Insolvency Law

[By Shraiya Jain & Palak Jhalani] The authors are students at the Institute of Law, Nirma University Background . . CoC as a transient assorted body, consisting of financial creditors is deemed to be the apex body to decide on the matters pertaining to the course of CIRP. Although the RP acts as a key managerial and administrative authority over the business affairs of the CD, however, in reality, it is the CoC who decide on the matters of core functioning of the Corporate Debtor. The CoC is not only entrusted with all the critical decision-making powers in the CIRP under the Code but is also responsible for the conduct of the CD’s business and assessing its viability to determine a way the distress could be resolved.[i] In its legislative guide on insolvency law, UNCITRAL noted that the expansion of committee authority promotes greater accountability in the insolvency system. It states that the CoC should legitimately exercise its authority and not abuse it.[ii] A process for the removal or replacement of any representative or member of the CoC in cases of negligence, incompetence, conflict of interest, or fraud was also advised by the guide for the states to adopt. Many nations have a thorough set of rules to keep an eye on and control the behaviour of different insolvency regime participants. For instance, in UK, to streamline the conduct of insolvency personnel, there is a delegated ‘Statement of Insolvency Practice 15 (SIP)’, which outlines basic set of guidelines for practitioners to follow. It serves as a beacon for the stakeholders and restores their confidence in the dispute settlement procedure.[iii] While the IBBI has proposed a set of guidelines to regulate the conduct of the CoC, the article envisages the need for such a code. In the latter part of the article, the authors have critically evaluated the proposed set of IBBI guidelines, highlighting the major impediments to successful application of the same.  Need for a code of conduct The burden of revival of the company falls upon the CoC based on the role that it performs. To exercise such an exclusive function, it enjoys an upper hand in determining a way to resolve the distress through the application of commercial wisdom in the financial matters of the CD. Such commercial wisdom of the CoC is always prioritized by the judicial authorities as well to uphold the creditor-in-control regime provided under the Code. However, exercising such great power comes with great responsibilities.  Despite a circular issued by the IBBI to elect competent and authorized personnel by the creditors,[iv] numerous questions have been raised against the conduct of CoC. In some cases, the members of the CoC are neither adequately empowered to take decisions on their own nor acquainted with their role. This causes delay and allows depletion of value,[v] which itself goes against the code’s objectives, i.e., timely resolution and maximization of value. In other instances, the tribunals have observed missteps by the CoC such as undertaking adjudication beyond their powers and violating the laws and procedures. [vi]  Discussions & Deliberations  IBBI propounded the necessity for the institutional financial creditors to take necessary steps  ensuring their respective representatives   to act in an efficient and timely manner while discharging their functions. .[vii] The urgency of a professional code of conduct for the CoC, which regulates their decisions due to their importance in the efficacy of the code, has also been reflected in the 32nd report of the Standing committee on finance to the Parliament.[viii]   . Identifying unregulated work environment of CoC, a discussion paper[ix] followed by a proposed  set of guidelines were introduced by IBBI. Again, in the year 2022, the committee recommended IBBI to come up with a standard code of conduct for CoC, for which it proposed to amend Section 196[x] of the Code as required.       . The Committee also examined the possibility of the MCA consulting with relevant financial sector authorities like SEBI and RBI to develop a suitable enforcement mechanism for the code of conduct.[xi]  The Draft Guidelines and its Objections Regardless of explicitly mentioned provisions under the Code directing CoC to work in an efficient manner, the proposed set of code of conduct acts as an icing on the cake. It provides for disclosures, maintaining objectivity in the decision making process, cooperation with other insolvency professionals, neutrality, ensure timeliness, etc. in addition to the basic principles of transparency and accountability in their manner of functioning. The creditor-in-control regime provided by the Code also vests certain duties of public trust and care with such creditors constituting members of the CoC. The implementation of a code of conduct for regulation of CoC imposes challenges to these duties. Conflict with the commercial wisdom of CoC The Apex court highlighted the limited role of the Adjudicating Authority (AA) in approving a resolution plan after it was approved by the CoC, thus, favoring their authority concerning financial decisions over and above anything else.[xii] Such was the case in another landmark judgment whereby the commercial wisdom of the CoC was upheld.