Crores before an arbitral tribunal which were earlier written off as ‘nil’ by the Resolution Professional during the CIRP in furtherance of its previous (mal)practices. This is a positive development for both the fields of Law since it would now be permissible for contingent creditors to pursue their claims before an arbitral tribunal despite the conclusion of the CIRP process, which were earlier written off by the Resolution Professional to the detriment of such creditors. Similarly, with the newfound clarity on foreign-seated arbitrations in India against the backdrop of PASL Wind Solutions Private Ltd. v. GE Power Conversion India Pvt. Ltd, the Supreme Court has opened avenues for creative solutions to arbitrate insolvency disputes. At present, the IBC does not envisage a cross-border application. It essentially means that the Code’s ability to centralise disputes revolving around foreign creditors or debtors is severely truncated since core concepts such as the moratorium period would no longer apply to such a foreign seated entity (or entities). Prior to PASL Wind Solutions, the only remedy that parties to a foreign seated Arbitration had in view of enforcing an arbitral award was to submit their claim to the Resolution Professional. However, IBC proceedings did not, at the time, consider such an award as valid proof of a ‘debt’, which, as per Indus Biotech is the sine qua non of initiating the CIRP proceedings and paramount for determining whether a dispute exists in rem or in personam. To that effect, with the Supreme Court’s pronouncement in PASL Wind Solutions, domestic parties have the liberty to choose a foreign seat of arbitration and pursue their claims accordingly. From a cursory understanding, it is evident that this does not ipso facto render such a ‘foreign award’ as invalid, rather, basis the recognition and enforcement of the award upon the two-fold test laid down in Section 48 of the Arbitration Act. Harmonising Arbitration and Insolvency Disputes – An International Viewpoint The United States has been widely acclaimed as a global arbitration and restructuring hub. The substance of practices adopted by the United States vest in segregating disputes that are exclusive to either insolvency or arbitration proceedings and letting the appropriate judicial fora take its course. For example, it would be apt to look at the practice of distinguishing between ‘core’ and ‘non-core’ proceedings that has been adopted by courts in the United States which is a much more refined approach towards arbitrability of insolvency matters. The American jurisprudence on the subject matter (particularly the U.S. Bankruptcy Code) proposes a non-exhaustive list of ‘core’ and ‘non-core’ proceedings, where insolvency courts would have jurisdiction over the former and arbitration would govern the proceedings in the latter case. To put it simply, the fundamental distinction between ‘core’ and ‘non-core’ proceedings is the degree of relativity that a claim enjoys vis-à-vis the bankruptcy filing. It can be said that a non-core

[By Rohan Srivastava & Priyanshu Mishra] The authors are students of National Law School of India University, Bengaluru.   Introduction In 2022, the Supreme Court in the case of State Tax Officer v Rainbow Papers, (hereinafter “Rainbow Papers”) held that Security Interests, which are placed at the second highest priority under the Insolvency and Bankruptcy Code (IBC) waterfall mechanism (contained in Section 53) may be created by operation of statutes. The controversial verdict has since then attracted a lot of criticism for undoing the economic and creditor-friendly rationale of the IBC. Recently, in the case of Paschimanchal Vidyut Vitran Nigam Ltd(PVVNL) v Raman Ispat Private Limited and Ors, (hereinafter “Paschimanchal Vidyut”) the Supreme Court has attempted to limit the applicability of the Rainbow Papers verdict by confining it to its own peculiar sets of facts. This has been commented upon as essentially “quarantining” the ratio of Rainbow Papers from future applicability. This piece shall delve into the reasoning in Paschimanchal Vidyut to highlight how it deviates from Rainbow Papers and can be seen as a part of the judicial trend of diluting the applicability of the Rainbow Papers verdict. In doing so, this post shall also attempt to shed light on the current applicability of Rainbow Papers, in light of various contradictory verdicts given by the courts on the meaning of “statutory dues” etc and also highlight the lack of uniformity in the jurisprudence. The Verdict in Paschimanchal Vidyut In Paschimanchal Vidyut, the appellant, PVVNL had entered into an agreement with Raman Ipsat for the supply of electricity. Clause 5 of the said agreement provided that “any outstanding dues shall be a charge on the assets of the company”. Reliance was placed on such wording by PVVNL to attach the property of Raman Ipsat upon non-payment of dues for recovery under regulations framed under the Electricity Act, 2003. The said attachment was challenged by the respondent claiming that it interfered with the liquidation proceedings that were ongoing against