Insolvency Law

[By Biprojeet Talapatra] The author is a student of Campus Law Centre, University of Delhi. Introduction Economic stability and prosperity in India require an effective insolvency resolution framework. With the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, India took a significant step in this direction. IBC was the first comprehensive law in India which addressed the insolvency of Corporate Persons and individuals. However, a law must be restructured over time to keep up with the times, therefore in 2019, rules for insolvency resolution and liquidation for individual insolvency were made applicable to personal guarantors (“PG”) to corporate persons. Following that, a distinct framework for pre-packaged insolvency resolution for micro, small, and medium-sized enterprises (“MSMEs”) was launched in April 2021. The Ministry of Corporate Affairs (MCA) has recently released a consultation paper outlining proposed changes to the Insolvency and Bankruptcy Code, 2016. The purpose of these changes is to improve transparency, reduce delays, and ensure efficient decision-making in insolvency proceedings. This article aims to highlight the key changes proposed in the paper.  Key changes proposed in the consultation paper To simplify the insolvency procedure, the MCA advocated the implementation of an E-platform in Insolvency Proceedings.The MCA believes that implementing an e-platform for insolvency proceedings will lead to a more efficient case management system, automated mechanisms for filing applications with Adjudication Authorities (AAs), notice delivery, and allowing Insolvency Professionals (IPs) to interact with stakeholders, among other benefits. By unifying and making information widely accessible, the e-platform will enable improved supervision of regulators and adjudicating authorities. The MCA advocates a greater dependence on data via Information Utilities (IUs), while also taking applications into account. Sections 7 and 9 of the code now provide that, in addition to the record of default kept by the IUs, further evidence can be provided to prove that a default has happened. It has now been recommended that the code should  be revised to allow the Adjudicating Authority to solely consider the default record from the Information Utilities when reviewing applications under sections 7 and 9 of the Code. Section 7 of the Code allows a financial creditor to apply for the commencement of the CIRP in relation to a Corporate Debtor (CD). The Supreme Court interpreted the usage of the word “may” in section 7(5) to mean that the Adjudicating Authority (hereinafter referred as AA) has the authority to accept or refuse the application despite the presence of a default. It is now recommended that an application submitted under Section 7 “shall” be allowed if a default is proved; the AA is only necessary to be satisfied regarding the existence of a default and the fulfilment of procedural requirements for this specific purpose (and nothing more). When a default is formed, the AA is required to allow the application and commence the CIRP. The proposals aim to give more power to the adjudicating authority by allowing mandatory admission of insolvency applications filed by financial creditors (FCs). The draft proposal also proposes a specialized framework for real estate to provide relief to allottees, as well as to broaden the scope of the pre-packaged bankruptcy scheme beyond MSMEs. The ministry also proposed that the 14-day timeframe in section 7 be read to apply exclusively to the ascertainment of default. However, it is also meant to apply to the AA’s decision under section 7(5) to admit or reject the application. As a result, it is proposed that a suitable adjustment be made to clarify the timeline’s application. The MCA has proposed removing the Corporate Debtor’s right to designate an Insolvency Resolution Professional (IRP). The draft proposal recommends that the IRP be appointed by the Adjudicating Authority (AA) based on the IBBI’s recommendations. As a result, this proposal seeks to limit the CD’s ability to propose an IRP.  The AA is now planning to have the power to penalize people who file frivolous or vexatious applications or fail to comply with the terms of the Code or any rules or regulations imposed thereunder. Furthermore, the AA’s minimum punishment for the aforementioned violations should not be less than one lakh rupees per day, with the maximum penalty being three times the damage incurred or illicit gain, whichever is greater. To ensure that corporate debtor promoters comply with their obligations and to prevent them from committing repeated or significant violations, the MCA has considered amending Section 29A of the Code to allow the AA to bar such a promoter from being a resolution applicant and submitting a resolution plan in the CIRP of any CD. During the liquidation process, Section 33 (5) of the Code prohibits the CD from instituting actions or legal processes against it without the