[xiii]  Given the fact that CoC has supremacy over commercial wisdom, it would be contradictory in nature if due to a formal and cautious decision-making approach such commercial wisdom is questioned before the AA. The practical consequences of subjecting it to judicial review would only result in increased challenges to the resolution plan by different stakeholders. Inconsistency in regulation As stakeholders from different backgrounds constitute CoC, they are regulated by their respective authorities. A different code of conduct for each of them would be tantamount to discrimination concerning discharging their functions. However, prescribing a set of guidelines applicable to all types of stakeholders irrespective of their nature would result in conflict between these different regulatory authorities and thus, inconsistency in regulation would prevail affecting the entire credit culture of the entity. Increased litigation Moreover, one of the objectives of the Code is the timely resolution of insolvency proceedings for realizing the maximum value of the assets. Judicial scrutiny at various stages of decision-making

[By Soumya Sinha & Bhabesh Satapathy] The authors are students at the National Law University, Odisha. INTRODUCTION The birth of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in India has not only alleviated the pain of Financial Creditor (“FC”) but also Operational Creditor (“OC”). By various judgments and amendments the scope of operational debt defined under section 5(21) of the IBC has been augmented. In many recent rulings, various authorities and courts have talked about the scope of advance payment for the goods and services under the umbrella of the operational debt. The recent National Company Law Appellate Tribunal’s (“NCLAT”) decision in Chipsan Aviation  Limited v. Punj Llyod Aviation Limited has created a debate concerning the significance and necessity of a prior contract on the basis of which an operational debt is considered u/s 5(21) of the IBC. NCLAT through its ruling held that advance payment for goods and services without a prior valid contract can still be considered as an operational debt under IBC. This stance has sparked more confusion regarding the prerequisites of an operational debt under IBC. In this article, the authors seek to critically analyze the Chipsan Aviation case and argue on the necessity of a valid contract to transfer goods or services in an operational debt under IBC. BACKGROUND                               The appellant, Chipsan Aviation Private Limited (“Operational Creditor”) had advanced an amount of Rs. 60 Lakhs to the respondent, Punj Lloyd Aviation Limited, the Corporate Debtor (“CD”) for aviation related services. However, the services were not rendered by the CD. In addition, the advance payment made by the appellant was also not refunded. But an advanced payment was reflected in the respondent’s balance sheet as a current liability. The circumstances led to an issuance of demand notice under Section 8 of the IBC and filing of a petition under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the CD over the default. The plea by the appellant was rejected by NCLT Delhi. It was held that advance payment would not come under the ambit of operational debt. However, establishment of operational debt would be dependent on the contract. The stance taken by NCLT was appealed by the OC before the NCLAT. The NCLAT had given its decision in favor of the appellant allowing advance payments to be termed as operational debt u/s 5(21) of the IBC. Further, it was held that even in the absence of any contract between the OC and CD, the advance payment would still constitute operational debt. It had put reliance on the Supreme Court’s judgment in the case of Construction Consortium Ltd v. Hitro Energy Solutions Pvt. Ltd, where it was held that Section 5(21) of IBC needs to be interpreted in a broad manner covering all aspects of advance payment. UNDERSTANDING OPERATIONAL DEBT U/S 5(21) Section 5(21) of the IBC expound operational debt as “A claim in respect of the provisions of goods or services”. Moreover, the word claim has been defined under the Section 3(6) as either “a right to payment or a right to remedy for breach of contract”. Here, if Section 5(21) is read with Section 3(6) then it is deduced that operational debt requires a claim for the payment of goods or services which implicitly has a nexus with a valid contract for the providing the same. This stance has been reaffirmed in the case of Mr. Harrish Khurana v. M/S One World Realtech Private and Construction Consortium Ltd v. Hitro Energy Solutions Ltd where it was held that “An operational debt should include only those debts which are arising from a contract in relation to the supply of goods or services from the corporate debtor”. Thus, the essentials of an operational debt are that there must be a debt in respect to which a claim arise which should be either for the remedy for breach of an underlying contract between OC and CD for providing goods or services, or for the payment of the goods or services which have already been supplied under a valid contract. CONTRACT NOT ESTABLISHED – DOES NOT GIVE RISE TO OPERATIONAL DEBT UNDER THE IBC The foremost requirement for a debt to be termed as operational debt is the existence of a valid contract. This has been elucidated in numerous judgments, the most notable of which is Tejas Industries v. Gujarat Machinery (P.) Ltd in which the court emphasized upon the relationship of the operational creditor and corporate debtor. In this case it was established that for a claim to be considered as operational debt, the existence of a formal contract between OC and OD is a prerequisite.  