Insolvency Law

[By Mayank Bansal & Shreya Gupta] The author are students of Dr. B.R. Ambedkar National Law University, Sonepat.   Introduction In our insolvency & bankruptcy regime, an adequate statutory mechanism is available to protect the interest of all the relevant stakeholders, especially the creditors. Normally, a secured creditor is an entity who lends money to the corporate debtor, and some assets are pledged with him as security. Recently, the Hon’ble Supreme Court (‘SC’) in the matter of M/S Vistra ITCL (India) Ltd. & Ors. v. Mr. Dinkar Venkatasubramanian, encountered a unique class of secured creditors, i.e., ‘indirect secured creditors’ who lent money to a third party (‘borrower’). However, the corporate debtor pledged its assets to secure the loan. This type of creditor has no engagement or involvement in the affairs of the corporate debtor, and their interest is limited to selling the pledged shares in the event of default by the borrower. In this case, an interesting question was posed before the Hon’ble SC – how such indirect secured creditors shall be treated during Corporate Insolvency Resolution Process (‘CIRP’) as no special treatment is provided to them as far as mandatory content of a resolution plan is concerned. As an answer to this question, the Hon’ble SC proposed two alternatives, namely, treating indirect secured creditors as ‘financial creditors’ of the corporate debtor or giving them rights and entitlements as provided to other secured creditors at the stage of liquidation under Section 52 of Insolvency & Bankruptcy Code, 2016 (‘IBC’). This article seeks to critically analyze both the given alternatives since treating them as financial creditors goes against the settled definition of financial debt, and granting liquidation rights at the stage of CIRP will efface the innate difference between direct and indirect secured creditors, contrary to the spirit of the IBC. Indirect Secured Creditors as Financial Creditors: A Legal Quandary As per the first alternative, the Hon’ble SC proposed that indirect secured creditors shall be treated as financial creditors of the corporate debtor up to the amount of the estimated value of the pledged shares; thereby making them a member of the Committee of Creditors (‘CoC’) and giving them voting rights. However, this proposed alternative is surrounded by myriad legal issues, as discussed below: No Debtor-Creditor Relation and Absence of Time Value of Money The Hon’ble SC, while dealing with an identical legal question in the matter of Anuj Jain IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd, held that for an entity to be classified as a ‘financial creditor’ in accordance with Section 5(7) of the IBC, the relation between the financial creditor and corporate debtor must exist ‘primarily’ and a financial debt must have been taken by the corporate debtor from such creditor. However, in the ongoing case, a loan has been taken by a third party, and the role of the corporate debtor is limited to pledging the shares as security with no relation to the money so lent. Thus, it would be far-fetched to bring such creditors within the ambit of financial creditors. Further, it is well settled that financial debt must involve the essential elements of the time-value of money. This means the financial creditor must receive something extra besides the principal amount from the corporate debtor over a specific period. However, in this tripartite agreement, the corporate debtor has merely pledged its shares against the loan obtained by a third party with no additional time-related benefit owing to the creditor; therefore, no time value of money qua corporate debtor is involved. A Pledge of Shares does not Constitute Financial Debt In the present case, it was argued that since the corporate debtor has pledged its shares to secure the loan given to a third party, it shall be treated as a guarantor, and this guarantee would fall within the umbrella of financial debt under Section 5(8)(i) of IBC. This argument is completely untenable as a fundamental difference exists between pledge and a guarantee. In Phoenix ARC Ltd. v. Ketulbhai Ramabhai Patel, the Hon’ble SC highlighted that a contract of guarantee involves two essential elements: a contract to perform the promise or discharge the liability. This pledge agreement cannot be equated with a contract of guarantee as the liability of the corporate debtor herein is restricted to the extent of the pledged shares. In the event of default by the borrower, the indirect secured creditor has a limited right to sell such shares, which does not necessitate the corporate debtor to perform a promise or discharge the liability. Unique Status of Financial Creditor Cannot be Extended to Indirect Secured Creditor The Hon’ble SC in Swiss Ribbon v. Union of India held that in the scheme of IBC, the financial creditors enjoy a unique status owing to their involvement from the very initial stages with the corporate debtor. Akin to a guardian, they are entrusted with the vital task of assessing the viability and restructuring of corporate debtors while exercising their commercial wisdom. In complete contrast to the above, the interest of indirect secured creditors is limited to realizing the security interest and recovering money from the corporate debtor. The Hon’ble SC in Anuj Jain (Supra) observed that the indirect secured creditors have a remote connection with the corporate debtor, bereft of any long-term objective of revival and growth, and they shall not be accorded the unique status of the financial creditor. Equal Treatment of Unequal: Conferring Liquidation Rights to Indirect Secured Creditors during CIRP As per the second alternative suggested by the Hon’ble SC, the indirect secured creditor shall be allowed to retain the security interest in the pledged shares even post CIRP; subsequently, it will be vested with all the rights and obligations as given to a secured creditor at the stage of liquidation under Section 52 and Section 53 of the IBC. During liquidation, the secured creditor can either sell the pledged security outside the liquidation framework or relinquish its security interest and claim its dues under the waterfall mechanism. In the