permission of the AA. It does not, however, preclude the continuation of any ongoing action or legal procedure after the moratorium imposed during the CIRP is lifted. As a result, it is suggested that Section 33 (5) may be revised to restrict any legal procedures during liquidation, except for those authorized under Section 52. (i.e., Secured creditor in liquidation proceedings). To continue any legal processes involving a CD in liquidation, the AA’s consent should also be necessary. Changes recommended in the requirements for the Pre-Packaged Insolvency Resolution Process The 66 per cent requirement for unrelated FCs might be reduced to 51 per cent. This will allow for faster and more efficient decision-making. The need under section 54C(3)(c) to provide a declaration involving avoidance transactions or unlawful trading is repealed. These transactions are difficult for MSMEs to recognise. Changes in management under section 54J, conversion to CIRP, or liquidation under sections 54O or 54N are to be deleted. The major goal of this suggested adjustment is to ensure that genuine CDs intending to address insolvency through this method are not affected. Proposals for Streamlining the Insolvency Resolution Process The Fast-Track Corporate Insolvency Resolution Process (“FIRP”) is being considered to allow FCs to lead the insolvency resolution procedure for a CD outside of the judicial process while keeping some involvement of the AA to

[By Satwik Mohapatra] The author is a student of National Law University, Odisha. The National Company Law Appellate Tribunal (NCLAT), in Kalinga Allied Industries India v. CoC of Bindals Sponnge Industries Limited (Kalinga Judgment), set aside the order of the National Company Law Tribunal (NCLT). The Tribunal ruled that the Committee of Creditors (CoC) cannot consider the new Resolution Plan outside the scope of Corporate Insolvency Resolution Process (CIRP) and withdraw their approval of the first Resolution Plan. Additionally, a plan that is submitted to NCLT  with  requisite majority is irrevocable and binding between the CoC and the Successful Resolution Applicant (SRA). This judgment sheds light on the unrestricted power of the CoC to make decisions under the ambit of “commercial wisdom” and highlights the need for a standard practice code for the CoC amidst the recent ongoing debate to regulate them. The author  has discussed the facts of the case and analysed tribunal’s verdict in the light of Insolvency Bankruptcy Board of India’s (IBBI) suggestions  Brief Facts An application for the initiation of CIRP was admitted against the Corporate Debtor (CD), Bindals Sponnge Industries Ltd., and Expression of Interest was issued, pursuant to which Kalinga Allied Industries submitted its Resolution Plan. After many discussions, Kalinga Allied Industries submitted a revised Resolution Plan, which obtained the approval of the CoC with the requisite majority. Following which, an application under Section 30(6) of the Insolvency & Bankruptcy Code 2016 (Code) was filed before the NCLT for the approval of the Resolution Plan. During the pendency of the application, Hindustan Coils Ltd., a third-party that was not a part of CIRP, filed an application before the NCLT seeking consideration of the Resolution Plan submitted by them. Their plan offered a value 12% higher than the value offered by Kalinga Allied Industries, the SRA. The NCLT allowed the CoC’s application that sought direction to reconsider the resolution plan of Hindustan Coils or any other entity and approve a suitable plan. The SRA objected to this order and filed an appeal under Section 61 of the Code. Tribunal’s Verdict The Appellate Authority chalked out the issue in question as being whether the CoC, having already consented to a resolution plan, can seek direction to consider a third-party resolution plan that was not part of CIRP and withdraw their approval after more than 2 years. NCLAT had previously directed that an application by a person outside the ambit of CIRP will not be entertained and remanded the matter to the Adjudicating Authority. This was never challenged by the CoC and has since been final. Furthermore, the Appellate Authority rejected the CoC’s argument that their decisions are based on “commercial wisdom” and are therefore non-justiciable and supreme, as stated in K. Sashidhar v. Indian Overseas Bank & Ors., and observed that the issue pertains to NCLT’s authority to direct CoC to consider a resolution plan outside the scope of CIRP and the binding value of the resolution plan. The Appellate Authority relied on the Ebix Singapore Pvt Ltd  v. CoC of Educomp Solutions Ltd & Anr (Ebix Judgment) to answer the first question that NCLT has residuary jurisdiction under Section 60(5). Furthermore, NCLT cannot do what the Code specifically does not give it the power to execute. Moreover, allowing any sort of withdrawal or modification to the Resolution Plan would defeat the objective of the Code and result in unnecessary delay. Furthermore, the