Further, in the case of Ms. Rohita v. All That Hype Media (P.) Ltd. the NCLT while rejecting the CIRP petition ruled that there should be a valid and enforceable contract between the parties under the operational debt. Under the  Indian Contract Law, 1872, the essentials of a valid contract are outlined. A valid contract requires the establishment of an offer by one party and acceptance by the other. The term ‘offer’ is defined in Section 2(a)  as “when one person will signify to another person his willingness to do or not do something (abstain) with a view to obtain the assent of such person”. Further, under Section 2(b), “when an assent is granted to the offer and the same is conveyed to the offeror, it is termed to be accepted”. However, in the present case the Draft Agreement was forwarded by the OC to the CD, which the CD never signed. It can be concluded that no acceptance of the offer was made. Thus, no valid contract was formed in the present case. Further, in order to prove an operational debt in a CIRP, the OC is provided with an option between an invoice demanding payment of goods supplied to the CD or a contract for supply of goods or services as per Regulation 7(2)(b)(i) and (ii)  of the CIRP Regulations 2016 .  Moreover,

[By Keerthana Rakesh] The author is a student at the Gujarat National Law University, Gandhinagar. Introduction Section 7 of the Insolvency and Bankruptcy Code (“IBC”) came under discussion due to the confusion that arose as to whether the proceedings can be initiated against the Corporate Guarantor under the Corporate Insolvency Resolution Process (“CIRP”). The apex Court in K. Paramasivam v. The Karur Vysya Bank Ltd. & Anr., has attempted to provide clarity on the same. Section 7(1) of IBC states that: “(1) A financial creditor either by itself or jointly with other financial creditors may apply for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.” The appeal came before the Supreme Court challenging the decision of the National Company Law Appellate Tribunal (“NCLAT), whereby the tribunal admitted the application under Section 7 of IBC filed by the Financial creditor, Karur Vysya Bank Ltd. against Maharaja Theme Parks and Resorts Private Limited (“Maharaja Theme Parks and Resorts”). The ground for appeal was that Maharaja Theme Parks and Resorts is neither a Corporate Debtor according to Section 3(8) of IBC nor a Corporate Guarantor as per Section 5(5A) of IBC. They are excluded from the ambit of Section 7 of IBC since the borrowers were not Corporate Debtors. Through this post, the author seeks to analyze the above case law and to see whether the Supreme Court’s judgement aligns with the object behind IBC, which is to relieve distressed corporate entities and provide a means of recovery to creditors. Factual Background Maharaja Theme Parks and Resorts is a Company registered under the Companies Act, of 1956. The financial creditor, Karur Vysya Bank Ltd., had extended credit facilities to three entities: Sri Maharaja Refineries, Sri Maharaja Industries, and Sri Maharaja Enterprises. Maharaja Theme Parks and Resorts became the guarantor of the loans availed by the entities. The borrowers failed to repay their debts to the financial creditor, resulting in the Financial Creditor applying Section 7 of IBC before the National Company Law Tribunal (“NCLT”), Chennai, to initiate the CIRP proceedings against Maharaja Theme Parks and Resorts. The application was filed on the ground that Maharaja Theme Parks and Resorts, being the guarantor of the borrowers is liable to repay the debt. Maharaja Theme Parks and Resorts objected to the contention of the Financial Creditor and argued that they do not fall within the purview of the Corporate Debtor as defined in Section 3(8) of IBC. Maharaja Theme Parks and Resorts also contended that they are not Corporate Guarantors according to Section 5(5A) of IBC since the borrowers are not Corporate Debtors. However, the adjudicating authority admitted the application under Section 7 of IBC and initiated the CIRP proceedings against Maharaja Theme Parks and Resorts. They challenged the order of the NCLT and appealed before the NCLAT. The NCLAT upheld the position of the NCLT and dismissed the appeal. Aggrieved by the decision of NCLAT, Maharaja Theme Parks and Resorts filed an appeal before the Supreme Court under Section 62 of IBC against the order issued by the NCLT and NCLAT. Issue The issue which came before the Court was whether the liability of the Corporate guarantor is co-extensive with that of the Principal Borrower i.e., whether Maharaja Theme Parks and Resorts is a corporate guarantor as mentioned under Section 5(5A) of IBC and is