[By Pavitra Priyadarshan & Dikshya Debipya Panda] The authors are students of National Law University, Odisha.   Introduction Section 7 of the “Insolvency and Bankruptcy Code, 2016” (IBC or Code) empowers a financial creditor to file a petition at the tribunal when the debt owed to him is due. This marks the initiation of the “Corporate Insolvency Resolution Process” (CIRP) against the Corporate Debtor (CD). The tribunal’s power at this stage to exercise its discretion in admitting or denying a petition has been a subject of a conundrum since the Vidarbha Industries Power Limited v. Axis Bank Limited (Vidarbha case). In this article, the author attempts to examine the discretionary power of the tribunal with respect to the admission of the petition under Section 7 (u/s. 7) of IBC, taking into consideration the M. Suresh Kumar Reddy v. Canara Bank & Ors (Suresh Kumar Reddy case) as a case study. In the Suresh Kumar Reddy case, the Supreme Court (SC) established that the ruling in the Vidarbha case will only be applicable to the facts and circumstances of the case and will not set a precedent against the settled position. Furthermore, the general norm is that the National Company Law Tribunal (NCLT) has to accept the petition filed u/s. 7 in the presence of a debt which is due and payable. Consequently, regardless of whether debt or other default on the part of the CD exists, the Adjudicating Authority (AA) does not possess discretion at the stage of admittance of the insolvency application. Thus, the AA cannot reject the petition u/s. 7 based solely on its discretion. Brief Facts Canara Bank (Financial Creditor) provided credit facilities to “M/s Kranthi Edifice Pvt. Ltd.” (Corporate Debtor), that failed to pay it back. To start the CIRP against the CD, the Financial Creditor filed a petition with the NCLT u/s. 7 of the IBC. By order dated 27th June 2022, the NCLT accepted the respondent-Bank’s application and proclaimed a moratorium for the purposes outlined in Section 14 of the IBC. Suresh Kumar Reddy, a suspended director of the CD, filed an appeal before the “National Company Law Appellate Tribunal,” claiming that he was an aggrieved party. However, the appeal was dismissed. Mr. Reddy then went to appeal the decision in the SC. The appellant argued that the settled principle of the Vidarbha Case provides that despite the existence of debt and default being proven, the tribunal has the option of refusing to admit the petition u/s. 7. Therefore, the tribunal can exercise its discretion while admitting the petition. Supreme Court’s Verdict The Hon’ble SC identified the issue as to whether after a petition has been filed u/s. 7, the AA may reject a petition solely based on its own discretion, even though it has verified the debt to be due and payable. The Court relied on the Innoventive Industries Limited v. ICICI Bank and Others (Innoventive Industries case), in which it was held that the tribunal must admit a petition u/s.7 once it is satisfied that a default has occurred on the financial debt owed. Following that, in E.S. Krishnamurthy and others v. Bharath HiTecch Builders Pvt. Ltd. (E.S. Krishnamurthy case), the SC outlined the tribunal’s powers by stating that it only has the power to ascertain if there is a default. Further, once the default’s existence has been verified, the said petition u/s. 7 must be admitted. Further, the Court discussed the SC’s decision in the Vidarbha case, where the Court had opined that in a case where it has been proven that there exists financial debt and default on the part of the CD, the tribunal is empowered to exercise its discretion in admittance of the petition u/s. 7 unless there is a clear and compelling reason to admit the petition. Finally, the SC in the Suresh Kumar Reddy case held that the rejection of a petition u/s. 7 could only be done when the debt is not due and payable. Analysis of the Verdict The Section 7(5)(a) of the IBC states that: “Where the Adjudicating Authority is satisfied that– a default has occurred, and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application.” The word “may” in the provision has been interpreted differently by Courts. In the Vidarbha case, the Court interpreted “may” as discretionary and not mandatory. Whereas, in the Innoventive Industries case and E.S. Krishnamurthy case, it was interpreted to be mandatory. Therefore, “may” has been a matter of dilemma. In Swiss Ribbons Private Limited v. Union of India (Swiss Ribbons case), the SC observed the Code’s primary objective as reorganization and insolvency resolution of the CD. The mandate of the Code is a prompt resolution of the CD in distress. This profoundly impacts supporting and developing the credit markets. In this case, the apex court observed that the Code is a facilitator for promoting credit availability in markets while ensuring the CD’s revival and continuous operations. The bench in the Suresh Kumar Reddy case observed, citing SC decisions in the Innoventive Industries case and E.S. Krishnamurthy case, that once a default on the part of the CD is verified, the tribunal has no discretion to refuse to admit a petition u/s. 7. It is a settled principle that the only reason for the dismissal of a petition is that the debt has not become due and payable. Moreover, failure to pay a portion of a due and payable debt constitutes a default. In such circumstances, an admission of petition u/s. 7 becomes necessary. If it comes to the notice of the NCLT that a debt is not due and payable, then there is no scope to allow an application. When Axis Bank Limited filed a review petition following the judgement in the Vidarbha case, the SC dismissed it in the order dated 22nd September 2022, with the observation that the elucidation made in the case was factual in nature and was

[By Vaibhav Kesarwani & Kamakhya Nadge] The authors are students of Gujarat National Law University, Gandhinagar.   Introduction In the realm of the Insolvency and Bankruptcy Code, 2016, one of the most common contentions of the stakeholders regarding the resolution process has always been either lesser value realization after the process is over or the high amount of time taken for the completion of the process which is much longer than what is prescribed under the law. With the release of the IBBI Discussion Paper on June 07, 2023, the board has proposed introducing a “Preferential Voting Method” to ensure that the preference of the Plan is captured and the creditors can vote freely. The introduction of preferential voting represents a pivotal shift, offering creditors a powerful tool to shape the outcome of insolvency proceedings. Unlike the existing binary voting system, preferential voting allows creditors to rank their preferences on received bids, opening the door to a more nuanced and comprehensive evaluation process. According to this method, the Committee of Creditors (COC) provides preference to all the resolution plans that are received, and then the plans are scrutinized according to the first preference of the COC; if no plan has achieved the required 66% votes of the COC, as required under section 30(4) of the Code, the Plan with least first preference is eliminated. Its first preference is allocated to the second preference. Thereby the process continues till one Plan has secured the required majority. However, if no plan secures the 66% threshold after the Preferential voting process is complete, it can be said that no plan was accepted by the COC. The Preferential Voting Method entails an iterative approach where preferences are reallocated until a plan secures the necessary majority. This iteration further involves keeping track of multiple preferences and reallocation that prolong the decision-making process and increase the complexity of arrival at a final resolution. Despite this complexity, Preferential Voting successfully reduces the burden of NCLT and, at the same time, provides flexibility