NCLAT stated that the effect of the CoC withdrawing an approved revival plan would be similar to the effect of the SRA withdrawing a resolution plan, as specifically discussed in the Ebix Judgement. NCLAT laid down that the current framework of the code lacks any scope for modification or withdrawal of the plan, which has received the requisite majority approval of the CoC. Furthermore, once submitted to the Adjudicating Authority, the resolution plan is binding and irrevocable. Moreover, belated submissions cannot be considered even if they provide for a higher value, as the same would have a detrimental effect on the timelines laid down in the Code as well as the already approved resolution plan. Analysis of Tribunal’s Verdict The precedent that had been set by the Ebix Judgment was that a Resolution Plan that has been presented before the Adjudicating Authority and received majority approval cannot be withdrawn from consideration  by the SRA. The apex court held that such withdrawal is not only not permitted under the framework of the Code but also defeats the time bound objective of the code. The Kalinga Judgment acts as an extension to the Ebix Judgment by holding that a Resolution Plan that has received the assent of the CoC cannot be withdrawn after it has been presented to the Adjudicating Authority, as the same has binding value. Withdrawal of the plan by the CoC would have the same consequences as those discussed by the Apex Court. As has been laid down in Gujarat Urja Vikas Nigam Limited v. Amit Gupta, a delay in the completion of the insolvency proceedings diminishes the value of the debtor’s assets and hampers the prospects of a successful reorganization. Therefore, CIRP cannot be allowed to continue for an indefinite period. Moreover, the withdrawal of the plan submitted to the Authority with the necessary requirements would result in another level of negotiations. The decision of CoC to withdraw its approval will not just affect the SRA but other stakeholders too. The purpose of an insolvency resolution process is to collectively address the claims of all stakeholders including secured and unsecured creditors, employees, other claimholders, etc. For instance, in the insolvency resolution of a big conglomerate with thousands of workmen depending on the company for their wages, such workmen and their dues would be delayed and would result in them being in a disadvantageous position due to unnecessary delays in approving the resolution plan. Apart from timely approving the resolution plan, the CoC is also tasked with the revival of the CD as a going concern. Being in the driver’s seat,

[By Prakriti Singh] The author is a student of Hidayatullah National Law University.   Introduction The Insolvency and Bankruptcy Code, 2016 was enacted to provide a speedy debt resolution mechanism and ensure value maximization of assets. The Code has provided legal recognition to the fact that business failures are normal and there should be effective remedies to rescue the Corporate Debtor. The Code brought an end to the prior existing defaulters’ paradise in India, introduced the Corporate Insolvency Resolution Process (CIRP) which provides a sound procedure for different stages from admission of default to the approval of resolution plan. The Code has brought a regime which prevents judicial intervention in commercial decisions, empowers the stakeholders and entrusts a duty upon the adjudicating authorities to uphold the spirit and procedural sanctity of the Code. The adjudicating authority is required to ensure that the Resolution Plan approved by the CoC is consistent with Section 30(2) of the Code. The Commercial Wisdom of the CoC is paramount in the CIRP. The judiciary itself has circumscribed its role in the CIRP and held that the CoC has the financial expertise to take financial decisions. However, it is the role of the adjudicating authority to ensure balance between stakeholders. The CoC, in exercise of its commercial wisdom, cannot waive off the obligations and statutory liabilities of the Corporate Debtor. In the case of Employees’ Provident Fund Organisation v. Dommeti Surya Rama Krishna Saibaba, (EPFO case) the Chennai Bench of NCLAT has set a dangerous precedent for the exercise of commercial wisdom of CoC. It refused to interfere with the approval of a Resolution Plan, which did not provide for the full payment of PF dues. This ruling failed to take note of the Jet Airways case and Rainbow Papers case. Through this article, the author intends to analyze the reasoning and impact of the recent ruling. Case Summary The Appellant was affected by the order of the Adjudicating Authority, wherein the Resolution Plan was approved on the grounds that the Resolution Plan is compliant with the procedure laid down under the Code and does not violate any provision. The Appellant challenged the order and contended that the Corporate Debtor failed to pay the ‘Employees’ Provident Fund’ (EPF) dues. The Adjudicating Authority