responsible for the payment of debts to the Financial Creditor. Ruling and Analysis The court upheld the findings of NCLT and NCLAT and found no grounds to interfere with their decision to admit the application filed by the Financial Creditor and that Maharaja Theme Parks and Resorts is a Corporate Guarantor as per Section 5(5A) of IBC. While addressing the issue, the apex Court delved into the aspects of Corporate Debtor and Corporate Guarantor as defined in the IBC and took a liberal approach towards Section 7 of the IBC. The Court mainly relied on its decision in the case of Laxmi Pant Surana v. Union Bank of India and Another (“Laxmi Pant Surana”) and emphasized that the financial creditor has the cause of action to proceed against the principal borrower as well as the guarantor in equal measure in the cases of default. The bench referred to Section 5(8)(i) of IBC which stated that the claim of the financial creditor also includes the liability of the person who gave the guarantee to the corporate debtor. The intention of this legislation was perceived by the apex court whereby the corporate guarantor is equally held liable as the corporate debtor for the failure of due payment to the financial creditor. It also looked into the contractual nature of the transaction and highlighted that the liability of the guarantor is coextensive as per Section 128 of the Contract Act. A broad approach was adopted by the Court where they extended the meaning of Corporate Debtor provided under Section 3(8) of the Act to include the Corporate Guarantor. This includes “corporate person” as defined under Section 3(7) of the Code. They further held that the principal borrower can be a Corporate or non-corporate entity, thus, giving a greater scope of relief to the financial creditor and preventing the Corporate guarantor or debtor to escape from its financial obligations. Referring to the Laxmi Pant Surana judgement, the Court held that a financial creditor can directly apply to Section 7 of IBC for the initiation of CIRP proceedings against a corporate guarantor without previously suing the principal borrower. It can be inferred from the present case that the corporate guarantor steps into the shoes of the principal borrower regardless of whether the borrower is a corporate entity or not. The Court held that the purpose of Section 7 is not to provide a remedy for financial creditors but to reorganise and provide insolvency resolution to the corporate debtor who is not in a position to repay the debt. However, the author contends that along with providing a resolution process for the corporate debtor,

[By Yash Sameer Joshi] The author is a student at the National Law University, Jodhpur. I. Introduction  The Insolvency and Bankruptcy Code, 2016 [“IBC”] has oft been described as a consolidating and amending Act enacted to ensure the viability of company assets in the case of corporate insolvency. The IBC provides for the initiation of the Corporate Insolvency Resolution Process [“CIRP”] in case of such insolvency, and the initiation of this process has traditionally been ‘default based’ (meaning of the term default can be found in Section 3(12) of the IBC) in the context of the IBC. What this means is that only when there is an actual non-payment of a pending debt by the corporate debtor can the CIRP process be initiated. This view has been upheld by both the National Company Law Appellate Tribunal [“NCLAT”] in the decision of Innoventive Industries v. ICICI Bank and is supported by the definition of ‘insolvent’ as is given in Section 2(8) of the Indian Sale of Goods Act, 1930. Due to this ‘default’ threshold, whose amount was increased to Rupees 1 crore through the recent amendments, the position that has always been interpreted was that the mere existence of said ‘default’ would compel the adjudicating authority to accept the application filed for the initiation of the CIRP. The High Court of Kerala in the Cyriac Case has gone as far as saying that “The litmus test on the anvil of which, the adjudicating authority will scrutinise the matter, is only the existence of the default, as defined in Section 4 of the Code”. The reasoning of the Court was in consonance with the Swiss Ribbons Judgement, in which it was held that “no other extraneous” matters should be considered while contemplating a decision under Section 7 (financial creditors) or Section 9 (operational creditors) of the IBC.  Recently, however, the Supreme Court in Vidarbha Industries Power v. Axis Bank [“Vidarbha”] brought in the element of discretion while deciding an application for the CIRP with respect to Section 7(5)(a), even in the case of a default. The word ‘may’ in the Section was given a literal interpretation, and the revival of the company was put on a higher pedestal than liquidation. The aspect of the presence of this discretion has already been explored and established, and in light of this, the main purpose of today’s article will be to analyse the extent to which this discretion can/should be used. Further, this article will also dwell on the conundrum of whether a discretion-based model vitiates the need for there being a ‘default’ as a condition for filing an application for the initiation of the CIRP. II. The extent of discretion: Construed Broadly or Narrowly  The fact that Vidarbha has brought in a degree of discretion is undisputed, but to what limit should the adjudicating authority exercise this? The Court in Vidarbha gave a very broad outline saying that discretion could not be used “arbitrarily or capriciously”. The Supreme Court tried to bring about some clarity by giving an example:  “For example, when admission is opposed on the ground of the existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is a good reason not to do so.”  