to the creditors. This article delves into the paramount importance of implementing preferential voting in insolvency proceedings, exploring its potential to enhance creditor empowerment, drive transparency, and optimize value recovery. By examining both domestic and foreign jurisprudence, the authors have attempted to glean valuable insights into the benefits, challenges, and best practices associated with this progressive approach and, at the same time, navigate the dynamic landscape of insolvency, where preferential voting emerges as a catalyst for equitable and efficient decision-making in an ever-evolving economic environment. Advantages of Implementation of Preferential Voting in Insolvency Proceedings Enhanced Creditor Expression Traditionally, the Creditors used to vote in favour of all the IBC complaint resolution plans to prevent the corporate debtor from ending in liquidation, leaving the creditors with little to no relief. This was more common for cases concerning the Real estate, as the real estate allottees had to experience huge losses if they became dissenting creditors. Consequently, the corporate debtor went into liquidation due to not crossing the 66% threshold. The proposed framework would successfully solve this problem and allow the creditors to vote according to their preference and ensure that the Plan which is most beneficial to them is accepted. The method of preferential voting unleashes a nuanced decision-making process that expands the scope of evaluation from the binary system to a robust and comprehensive analytical approach that empowers the creditors to express their preference in the proposed resolution plans. With this process, the creditors can assess each resolution plan’s relative merits and drawbacks, allowing for more informed choices that align with their individual priorities. By unleashing this heightened level of scrutiny and discernment, preferential voting maximizes the potential for value optimization. It fosters a fair and transparent decision-making environment that upholds the interests of all parties involved. Flexibility and Informed Decision Making The proposed priority-based method for evaluating the Resolution plan enables the creditors to make an informed choice before accepting the resolution plan. It prevents the plans from going under liquidation if the concerned creditor does not individually prefer a particular resolution plan. For instance, if creditor A wanted to prefer Resolution Plan 1 and dissent from Resolution Plan 2, he/she would be forced to vote for both plans without any preference to prevent himself from being a dissenting creditor and the company from going under liquidation. The priority voting method gives a multi-dimensional approach to evaluating creditors and empowering them to optimize value recovery without worrying about the company going under liquidation if they dissent from the resolution plan. The introduction of preferential voting enables creditors to tailor their decision-making process based on their unique priorities and objectives. Creditors can rank bids according to various criteria, such as maximizing financial recovery, preserving jobs, or promoting sustainable business practices. This customization ensures that value recovery aligns with the specific needs and goals of creditors within the IBC framework. The economic environment in India encompasses a wide range of industries and businesses, each with its complexities and challenges. Preferential voting recognizes this diversity and allows creditors to adapt the decision-making process accordingly. By expanding flexibility, creditors can assess bids based on industry-specific factors, operational considerations, or market dynamics, thereby optimizing value recovery in line with the intricacies of the Insolvency and Bankruptcy Code, 2016. Promoting Fairness and Transparency The introduction of preferential voting can provide an equitable approach to creditors by eliminating any potential bias or favoritism of a resolution plan by the other creditors. The ranking of the resolution plan provides a transparent view of how the creditors perceive and evaluate different plans, and this visibility not only fosters accountability among creditors but also facilitates an open and informed dialogue between stakeholders, contributing to greater trust and credibility in the insolvency process. It levels the playing field by taking the individual preference of each creditor. With the preferential voting framework, the Creditors, investors, and other stakeholders can have greater faith in the decision-making outcomes, knowing that their interests are being considered fairly and

[By Devansh Dixit & Abhimanyu Pathania] The authors are students of Gujarat National Law University.   Introduction The insolvency regime prioritizes the interests of creditors and hence, the interest of minority shareholders of an entity undergoing CIRP remains largely ignored. They occupy the lowest position in the ‘distribution waterfall’. They don’t have any representation in the CoC. The minority shareholders of DHFL and Sintex Industries suffered huge losses when the resolution plans suggesting for the delisting of the entities were approved by the NCLT and they were left with no recourse. SEBI recently issued a consultation paper on safeguarding the interests of public equity shareholders in listed companies undergoing CIRP under the IBC. This article aims to critically analyse the consultation paper and its potential impact on the protection of public equity shareholders if the suggested framework is implemented. The current legal framework As highlighted above, the IBC hardly has any provision for protecting the minority shareholders. Through precedents like Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC and Keshav Agrawal v. Abhijit Guhathakurta, it has been laid down that minority shareholders cannot raise objections against a Resolution Plan (RP) approved by the CoC. The IBC coupled with several regulations further adds to the distress of the public shareholders. Regulation 3(2) of the SEBI Delisting Regulations provides exemption delisting carried out in accordance with a resolution plan approved under IBC if such plan provides for “exit opportunity to the existing public shareholders at a specified price”. Hence, the public shareholders are denied a fair bargain by providing an exit opportunity at a market-determined price and are instead left at the mercy of the Resolution Applicant (RA). The provision that existing public shareholders be given exit opportunity at a price which equal to or more than what is offered to the promoters is of little help considering that promoter’s equity is often written off, making it highly unlikely that public shareholders will receive any value. Further, in insolvent liquidations, there is no liquidation value attributable to equity-holders. Another amendment in the Securities Contracts (Regulation) Rules, 1957 (SCRR) in 2021 mandated a minimum of 5% public shareholding for an entity to remain listed post-CIRP. Such a