Raman Ipsat under the IBC, after failure of the resolution process. The NCLT set aside the impugned attachment order as it interfered with the Liquidation proceedings and declared that the assets of the company would be distributed according to the waterfall mechanism contained in the IBC. The NCLAT also endorsed the NCLT’s holding and held that PVVNL had to recover its dues under the IBC as a secured operational creditor within the waterfall mechanism. In the Supreme Court, PVVNL had argued that it was entitled to recover its dues under the Electricity Act and the mechanism provided in regulations framed under it by virtue of it being a special law and having non-obstante clauses. Alternatively, it had also argued, that in light of the Rainbow Papers verdict, the electricity dues were “secured interests” and the same had also been held by the impugned NCLT and NCLAT orders. In opposition, the Liquidator had argued that the IBC, having already provided a different section for government dues, does not view the government as a secured creditor under the waterfall mechanism and the said dues were covered under Section 53(1)(e) as an amount owed to the government. The Supreme Court firstly affirmed the overriding nature of the IBC over the Electricity Act and clarified that PVVNL cannot seek recovery under the Electricity Act but only under the IBC’s waterfall mechanism. On the second question, the SC clarified that PVVNL will be a secured creditor under the waterfall mechanism. This post shall focus on the reasoning used by the court in arriving at its second conclusion. Contrasting Rainbow Papers and Paschimanchal Vidyut In distinguishing the State as a “Secured Creditor” from “amount due to the government” under 53(1)(e), the court alludes to the wording of 53(1)(e) which makes a reference to the consolidated fund. The Court reasons that the liquidator’s argument that the electricity dues were an amount due to the government under 53(1)(e) is unfounded as it is a due owed to a corporation created by statute which has a separate juristic entity. The Court uses a functional test and concludes that PVVNL’s functions were something which could be performed by private entities as well and was not a governmental function. While the reasoning in Rainbow Papers and the Court’s reasoning, in this case, both arrive at the same conclusion, the Supreme Court explicitly negates the applicability of Rainbow Papers. The approach in the current case is one which defines State very narrowly, with reference to the consolidated fund and Article 165 of the Constitution, having defined the state narrowly and excluded statutory corporations from its ambit, the court then evaluates the nature of the dues as to whether they are secured or not. Contrary to this, the Rainbow Papers’ decision does not allude to 53(1)(e) to exclude “State” but directly jumps to the evaluation of the nature of interest, regardless of whether the dues come under 53(1)(e) or not. Such an approach is more textually fitting to the scheme of the IBC given that the code’s preamble along with its provisions has sought a different treatment of government dues. Having a two-stage enquiry as laid down by the court in this case by first applying the definition of State to the party and only if the question is answered in the negative, then going to the question of secured interest, is thus more appropriate than broadly giving the status of the secured creditor to the statutory first charge. Being a coordinate bench, however, the Supreme Court could not overrule Rainbow Papers but instead distinguished it on the ground that Rainbow Papers was not in the context of liquidation, hence was not binding in the given case and must be confined to its factual matrix. This distinction however stands on flimsy grounds as the court did not provide any principled arguments as to why Rainbow papers’ verdict shall not apply to liquidation proceedings and be limited to the CIRP. This can be seen as a part of the broader judicial course-correction trend which has

[By Akshay Dhekane] The author is a student of National Law University, Delhi.   INTRODUCTION Professor Roy Goode has succinctly put the importance of security in banking as “vast sums of money which might not otherwise be dispensed are lent in reliance on real security over all kinds of asset, including land, goods and receivables”. However, the complexity of raising finance increases when third-party security beneficiaries are involved. A third-party security is an arrangement where the creditors receive security to secure the debt of a borrower from a third-party (generally a parent or subsidiary company). When dealing with these beneficiaries, one of the most contentious matters that arises is the determination of the status of third-party security beneficiaries. For this reason, this article will examine key cases, particularly focusing on the recent Supreme Court decision in M/S Vistra ITCL (India) Ltd & Ors. v Mr. Dinkar Venkatasubramanian & Anr (“Vistra ITCL”). The article explores a way in which third-party security beneficiaries can be treated as financial creditors. For