had expressed satisfaction with the Resolution Plan. However, the exclusion of EPF dues is in contravention of Section 36 (4) (a) (iii) of the code, which prescribes that the sums owed to employee fund, including provident fund (PF) shall be excluded from the Liquidation Estate of the Corporate Debtor. Due to the approval of the Resolution Plan, the Corporate Debtor has got a waiver on the amount due to the Employees. The Appellate Authority dismissed the Appeal. It took note of the Apex Court ruling in Arun Kumar Jagatramka v. Jindal Steel and Power Limited and Another and held that the fulfilment of the objectives of the Code requires that the intervention of judiciary is kept at the minimum level. The NCLAT took note of the ruling in Vallal RCK v. M/s. Siva Industries and Holdings Limited and Others, that the CoC has the expertise to take the decisions in the CIRP and hence, circumscribing the intervention by judiciary and the authorities is justified.  Since the Adjudicating Authority was satisfied that the Resolution Plan does not contravene any provision of the Code, the Appellate Authority will not interfere in the commercial wisdom of CoC. Unsettling the Jurisprudence The Appellate Authority, in its ruling, referred to previous ruling under the Code giving paramount status to the CoC. However, it failed to take note of rulings which dealt with the payment of PF dues by a Corporate Debtor undergoing CIRP. In Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia Resolution Professional of Jet Airways (India) (Jet Airways case), the Appellant had approached the Appellate Authority on similar grounds. Although the Resolution Professional failed to make complete payment of the PF and gratuity dues, the Adjudicating Authority had approved the Resolution Plan. The rationale behind excluding the gratuity and PF dues from the liquidation estate of the Corporate Debtor is that even in case of the insolvency of the Corporate Debtor, the interests of the workmen shall be safeguarded. The CIRP cannot be a medium to escape the obligations under labour laws. Although the Respondent contended that the Commercial Wisdom of the CoC cannot be subjected to judicial review, the Appellate Authority set up a remarkable precedent by scrutinizing the Resolution Plan and ensuring that the same does not contravene the Code. In K. Sashidhar v. Indian Overseas Bank, the Apex Court stressed upon the need to minimize judicial intervention to achieve a speedy resolution. Even in Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta, the Apex Court had held circumscribing the role of Adjudicating Authority to be crucial for the Code. In Kalpraj Dharamrishi v. Kotak Investment Advisors Ltd, it was held that although the role of the Adjudicating Authority is minimal, it is bound to ensure that the procedure and spirit of the Code is upheld. In Jet Airways Case, the Appellate Authority balanced the Commercial Wisdom with its function of ensuring procedural compliance. Regulation 38(1A) of CIRP Regulations and Section 30(2) of the Code cannot be compromised due to the decisions taken in exercise of Commercial Wisdom of the CoC. As there was a statutory obligation upon the Corporate Debtor, the claim of PF dues made by the workmen were to be accepted. The Successful Resolution Applicant is bound to make the payment of the balance amount of PF. As the PF is excluded from the Liquidation Estate, the workmen are entitled to full payment of the same. The Adjudicating Authority must fulfill its role in the CIRP. Anything more or less than that would throw a spanner in the CIRP. Another case with similar facts, Tourism Finance Corporation of India v. Rainbow Papers Ltd was not referred to in the present ruling. In the Rainbow

[By Shalin Ghosh] The author is a student of Maharashtra National Law University (MNLU), Mumbai. Introduction The recovery and treatment of statutory dues has always been a vexatious issue for stakeholders in cases involving a distressed entity facing proceedings under the Insolvency and Bankruptcy Code (“IBC”). The absence of clear guidelines coupled with judicial uncertainty muddied the waters, affecting the adjudication of disputes and hampering the efficiency of the resolution process envisaged under the IBC. A recent circular released by the Central Board of Indirect Taxes and Customs (“CBIC”), directing tax officials to recover a reduced amount under the Central Goods and Service Act, 2017 (“CGST Act”) from companies against whom insolvency proceedings have been initiated, resolves the quandary surrounding the quantum and the treatment of outstanding GST dues from distressed companies undergoing resolution under the IBC. This article aims to discuss the CBIC’s directive and analyse its legal and commercial significance. IBC proceedings within the ambit of the CGST Act The primary concern addressed by the circular mainly hinged on the interpretation of a broad phrase in a provision, Section 84 of the CGST Act, governing the validity and