mandate disincentivises the new entity post-CIRP to be listed and hence, they go for delisting which again is against the interest of minority shareholders. Therefore, once a RP is approved for a listed company, the possible scenarios are: Liquidation of the company in which case they get virtually nothing; Continuation of the company with or without listing, based on the resolution plan which largely results in dissolution of shares again squeezing out the shareholders. In both the scenarios, the existing public equity shareholders get squeezed out and usually end up with almost nothing. Need for protection of minority shareholders One could argue that the treatment of such shareholders is justified if they chose to remain interested in the company even when the company had reached at that stage. While this reasoning is not misplaced, it is also important to consider that the shareholders are often misled hoping that they might end up getting a better deal. The minority shareholders argue that they don’t have much say when equity owners run down the company. Further, most of such minority shareholders are retail or small shareholders who don’t possess the awareness and the level of information to make a timely decision. Another concern is that the CIRP can be triggered on a mere default and the company need not be balance sheet insolvent. Data shows that as of June 30, 2022, 517 companies were resolved by resolution plans and in 56 cases, FCs realized at least 10% of their claims. Hence, there is a realistic possibility that some of these companies may have residual value in its equity yet in many cases it is wiped out in the resolution plan. The SEBI consultation Paper Addressing the concern of the minority shareholders, SEBI came out with a framework for protection of interest of public equity shareholders in case of listed companies undergoing CIRP. The key recommendations are as follows: Opportunity for Public Equity Shareholders: Public shareholders will have the opportunity to acquire equity in the new entity that is formed post CIRP. Promoter and promoter group, KMPs etc. would be excluded while identifying such public equity shareholders. Minimum and Maximum limit: The acquisition of equity by public shareholders will be minimum 5% and a maximum of 25% of the capital structure. The pricing terms for this acquisition will be the same as those agreed upon by the resolution applicant. Mandatory Delisting on failure to achieve minimum Shareholding: For the company to continue as a listed entity, at least 5% of the fully diluted capital structure must be held by public shareholders. If the resolution applicant fails to achieve the 5% public shareholding, the company will be delisted, and the consideration received from public equity shareholders will be refunded. Exemptions from Delisting Regulations: The recommendation also states that exemptions from Delisting Regulations will be applicable only in cases of liquidation or if the public equity shareholding remains below 5% of the new entity after the offer. SEBI’s Proposal: A measure for protection or an instance of myopia? Should IBC protect the minority shareholders? The IBC was designed to promote entrepreneurship, improve credit access, and strike a balance between the interests of all stakeholders while maximising the value of a company under insolvency. It identifies two main sets of stakeholders: shareholders and the creditors and hence, endeavours to balance their rights. The Bankruptcy Law Reforms Committee in its first report, observed, “The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say.” The problem with the suggested framework is that it assumes that the minority shareholders must be given any

[By Tushar Krishna] The author is a student of West Bengal National University of Juridical Sciences.   Introduction Section 45 of the Insolvency and Bankruptcy Code (‘IBC’) encompasses the expunction of transactions executed at undervalue, including acts of gifting or instances wherein the consideration obtained by the corporate debtor is significantly less than the value rendered by the corporate debtor. Similar provisions also resonate throughout the international landscape, exemplified by the presence of Section 238 in the United Kingdom (‘UK’)’s Insolvency Act of 1986, wherein the annulments of transactions conducted at undervalue are addressed. Likewise, the United States Bankruptcy Code’s Section 548 embraces the avoidance of transfers that may manifest as either overtly fraudulent or covertly deceptive in nature.[1] These provisions are instituted with the express purpose of thwarting the diversion of corporate assets by the corporate debtor’s management, who possess an intricate knowledge of the abysmal financial state of the said debtor and may purposefully engage in such transactions in close proximity to insolvency. In light of the same, Section 45 also provides the Adjudicating Authority, on the application of the liquidator or Resolution Professional, the prerogative to annul the consequences of such transactions, rendering them null and void, thereby depriving any party deriving benefit from the transaction of any associated rights. Since the nascent nature of the IBC has a limited body of jurisprudence, the dearth of legal precedents pertaining to specific provisions, such as Section 45, is unsurprising. However, in the recent times, a discernible augmentation has been observed in the frequency of instances whereby Section 45 has been employed as a means to invalidate transactions deemed to be undervalued, bearing significant repercussions on the corporate assets.[2] Nevertheless, given that Section 45 is not a kind of provision invoked in every IBC matter, it becomes imperative to bestow due attention upon specific inquiries like the potential inclusion of interest-free loans within its purview. The complexity of this quandary transcends its superficial appearance, primarily owing to the fact that Section 45 predominantly employs a framework centered upon situations where the consideration involved is readily discernible. Consequently, comprehending its applicability vis-à-vis typical transactions like the granting of interest-free loans proves to be an intricate undertaking. In this regard, the present article has been meticulously organized as follows: Initially, it conducts an assessment of the potential classification of Interest-free loans as an undervalued transaction, a matter of utmost pertinence when examined within the purview of section 45. Subsequently, it engages in an intellectually stimulating exploration of the matter, delving into the profound ramifications stemming from the Oator Marketing Judgement. Finally, it culminates in a concise synthesis of the arguments, marked by a concluding remark. Interest-free loans as undervalued transactions The inquiry surrounding the inclusion of interest-free loans within the purview of Section 45 manifests as an examination into the potential categorisation of such loans as undervalued transactions. An undervalued transaction materializes when