However, this did little to the fog, considering that the example was almost parallel to the facts present in the instantaneous case. The doubt that is bound to arise is that apart from the existence of an award that is in favour of the corporate debtor that exceeds the debt amount, when can discretion be used. According to the author, this can be interpreted in two ways: A) Broad Construction What this approach would entail is that the adjudicating authority or NCLT would use its jurisdiction widely by looking at the overall financial health of the company in question. This would entail roughly following what is known as the ‘balance sheet’ test of determining insolvency, which takes into account external aspects like examining the balance of total assets and liabilities or any outside phenomenon that prevented the payment of debts that was not the fault of the debtor. As was rightly analysed by a working paper published by the Indian Institute of Management Ahmedabad, while the dominant position in India has been the ‘default’ based approach post-IBC, there have been instances where the Court has brought in the balance sheet test to an extent. This test has been successfully implemented to varying degrees in Jurisdictions such as the United States and the United Kingdom. At a preliminary glance, it seems as if Vidarbha is aiming to bring in the balance sheet test, with the adjudicating authority expected to look at the situation as a whole and apply what it seems right in a manner that is not ‘capricious’. However, we cannot overlook the fact that the Court in this case relied more on ‘rules of interpretation’ by referring to cases such as Hiralal and Premchand. The main purpose for which the IBC was brought in was to solve the insolvency of a company, and the main purpose of the CIRP is to keep the company as a ‘going concern’, as was also elucidated in the Tata Consultancy Services Case. Therefore, its timely imitation may many a time be a boon rather than a bane in consonance with this ‘purpose’. B) Narrow Construction The second approach that can be taken is to look at the reasoning of the Court in Vidarbha in a more pragmatic manner. As we have already seen, both the facts in the said case and the example given by the Supreme Court indicated a pending decree, which on resolution in the favour of the debtor would allow it to repay its debts. In pursuance of this, what the author

[By Nishant Kumar] The author is a student at the Hidayatullah National Law University, Chhattisgarh. Introduction: In the year 2016 Insolvency and Bankruptcy Code (Hereinafter referred to as IBC) was promulgated as the principal legislation to tackle the surging corporate debts and for the timely resolution of corporate insolvencies. The code replaced several legislations including the Industrial Companies Act 1985 with an aim to facilitate a more timebound and efficient method of debt restructuring. However, there have been several instances when the IBC has failed to meet the expectations. Recently, Canara Bank became the second bank to file an insolvency plea against the Gayatri Projects. The first petition was filed by Bank of Baroda in February which is still awaiting the approval of National Company Law Tribunal (Hereinafter referred to as NCLT). According to Section 7(4) of the IBC, the Adjudicating Authority is obligated to give a decision over the insolvency application within 14 days. However, in the instant case the application has been pending before NCLT for months consequently jeopardising the assets of debtor. In this article, in light of recent developments in dispute between Canara Bank and Gayatri Projects, I attempt to highlight the delays in the resolution procedure and its implications on the stakeholders involved. Issue: Canara Bank filed an insolvency petition against the Gayatri Projects for a default of Rs 1,520.75 crore. This insolvency petition is second in row after the initial petition filed by the leading lender Bank of Baroda. It is alleged that the debtor i.e., Gayatri Projects owes almost rupees 6000 crores to its lenders. After a failed structuring plan against the debtor in 2015, lenders had declared the loans as Non-Performing Asset (NPA).  