continuation of recovery proceedings regarding outstanding tax obligations. The specific segment of the provision in question, Section 84, stipulates the following: “any recovery proceedings initiated on the basis of the demand served upon them prior to the disposal of such appeal, revision or other proceedings may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal.” This clause suggests that the government dues pending against any entity are reduced due to an appeal, revision or other proceedings connected with such dues, then the quantum of dues to be recovered from that entity shall be reduced. Moreover, the recovery proceedings initiated against such an entity shall be restricted only to the extent of the reduced amount. The CGST Act does not define the contours of the phrase “other proceedings” as mentioned in Section 84. This legislative ambiguity made it difficult for courts to resolve disputes involving recovery actions initiated by the tax department against companies facing insolvency proceedings. A recent example of this conundrum was the ruling given in the Ultratech Nathdwara Cement Ltd case where the Ahmedabad branch of the Central Excise and Service Tax Appellate Tribunal (“CESTAT”) directed CBIC to frame guidelines regarding the treatment of pending tax liabilities from companies facing IBC proceedings. In its ruling, the tribunal observed that while the assessee had approached it to quash the appeals considering the orders of the National Company Law Tribunal (“NCLT”), the revenue department (the respondent in the case) was unaware of the future course of action due to the absence of any guidelines by the CBIC. Constituted under the Customs Act, the CESTAT cannot decide whether a pending tax liability can be recovered due to the absence of corresponding provisions in the Customs Act or the Central Excise Act. This problem is not cured despite the non-obstante clause, Section 238, in the IBC which is otherwise applicable in cases of conflict. The ‘Adjudicating Authority’ dealing with disputes under IBC is NCLT. It is trite law that the tribunal along with its appellate body, the National Company Law Appellate Tribunal (“NCLAT”) are quasi-judicial institutions. Apart from dealing with cases regarding insolvency and the resolution of companies in the red, both NCLT and NCLAT have also adjudicated on several matters concerning the payment of pending government dues under the CGST Act or any other applicable law by the corporate debtor. Since proceedings involving the treatment of statutory dues have been an important part of the NCLT/NCLAT’s scope of adjudication, it may be inferred that they fall within the purview of “other proceedings” as used in Section 84 of the CGST Act. This interpretation has plugged the prevailing legislative ambiguity thereby preventing the unnecessary litigation saddling the concerned stakeholders. It can provide greater clarity to indirect tax officials in dealing with cases involving the interplay of IBC and other indirect tax laws like the CGST Act. Aligns with established precedents It can be argued that the CBIC’s circular implicitly suggests that once the NCLT admits an insolvency resolution application, the tax department cannot take any coercive measures to recover pending statutory dues against the corporate debtor for the period prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”) under IBC. The scope of recovery action is only limited to the reduced amount of statutory dues payable. In restraining the tax department from forcing a corporate debtor to cough up dues in excess of the reduced amount, the circular appears to be consistent with the Supreme Court’s landmark judgment in Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.(2019), where it held that due to the sacrosanct nature of the Resolution Plan which makes it legally binding on every stakeholder having a skin in the CIRP process (the government not being an exception), tax recoveries must also strictly conform to a Plan that has received the legal sanction and approval of the NCLT. Moreover, the circular’s attempt to curtail the coercive powers of the tax officials is harmonious with the emerging judicial trend of preventing the recovery of statutory dues from a company facing proceedings under the IBC. The closest parallel is the Supreme Court’s recent judgment in Sundaresh Bhat v. Central Board of Indirect Taxes and Customs(2022) where the Court, while ratifying the primacy of IBC over the Customs Act in case of a clash, precluded the custom authorities (CBIC) from initiating actions to recover outstanding dues under the Customs Act against the distressed corporate debtor undergoing CIRP. It may also be inferred that the circular could potentially allay the confusion stirred up by the recent decision of the Supreme Court in the contentious Rainbow Papers judgment (2022) which, in holding the government as a secured creditor, elevated the status of statutory dues in the liquidation waterfall, resultantly giving the tax department greater powers