the corporate debtor transfers one or more assets at a significantly less value compared to the consideration disbursed. Precisely defining the phrase “significantly less” proves to be an elusive task, bereft of absolute precision. In the UK, one case elucidates that even a marginal 10% variance in price remains insignificant when grounded in the genuine divergence of opinion,[3] although in a different case, it may be deemed substantially dissimilar. Thus, even when drawing upon the position adopted by the UK, whose provision for the avoidance of undervalued transactions adheres to similar language as Section 45, a measure of ambiguity persists regarding the precise delineation of “significantly less.” However, it is discernible that a heightened threshold is necessitated. Notwithstanding, it is generally explicable that the consideration attached to a transaction assumes substantially less value if it notably falls below its fair value or the consideration furnished by the debtor itself. However, the comparison of values paid or received by the company may not be an easy task in every case, especially cases like interest-free loans, where transactional consideration does not overtly manifest. In the case of an interest-free loan, the consideration tendered by the corporate debtor encompasses the opportunity cost. Even if the corporate debtor disburses funds at a markedly lower interest rate in relation to its capital’s comprehensive cost, encompassing the opportunity cost, the transaction in question may be appraised as an undervalued transaction. The opportunity cost associated with the interest accrued by the corporate debtor equates to the interest relinquished, thereby constituting the consideration offered by the company. Any detriment experienced by the corporate debtor assumes pivotal significance in the comparative evaluation of the consideration. In this milieu, one may argue that when it comes to interest-free loans, the threshold of “significantly less”, as required under section 45, may be more readily satisfied, as opposed to a scenario involving lending at a reduced rate, which presents a subjective and intricate predicament. This proposition gains particular credence in the context of the recent Insolvency and Bankruptcy Board of India (‘IBBI’) Guidance on avoidance transactions for resolution professionals, wherein it is asked to consider interest-free transactions by the corporate debtor as a “red flag”.[4] Furthermore, it is imperative to note that even if interest-free loans are deemed as undervalued transactions, as per Section 45, their avoidance can only be executed provided that the transaction was not conducted in good faith and did not adhere to the ordinary course of business. These factors can be assessed by observing the involved intention[5]to defraud the creditors using the specific material facts, as highlighted in Anuj Jain v. Axis Bank Limited and Ors. Implications of Oator Marketing Judgement In the context at hand, an intriguing avenue for analysis emerges by virtue of the recent pronouncement of the Supreme Court in Oator Marketing Pvt. Ltd. v. SamtexDesinz Pvt. Ltd. In this case, the Court expounded upon the contours of the term ‘Financial Debt’, and held that interest-free loans are unequivocally encompassed within the ambit of Financial Debt. Thus, it confers upon the creditor, who gave the interest-free loans, the capacity to initiate Corporate

[By Samriddh Bindal] The author is an associate at Saikrishna & Associates.   Introduction The Insolvency and Bankruptcy Code, 2016 (‘IBC’) is regarded as one of the most significant economic legislations implemented in recent times. Unlike previous legislations, the IBC introduces a creditor-centric framework for restructuring the assets of the Debtor. It aims to expedite the process of creditors recovering funds from the Debtor and also seeks to enhance India’s ranking in the ‘ease of doing business’ index. In the present article, the author emphasizes the necessity of allocating differential voting rights to the allottees of a real estate project based on the established principle of debt that is due and payable. The author argues that such an approach is crucial for ensuring fairness and equity among the allottees, taking into consideration their individual claims and obligations. By implementing this principle, the author suggests that the voting rights can be allocated in a manner that aligns with the financial positions and interests of the allottees, thereby promoting a more just and balanced resolution process. As per the provisions of IBC when the National Company Law Tribunal (‘NCLT’) initiates CIRP and appoints IRP, The IRP collates the claims of the creditors, constitutes the Committee of Creditors (‘CoC’), and also assigns the voting share to each creditor within the CoC. The CoC plays a significant role in making key decisions regarding the CIRP process, including the appointment of the Resolution Professional (‘RP’), CIRP costs, interim finance, Form G, and approval of the Resolution Plan, among others. Additionally, as per Section 21(6A) of the IBC, an Authorized Representative (‘AR’) is also appointed to represent the financial creditors- in class before the CoC. In the case of CIRP for a real estate project, it is often observed that a majority of the creditors are financial creditors- in class, which is also in line with the Pioneer Urban Land and Infrastructure Limited and Anr. Vs. Union of India & Ors, [WP (C) No. 43/2019]. It is trite that the Insolvency Professionals as a matter of practice, admit the claims of the allottees, without acknowledging the fact that such allottee(s) have received possession of their respective units or what is the stage of the buyer-builder agreement(s) executed between the allottee(s) and the Corporate Debtor. Need for differential voting rights In a real estate project, the allottees/financial creditors in class can be categorized into different segments based on the amount due and payable as on the insolvency commencement date. The following segments can be considered: Allottees who are yet to receive possession of their units. Allottees who have received possession of their units but are yet to receive the completion certificate and/or have pending execution of the registration deed for their units, etc. Allottees who have received possession of their units without fit-outs or without basic amenities such as electricity, water supply, connecting roads, etc. In view of the above, each segment of the allottees as mentioned above will have different claims against the Corporate Debtor on the basis of what is due from the Corporate Debtor. This disparity arises due to variations in the progress of the buyer-builder agreements across different segments. As a result, the RP will be required to admit the claims of these allottees based on the remaining performance obligations, i.e., the outstanding debt in terms of the agreement yet to be fulfilled. Consequently, each segment of the allottees will hold a different voting share. The above classification