The first petition was initiated by Bank of Baroda in February which has still not received approval from the NCLT. Consequently, the failure to start the resolution process has forced the lenders to sell the pledged shares of the debtor company further deteriorating its condition. Such inordinate delay in the application process destabilizes the complete process. Furthermore, according to a study by Insolvency and Bankruptcy Board of India (IBBI), admission of applications for CIRP takes much longer than the time prescribed in the code. It is to be noted that the delay in application process is just the tip of the iceberg, the study by IBBI highlights several unreasonable delays in almost every stage of the resolution process. These inexplicable delays have serious ramifications on both creditors and debtors. Moreover, it also hampers the ease of doing business in the country. Legal Analysis of the Problem: Under Section 7 of the IBC a financial creditor or a group of financial creditors can initiate the Corporate Insolvency Resolution Process (Hereinafter referred to as CIRP) against the debtor. Section 7(4) of the code further says that the adjudicating authority (AA) has to take the decision on such applications within 14 days. In case of any delay the AA should give a written explanation for such delay. Section 12 of the IBC provides time limit for completion of the resolution process. Supreme Court in Arcelor Mittal Pvt. Ltd. v Satish Kumar Gupta has clearly specified that the entire timings prescribed by the Section should be mandatorily followed. Any delay in the process can affect the interest of both debtors and the creditors involved. In Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta, the Supreme Court held that the resolution plan should be completed within 330 days including the time taken in litigation except in certain exceptional cases. The Supreme Court in several rulings time and again has attempted to limit the delays in the process in order to maintain the sanctity of the code. In a very interesting case of Sharad Sanghi v Vandana Garg NCLT refused to consider the resolution plan approved by the Committee of Creditors after a lot of negotiations because 270 days had lapsed since the initiation of resolution process. The intention of the appellant authority was to curb these unexpectable delays. Further in the landmark case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Ltd Supreme Court conclusively held that a resolution plan once approved by Committee of Creditor cannot be withdrawn or modified or altered in anyway. This ruling by the apex court is a positive step in the direction to establish an efficient insolvency regime. However, in the recent ruling of Supreme Court in Vidarbha industries limited v. Axis Bank Supreme Court has complicated the application process by the creditors under Section 7 of IBC. Two objective conditions that have been mentioned in the code for admission of resolution application the first condition being the existence of debt and second being the evidence of default by the debtor. The Supreme Court in the above ruling has empowered the AA to reject the application even if the conditions mentioned in the act have been met. The test has now become subjective and susceptible to several conflicts. Supreme Court has put yet another impediment in the path of speedy restructuring of debt. Inordinate Delays: In this competitive corporate environment insolvency regime plays a significant role. Any delay in resolution of insolvency can prove detrimental for parties involved. An efficient insolvency regime facilitates a healthy credit culture in the economy. It minimises bad loans and non-performing assets in the market. Furthermore, it helps the creditors in getting beneficial returns on their loans and also aid debtors by maximising their assets. However, India has been witnessing surging delays in insolvency resolution. Time and again the duration prescribed by the IBC is breached. According to IBBI reports 73% of insolvency cases breached the 270 days’ timeline prescribed the IBC. There can be many reasons that can be attributed to delays in insolvency resolution procedure. The reasons range from inefficient system to unfilled vacancy in the NCLT. It has been reported that manpower shortage in the NCLT is proving to be a significant hindrance in timely resolution of the insolvency. IBBI in its

[By Vinay Sachdev] The author is a student at the Unitedworld School of Law, Karnavati University. Background  In the Corporate Insolvency Resolution Process (“CIRP”) initiated under the Insolvency & Bankruptcy Code 2016, the claim is the most important factor to be taken in the Resolution Plan for the Corporate Debtor. The provisions of the Code strive to protect the interest of creditors of a company that is under CIRP while completing the insolvency resolution process in a time-bound manner. The duties of an Interim Resolution Professional (“IRP”) and a Resolution Professional (RP) have been laid down in Sections 18 and 25 of the Code. According to, Section 18,  the duties of an IRP include, inter alia, receiving and collating “all claims submitted by creditors to him, after the public announcement made by him”. In the same manner, an IRP under section 25(2)(e) has to maintain an updated list of all the claims of the creditors. Additionally, Regulation 13 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulations, 2016 (IRPCP Regulations) provides for verification of the claims and maintenance of a list of creditors by an IRP or RP, as the case may be. It is to be noted that neither Section 18 nor Section 25 of the Code expressly