this, it analyzes the current legal framework and expresses the needed alterations by analyzing the definition of financial debt under Section 5(8) of the IBC. Two approaches had emerged regarding the treatment of third-party security beneficiaries. The first approach, as taken by the NCLT in SREI Infrastructure Finance Limited v Sterling International Enterprises Limited considered such creditors as financial creditors of the third-party security provider, based on the mortgagor’s liability for repaying the underlying debt. Here, the mortgagor (vide the Transfer of Property Act, 1882) was held to be obligated to repay the mortgage money hence, it was vital to recognize their security interest and treat them as a financial creditor. This approach, however, failed to gain traction and was overruled. The second approach as laid down in Anuj Jain IRP for Jaypee Infratech Limited v Axis Bank Limited (“Anuj Jain”) states that providing security does not qualify as a ‘financial debt’ under Section 5(8) of the Code, and therefore, such creditors should not be categorized as financial creditors vis-à-vis the security provider. This position was reaffirmed by the Supreme Court in Phoenix ARC Pvt. Ltd. v Ketulbhai Ramubhai Patel (“Phoenix ARC”). In Phoenix ARC, the creditor was held to be a secured creditor only against the third-party security provider. However, while treating Phoenix as a secured creditor, the scope of the decision was limited to deciding the claims only. THE SAGA CONTINUES The recent decision of the Supreme Court in Vistra ITCL attempted to tweak the prevailing legal framework by holding Vistra (the third-party security beneficiary) to be a secured creditor and entitled to all the rights and obligations available to a secured creditor. While adjudicating the case, the court decided not to recognize Vistra as a financial creditor, citing the prevailing legal position established in Anuj Jain and Phoenix ARC. In Anuj Jain, the court held that the mortgage in that case did not create a financial debt as the definition of financial debt was interpreted in a narrow manner. In Phoenix ARC, the court held that the “pledge of shares” did not meet the criteria of constituting a “disbursement of any amount against the consideration for the time value of money.” Consequently, the pledge of shares did not fall within the purview of subclause (f) of sub-section (8) of Section 5 of the IBC. SOLVING THE THIRD-PARTY SECURITY CONUNDRUM The jurisprudence that has evolved from these cases (in a broad and abstract manner) establishes that a debt can be classified as a “financial debt” when it is disbursed against the time value of money. The courts have taken the view that the debt so “disbursed” must be towards the corporate debtor. As per Vistra ITCL, even if the corporate debtor was the direct and real beneficiary of the debt, the creditor cannot be treated as a financial creditor considering the lack of an obligation to repay, perform the promise, or discharge the liability of the borrower. The corporate debtor’s liability is distinguished and limited by the fact that it needs to have entered into a contract to perform the promise, or discharge the liability of the borrower in case of their default to make the third-party creditor to be their “financial debtor”. The features of the expressions used in Sections 5(7) and 5(8) of the Code in defining the terms “financial creditor” and “financial debt” should be revisited. A third-party security can be treated as a financial debt under Section 5(8) of the IBC in the following ways: For convenience, the requirements under Section 5(8) of the IBC are divided into three parts. First, it is shown that the term ‘debt’ as used in defining ‘financial debt’ includes third-party security. Second, the argument progresses to explicitly demonstrate the fulfillment of the disbursal requirement. The third part involves assessing whether this disbursement was made ‘against the consideration of the time value of money’. a.     there exists a debt Firstly, it needs to be noted that the definition of financial debt must be construed in an extensive manner. When the words “means and includes” are used together, they become difficult to interpret.[1] When ‘include’ is used in a definition after ‘mean’, it is used to imply a comprehensive explanation of the meaning that must be consistently associated with these words or expressions for the purposes of the Act. In Swiss Ribbons Private Limited v. Union of India (“Swiss Ribbons”) the definition of financial debt was interpreted to be an inclusive one. Further, in Nikhil Mehta & Sons v AMR Infrastructure Limited (“Nikhil Mehta”) to clarify the position of homebuyers/allottees as financial creditors, the definition was read in an extensive manner. The Insolvency Law Committee hereafter the “ILC”) in its 2018 report backed the same viewpoint, deeming this definition inclusive. A collective reading of Section 5(7), Section 5(8), and Section 3(11) of the IBC makes it clear that for someone to become a creditor, there must be a debt owed by any person, or it must be transferred or assigned. So,