is indeed justified, considering the varying amounts of debt due for each segment. When a Resolution Applicant invests in the Corporate Debtor through its Resolution Plan, each segment of the allottees is treated differently, since it requires different amount of investment. This means that the Resolution Applicant will need to allocate more funds towards the segment of allottees where the units are yet to be constructed. On the other hand, in cases where the allottees are only seeking fit-outs and/or the execution of their respective documents, the Resolution Applicant will have to invest a significantly lower amount. It is pertinent to mention that the Hon’ble Apex Court in the matter of Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., [W.P. (C.) 37 of 2019] has held that a creditor can file its ‘claim’ when the ‘debt’ is ‘due’. Hence, it seems unjustified that the total claim of the allottees is admitted even though they have received possession of their respective units. Against the above backdrop, it is relevant to mention the judgment passed by the Hon’ble NCLAT in the matter of Gajraj Jain & Ors. Vs. Shivgyan Developers Pvt. Ltd., [Company Appeal (AT) (Ins.) No. 1265 of 2019], wherein the allottees of a real estate project had filed a Section 7 application contending that ‘legal possession’ has not been received by the allottees in the absence of Occupancy Certificate/ Completion Certificate, registration cannot be completed. The Hon’ble NCLAT held that the Ld. NCLT has rightly dismissed the application filed under Section 7 of the IBC since the construction of the said project stands complete. Therefore, admission of the complete claims of the allottees who have received possession by the Corporate Debtor, seems unjustified and hence a mechanism should be introduced for accepting such claims. It is seen that there has been a divergent view of the Insolvency Professionals regarding the admission of claims of the allottees. However, it is pertinent to mention that in the CIRP of Supertech Limited, the Resolution Professional has made classifications amongst the allottees on the basis of (a)Allottees who are yet to receive possession of their respective unit(s); (b) Possession given however sub -lease deed or registry is pending of the respective allottees is pending; and (c) Sub Lease deed or Registry is executed, however, delay compensation is yet to be given to the allottees. Accordingly, the Insolvency Professional has not admitted the total claims of the allottees who have received possession of their respective units. The list of creditors as available on the website

[By Ansruta Debnath and Shubham Singh] The authors are students of National Law University Odisha.   INTRODUCTION In the recent case of Moser Baer Karamchari Union Thr. President Mahesh Chand Sharma and Ors. v. Union of India, the court has used the doctrine of hands-off to refuse to interfere with the waterfall mechanism in the Insolvency and Bankruptcy Code, 2016 (“IBC”) which it categorised as an economic legislation. This doctrine is a manifestation of the principle of separation of powers and has originated in the United States, essentially laying down that courts should not interfere in the executive’s work. BACKGROUND In the Moser Baer case, the constitutional validity of Section 327(7) of the Companies Act, 2013 was challenged because it was an overriding provision that cancelled the effects of Section 326 and 327 when kicked in. Section 326 and 327 would not apply at the time of liquidation, Section 53 of IBC would and that proposes a waterfall mechanism which proposes a different order of priority for distribution of proceeds. According to Sections 326 and 327, payments of worker’s dues, revenues, taxes and cesses due to the Union would have had priority but under Section 53, the order of priority is secured financial creditors, insecure financial creditors, government dues and finally, operational dues. In this case, workers’ dues come under operational creditors. This apparent dichotomy was challenged in this case because it was violative of Article 21 of the Indian Constitution. HANDS-OFF BY INDIAN COURTS IN LIGHT OF IBC Economic legislations are laws and regulations on various aspects of economic activity. These legislations aim to promote economic growth, protect consumer rights, ensure fair competition, regulate financial systems and maintain stability in the economy. While the Indian Judiciary is well known for its activist role when it comes to the rights of Indian citizens, a trend of non-interference has been seen in the case of so-called “economic legislations”. IBC is an economic legislation. The Moser Baer petition involved the validity of certain provisions of the Insolvency and Bankruptcy Code, 2016. The Supreme Court recognized that IBC is primarily economic legislation and that the judiciary should not unilaterally give judgements that would affect its intricacies without legislative consensus. The Court acknowledged IBC’s impact on secured creditors and financial institutions, stressing the importance of their economic stability for the general public and the national economy. It was stated that employment opportunities, economic growth, and investments depend on IBC’s provisions. Since the IBC was the result of an organic evolution of law and extensive consultation, the prescribed waterfall mechanism should not be interfered with. A key case which highlights the implementation of the hands-off doctrine vis-a-vis IBC is  Swiss Ribbons Private Limited and Anr. v. Union of India and Ors. This case yet again involved a challenge to IBC by operational creditors, alleging discrimination. The Court acknowledged that legislators consider practical and administrative factors and engage in experimentation when formulating such laws. Therefore, a rigid doctrinaire approach should be avoided. This principle, apart from IBC, has been used for economic policies as well. The Supreme Court of India, relying on multiple prior judgements have categorically stated that “it is neither the domain of courts nor the scope of judicial review to embark on whether a particular public policy is wise”. Courts have time and again advised caution when it comes to economic and fiscal regulatory matters since they are not experts in those matters. The only way the same can be struck is if they are manifestly arbitrary and contrary to any law. A FAIR PLAY BY THE JUDICIARY OR A MISSTEP? Adjudicating on legality instead of soundness or wise ness of a law or policy seems to be the appropriate job for the judiciary. However, this is quite a difficult line to tread upon. The judicial hands-off doctrine is a manifestation of the principle of judicial restraint, which needs to be exercised while treading that line. By limiting judicial intervention, the doctrine upholds the integrity of this separation and fosters a healthy balance of power. It is also observed whenever fundamental rights and principles are affected; the court has always intervened in the legislature. India, however, does not follow a