imposes a duty upon the IRP/RP to verify, admit or reject claims. The duty to verify the claims by the IRP or RP has been provided under Regulation 13 of the CIRP Regulations. Adjudicatory Power of RP/ IRP Apart from these sections and rules related to the powers and duties of the IRP and RP help sum up the mandate of an RP or IRP including receiving, collating, and verifying the claims received by him during CIRP. Moreover, as often observed in practice, on verification, an IRP either accepts or rejects the claims of the creditors. Due to this, in a number of cases that have come before the Tribunal, an issue pertaining to the power of the IRP/RP has arisen. In the case of Grasim Industries Limited and Edelweiss Asset Reconstruction Company Limited Vs. Tecpro Systems Limited, the  NCLT, Principal Bench, New Delhi has observed that “a perusal of Regulation 13 of the CIRP Regulation, which makes it clear that IRP is under a statutory duty to verify each and every claim and maintain the list of creditors containing their names and amount claimed by them and the amount of their claim admitted.” In the said case the IRP had rejected the claim given by the applicant as the claim amount was the subject matter of the arbitration before the Arbitral Tribunal and thus the Tribunal upheld the decision taken by the IRP. Further, in the combined appeal filed before the Appellate Tribunal in the matter of M/s. Prasad Gempex vs. Star Agro Marine Exports Pvt. Ltd. & Ors. and SREI Infrastructure Finance Ltd. vs. Kannan Tiruvengandam, the issue arises for consideration is whether the ‘RP’ has the power to adjudicate the claim of creditors of the company. In the landmark case of Swiss Ribbons Pvt. Ltd. v. Union of India, clarifies the above issue. The Supreme Court conclusively stated that the RP has no adjudicatory powers under the Code. To establish the judgment, the bench compared the powers and duties of an RP to a liquidator and stated that a liquidator has the power to determine the valuation of claims under section 40 of the Code and that such determination is “quasi-judicial in nature”.  After establishing this, the Court stated that an RP, unlike a liquidator, cannot act without the approval of the committee of creditors (COC), and can be replaced by, COC. IRP merely acts as “a facilitator in the CIRP whose administrative functions are overseen by the COC and by the NCLT”. However, the court completely missed the point that COC approval is required only in certain matters that are mentioned under section 28 of the IBC. IRP doesn’t need approval when verifying a claim or making a “precise estimate of the amount of the claim” of imprecise claims under the CIRP Regulations. These functions, referred to as administrative because they are overseen by the Committee of Creditors and Tribunal, unavoidably require the use of discretion (during investigation, inquiries, and verification of claims) by the IRP. The other important argument on which the Court relied was that an RP can be replaced by COC. The fact that an RP will be replaced by the COC is only if the COC would have an interest when an RP or IRP accepts and verifies the claims. It would go against the interest of the Committee when an RP accepts more claims or increases the existing claims. Therefore, the contention that the COC has oversight over RP does not help in maintaining a check on whether it accepts or rejects genuine claims of the creditors. Power of NCLT to adjudicate claims The Hon’ble NCLAT in the case of M/s. Prasad Gempex noted that with respect to the claims, an application or suit can be initiated against the Corporate Debtor, in terms of provisions of Section 60 of the Code. The relevant portion of Section 60 is cited below: (5) Notwithstanding anything to the contrary contained in any other law for the time being in force, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of— (a) any application or proceeding by or against the corporate debtor or corporate person; (b) any claim made by or against the corporate debtor or corporate person, including claims by or against any of its subsidiaries situated in India; and (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. From the above provision, it is evident that notwithstanding the order passed under Section 31 of the IBC, it is open to a person to initiate a suit or an application against the Corporate

[By Shalin Ghosh] The author is a student at the Maharashtra National Law University (MNLU), Mumbai. Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) has been a watershed reform for the Indian economy, being one of the most comprehensive laws governing insolvency and credit recovery matters in the country. The interplay between tax law and IBC has increasingly been gaining traction, throwing up questions that have a great bearing on the future of India’s insolvency regime. A pertinent example is a critical issue that has, over the years, emerged up for consideration before various tribunals and the Supreme Court (“SC”) regarding the classification of tax authorities as secured or unsecured creditors. A recent decision of the SC in State Tax Officer v. Rainbow Papers Limited (“Rainbow Papers”) has significantly upended the evolved legal position on the issue by declaring tax authorities to be ‘secured creditors’ under the IBC, adding that they have a statutory first charge over the property of the corporate debtor. This article analyses the judgment, pointing out the inconsistencies in the SC’s rationale while discussing the scheme of the relevant provisions and the evolved jurisprudence on the matter. Facts The corporate debtor, Rainbow Papers Limited (“respondent”) went insolvent in July 2016 and was burdened with an outstanding tax liability amounting to nearly Rs 47 crore under the Gujarat Value Added Tax Act, 2003 (“GVAT”). Consequently, the State Government’s tax department (“appellant”) filed claims to recover the pending tax dues. However, the concerned Resolution Professional (“RP”) waived off the entire quantum demanded by the appellant contending that the sales tax office is considered to be an ‘operational creditor’ under the IBC and therefore, would not enjoy a first charge over the corporate debtor’s property. The National Company Law Tribunal (“NCLT”) ruled in the respondent’s favour, validating the contentions of the RP. Upon appeal, the National Company Law Appellate Tribunal (“NCLAT”) reaffirmed the NCLT’s decision, rejecting the appellant’s claims of enjoying a first charge over the respondent’s assets reasoning that Section 48 of the GVAT, which provides for a first charge on an individual’s property with respect to any outstanding claims will not prevail over Section 53 of the IBC. Eventually, as the matter reached the SC, a different conclusion followed, with the Court holding that the appellant’s claim is within the ambit of ‘security interest’, making it a ‘secured creditor’ under the IBC. Resultantly, the Court ruled that the appellants would have a first charge over the respondent’s property, reiterating that Section 48 of the GVAT is not inconsistent with Section 53 of the IBC. Analysis Tax dues as secured debt? The legislative scheme and construct of the IBC seem to imply that any outstanding dues payable to the government should not be classified as secured debt. Section 5(21) defines ‘operational debt’ as “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.” The list of items included in the aforementioned definition seems to suggest that outstanding dues like pending tax liabilities fall squarely within the scope of ‘operational debt’. The Court in its landmark Swiss Ribbons judgment clearly enunciated the difference between financial debts and operational debts under the IBC, noting that only the former enjoys a ‘secured’ status as opposed to the latter, which is unsecured. There is another point that merits comment. In the present case, the SC observed that merely because Section 48 of the GVAT creates a statutory first charge on an individual’s property, the appellant’s claims fall within the scope of ‘security interest’ under Section 3 (31). Therefore, the appellant, by extension, becomes a ‘secured creditor’ as defined under Section 3 (30). The Court, agreeing with the appellant’s argument, ruled that the term ‘secured creditor’ is not narrow or restrictive and can be interpreted expansively to include all types of security interests within its meaning. This observation is erroneous on a few grounds. Under the IBC, having a ‘security interest’ is a pre-requisite for being a ’secured creditor’. Section 3 (31) defines ‘security interest’ to mean “a title, right, claim or interest to property created as a result of a transaction which secures payment of performance of an obligation.” This clause appears to assume the existence of a contract between two parties, and not a particular legal provision, to give rise to a ‘security interest’. Furthermore, any transaction that leads to the creation of a security interest must be consensual and voluntary and not vitiated by coercion or force, for it to be considered valid. In this light, it is difficult to consider that the non-voluntary and coercive act of tax authorities attaching assets like property leads to the creation of a ‘security interest’ under Section 3 (31) of the IBC. Deviates from established precedents Courts across the country have, in the past, adjudicated on the priority of secured creditors, albeit in the context of claims made under the Customs Act, Income Tax Act, and so on. Recently the SC, in Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs, ruled that IBC will prevail over the Customs Act. Incidentally, even the Customs Act contains a provision that gives rise to a statutory first charge to the customs officials over the corporate debtor’s assets. In another case, PR Commissioner of Income Tax v. Monnet Ispat and Energy Limited, the Court categorically observed that under the scheme of the IBC, income tax dues cannot be accorded a higher priority than secured creditors. A similar conclusion was also reached in a recent decision of the Rajasthan High Court where the court refused to accord a greater priority to government dues over those payable to secured creditors. Incidentally, even in the aforementioned case, the state tax department contended that it enjoys a statutory first charge on the property of the entity undergoing liquidation on the basis of a specific