strict separation of powers as in the United States. Instead, there is a “broad separation of powers”. The term “broad” implies that the organs are to not interfere in the core functions of each other but a general overlap among each other is permissible. The judiciary’s involvement in the structuration of laws primarily occurs to safeguard the Constitution, most importantly fundamental rights contained therein. It is, however, interesting to note that in all the above-mentioned cases there was one common argument i.e., a violation of a fundamental right. Yet, the judiciary chose to take a hands-off approach and not interfere. Concerning fundamental rights, the court has consistently opined that a legislation cannot be deemed manifestly arbitrary if it explicitly addresses certain provisions, even if it looks like a violation of some rights of an individual. This standpoint was evident in the case of Moser Baer, wherein the court held that the Preferential Payments provision in the Companies Act would no longer be applicable once the liquidation process of a company has been initiated, as the Insolvency and Bankruptcy Code of 2016 now governs the procedures related to liquidation. THE ULTIMATE CONUNDRUM Judiciary intervening in the functioning of legislations are aplenty. With respect to economic legislations like IBC specifically, the count is comparatively low as there have been incidents when the courts have given judgements that have led to negative consequences. A prominent case in this regard is State Tax Officer v. Rainbow Papers Limited, in which the courts categorised government dues as secured creditors if they have security thus, going against  the provisions of IBC and creating quite a quandary. Why a hands-off approach is warranted when it comes to statutes like IBC can be attributed to India being a growing economic market. The dynamic nature of economic activities makes the intent

[By Yash Arjariya] The author is a student of Hidayatullah National Law University.   Introduction Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) explains operational debt as a claim made in respect of ‘goods and services’. The earlier jurisprudence developed by the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) in M. Ravindranath Reddy v. G. Kishan & Ors and subsequently followed in Promila Taneja v. Surendri Designe Pt. Ltd.held that rent of a leasehold property did not amount to ‘operational debt’ for the purpose of Sec 5(21) of IBC and purported to follow what can be described as the “direct-nexus test”, i.e., the supply by the creditor must directly relate to or affect the production of goods and services by the debtor to classify the creditor as operational creditor. The decision of the NCLAT in Jaipur Trade Expocentre Private Limited v. M/s Metro Jet Airways Training Pvt. Ltd.overruled the earlier interpretation of Sec 5(21) of IBC and provided that lease of premises is a ‘service’ and hence the claim of the licensor for the payment of licence fee is a claim of ‘operational debt’ within the meaning of Sec 5(21) of IBC. The dust, with respect to the classification of rental dues or leasehold dues as operational debt, is settled now. However, there remains to be an inquiry made about the treatment of rental or leasehold dues arising after a Corporate Insolvency Resolution Plan (hereinafter referred to as “CIRP”) has been filed and a moratorium is imposed, i.e., whether such dues will continue to be classified as operational debt or be included in CIRP costs. If such rental dues are considered as post-CIRP cost, they shall be treated as CIRP cost and would be payable to recipients on priority, as held by the National Company Law Tribunal (hereinafter referred to as, “NCLT”) in Hind Tradex Limited v. Lakshmi Precisions Screws.It is necessary to account for the explanation that, as per the scheme of distribution of assets as envisaged in Sec. 53 of the IBC, the insolvency resolution process costs are paid in full and in priority over other claims.Thus, when the resolution professional manages the business of the corporate debtor during insolvency proceedings, the question is whether the rental or leasehold amount becoming due after the insolvency proceedings have started should be considered CIRP costs or be pooled in the class of operational debt. The article examines the two different jurisprudential approaches to treating post-CIRP rental dues or leasehold dues as either cost or operational debt. Then, the author makes an attempt to address this proposition through the lens of a statutory creditor (established as a creature of law). The article concludes by listing and accounting for the carvings made in the jurisprudential epoch on this proposition. Post CIRP rental dues as ‘CIRP Cost’ In this respect, Prerna Singh v. CoC of M/s Xalta Food and Beverages Pvt. Ltd.(hereinafter referred to as “Prerna Singh”) can be said to be an epoch-making judgement. In the instant case, the operational creditor was extremely prejudiced by the moratorium imposed on account of the initiation of insolvency proceedings, to the extent of becoming insolvent in the near future. The NCLAT ordered the inclusion of post-CIRP rental dues in CIRP costs and their payment on priority. What NCLAT can be said to have devised as a rule is that if the right of the lessor to recover rent is affected on account of a moratorium, the lessor is entitled to recover the rent, which shall be included in the CIRP cost. The Chennai Bench of the NCLAT in S. Rajendran Resolution Professional of M/s Vasan Health Care Pvt. Ltd. v. B.M. Anand(hereinafter referred to as “S. Rajendran”) in its judgement necessarily read Section 5(13) of IBC into details enumerated in Regulation 31 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to classify post-CIRP rental dues as CIRP cost. By doing so, the court has furthered the juristic principle that the rights of creditors must not be prejudiced by moratorium. However, this ‘prejudice to rights of creditor due to moratorium’ is qualified by the presentation of adequate facts and circumstances by the creditor; the law doesnot automatically classify post-CIRP rental dues as CIRP cost but on the warrant of a factum of circumstances. This factum has been a pendulum between a situation as weighty as nearly causing the bankruptcy of the creditor himself in Prerna Singh (supra) to a mere inadequacy of funds in S. Rajendran. The law in this respect was followed in a catena of judgements delivered by both NCLT and NCLAT inNishant Singhal v. Hasti Mal Kachhara, Oriental Insurance of Commerce v. Yamuna Infradevelopers Private Limited, and Santanu T. Ray v. Tata Capital Financial Services Limited. Necessary Outliers The classification of post-CIRP dues as CIRP cost has not necessarily been dealt as only an issue of fact, i.e, such classification does not exlusively depended on creditor proving that his/her rights have been prejudiced on account of moratorium. The judgement of NCLT in Karad Urban Co-Operative Bank Ltd. v. Khandoba Prasanna Sakhar Karkhana(which was later affirmed by the Supreme Court) has caused this proposition to transcend from entirely a issue to fact to so certain legal qualifications to be met. The NCLT held that an application for recovery of outstanding rental dues as CIRP cost cannot be filed after the application for approval of the resolution plan has already been filed with the adjudicating authority. The decision can be rationalised on the ground that such a belated filing of the application cannot be said to be anything but an attempt to forestall the resolution process. Thus, the law as it stands now requires the application for treatment of post-CIRP rental dues as CIRP costs to be filed before the resolution plan is filed for approval before the adjudicating authority. Case of a Statutory Creditor Section 14(1)(d) of the IBC provides a general rule as to the

[By Jahnvi Pandey] The author is a student of University of Petroleum and Energy Studies, Dehradun.   Introduction The Committee of Creditors (“CoC”) is said to be the custodian of public trust during the Corporate Insolvency Resolution Process (“CIRP”). The Insolvency and Bankruptcy Code, 2016 (“IBC“) envisages a doctrine of commercial wisdom by virtue of which CoC exercise their commercial decisions. Section 33(2) of IBC states that CoC can put the Corporate Debtor into liquidation anytime during CIRP but before the approval of the resolution plan. In the case of Mr Pawan Kumar Goyal, IRP v. Alchemist XXXVII (“present case”), the National Company Law Tribunal (“NCLT”) issued a show cause notice (“SCN”) under Section 65 of IBC to the members of CoC for fraudulent initiation of liquidation proceedings. The SCN was issued to the CoC as they voted to initiate early liquidation of the Corporate Debtor. The decision to initiate liquidation proceedings was made without inviting a prospective resolution plan for the resolution of the Corporate Debtor. This article aims to analyse the above case and seeks to address the issue of whether issuing SCN under Section 65 to the CoC will be deleterious to the commercial wisdom of the CoC. Background of the case The present application has been filed by Mr Pawan Kumar Goyal, an Interim Resolution Professional (“IRP”) of M/s. SARE Realty Projects Private Limited (“Corporate Debtor”), under Section 33(2) of IBC, to attain the liquidation order. The essential step in inviting a resolution plan is to publish a detailed expression of interest (“EOI”) in the format of Form-G. The EOI calls for resolution applicants to submit their respective resolution plans. The CoC did not take any initiative and instead deferred from approving the EOI contained in Form-G, leaving no scope for preparing resolution plans. All five CoC meetings conducted by IRP discussed early liquidation of the Corporate Debtor. In the fifth CoC meeting, the liquidation proposal by CoC was put to a majority vote. Moreover, CoC preferred early liquidation because they could not find a prospective buyer even after trying to sell the corporate debtor’s project, and no liquid assets were present. The issue raised before the Tribunal was whether CoC justified the decision regarding early liquidation. Decision of the Court The Tribunal observed that the CoC had not initiated the resolution process as the early liquidation after being discussed in all meetings, got approved in the fifth meeting. This shows that all the courses of action by the CoC were pre-planned. The logic of putting the Corporate Debtor into liquidation because no prospective buyers are available for the said assets, was considered vague by the Tribunal. No resolution applicant was appointed to submit the plan to get a prospective buyer. Moreover, the Tribunal observed the importance of CIRP over liquidation, as the resolution process provides a fair chance for the Corporate Debtor to escape financial distress. The Tribunal identified that the Corporate Debtor is a real estate company with assets and projects; hence, opting for early liquidation is arbitrary. The Tribunal observed that the pursuance of liquidation against the Corporate Debtor showcases mala fide intent considering the resolution process has been skipped altogether. Thereafter, the Tribunal ordered to issue SCN under Section 65 proceedings of IBC against the assenting members of CoC. The Tribunal’s final decision will depend upon the records presented by IRP and the reply to the show cause notice by CoC. Analysis Impact of Section 65 on Commercial Wisdom of CoC The presumption attained by the settled position of law is that CoC takes its commercial decision in accordance with the Corporate Debtor as a going concern and viable prospect of going ahead with any proposed resolution plan. The CoC’s commercial wisdom is of utmost importance, and hence, no judicial intervention in their commercial decisions is allowed. The limited scope of the judiciary indicates assessing whether the requirements enshrined in IBC are met concerning the submitted resolution plan. This leads to the conclusion that any judicial authority cannot overturn the collective business decision of the CoC. Section 65 of IBC is a penalty provision against proceedings initiated with mala fide or fraudulent intentions. A significant penalty is imposed in cases where CIRP is commenced for a purpose other than resolution or liquidation. In the present case, action against CoC under Section 65 will create a bad precedent for further financial creditors to take decisions through free will. The CoC’s final decision considers all debts to be paid off in some or the other way to both financial and operational creditors. There is no deniability in considering the Corporate Debtor as the beneficiary of the resolution process, and liquidation should be a last resort. However, situations may arise where the corporate debtor is not left with assets and money to adjust and pay off the creditors’ debts. In such a situation, analysis can be drawn to prefer liquidation before resolution since the corporate debtor’s company is deprived of assets and is on edge. For such circumstances, Section 33 of IBC has been provided for the benefit of the CoC to avoid an unnecessary stretch of time when it would ultimately result in the liquidation of the corporate debtor considering the condition. Therefore, penalising CoC for its commercial decision of early liquidation would curb different other financial creditors in future from deciding against those Corporate Debtors who do not have sufficient assets left to pay off the debts. No detrimental effect due to skipping procedures The present case cited a judgment titled Sunil S. Kakkad v. Atrium Infocom Private Limited & Ors. wherein there is no publication requirement of Form-G while passing an order of liquidation. In addition, a recent decision of NCLAT, Delhi, titled Jayanta Banerjee v. Sashi Agarwal, raised a question, i.e., “whether any of the procedures prescribed under the Code can be skipped on the pretext of the commercial decision of CoC.” The Tribunal observed that statutory requirements become mandatory before CoC gets to decide during CIRP to liquidate the