[By Pooja Shukla & Mohammad Atik Saiyed] The authors are students of Gujarat National Law University. Introduction In our structure, Law is like a game of billiards with a bunch of statutes, precedents, and other dynamic legal authorities clustered together, necessitating harmony amongst associated topics for the ends of justice. On the same matrix, the Insolvency and Bankruptcy Code 2016 (“IBC”) is to be read alongside several other statutes such as, inter alia, the Taxation, SARFAESI, Arbitration, Prevention of Money Laundering Act, and Indian Contracts Act on a variety of situations and shifting timeframes. The primary goal of these established laws is to deliver justice; thus, they should be read and understood accordingly. However, while reading two statutes concurrently, questions about which one will take precedence and whether the disagreement would be resolved in accordance with the act or not occur quite often. Established with the vision of streamlining and consolidating the insolvency framework, the IBC is currently wending toward clearer jurisprudence, and, therefore, the Courts are encountering diverse legal issues.  This article will address one such legal dilemma revolving around the Indian Contracts Act and the Insolvency and Bankruptcy Code. Operational debt and operational creditors are the key concepts to consider while addressing section 9 of the Insolvency and Bankruptcy Code (hereinafter “IBC”). The word “debt” needs to be understood differently in light of the changing times and situations, even though it has been explicitly defined. It has been defined into the following categories: “Debt” as described in Section 3(11) of the IBC,2016 means “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” “Operational Debt” as described in Section 5(21) of the IBC, 2016 means “a claim in respect of the provisions 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.” “Operational Creditor” as described in Section 5 (20) of the IBC,2016 means “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.” On that foundation, the present blog will primarily deal with two law propositions. Firstly, what contractual defaults will be covered under section 9 IBC? Secondly, can an application under section 9 IBC be made solely based on interest? Reflecting fundamentals of CIRP by operational creditor The Insolvency Code constructs the foundation of the issue by providing under section 9 for the initiation of CIRP by operational creditor. In alignment, the basic principles to look at before filing an application under section 9 are: a) Whether there is an ‘operational debt’ as defined exceeding Rs. 1 Crore?[1] b) Does documentary evidence furnished with the application show that the debt described above is due and payable and has not yet been paid? c) Whether there is an existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before receipt of demand notice of the unpaid operational debt concerning such dispute? The application would need to be rejected if any of the aforementioned requirements were not met. It is a settled principle, as per section 9(5)(ii)(d) of the IBC, that if the claim is disputed, then it cannot proceed further. However, in the case of M/S. Innoventive Industries Ltd. Vs. ICICI Bank & Anr. the Court observed, “a claim means a right to payment even if it is disputed. The Code gets triggered the moment the default of Rs.1 Lakh or more occurs” and thus, the Corporate Debtor cannot always take this as a defense. Beginning with the legal dilemmas at hand, it is a settled principle that to claim financial damages, it must first be assessed by a decree or order of a court by an adjudicating authority. It should not be wholly arbitrary and baseless when determined u/s 73 of the Contracts act. This principle is applicable to claim all unliquidated damages and was given in the case of Union of India vs. Raman Iron Foundry, and was reiterated by a recent judgment of Tata Chemicals ltd. Vs. Raj Process Equipments and Systems Private Limited (NCLT bench, Mumbai) and sole reliance on this was placed in the case of J. Kumar Infra projects ltd. Vs. Kanta Rubber Pvt ltd (NCLT, Hyderabad Bench). Contractual disputes Progressing to the first conundrum dealing with contractual defaults and its effect from the IBC perspective, in the recent judgment of XYKno Capital Services Pvt. Ltd. v Rattan India Power Ltd.(NCLAT), the Tribunal made it evident that the dispute about contractual issues related to quality and efficiency of the services are not to be resolved in the proceedings of section 9 IBC, and thus, the Bench, in this case, dismissed the appeal filed by the operational creditors. However, there are some dimensions to the central question, which are addressed hereinbelow. Breach of Warranty In the question of breach of a warranty in the contract of sale or purchase of goods and services as given in sections 12 and 13 of the Sale of Goods Act,  NCLT as well as NCLAT recently  allowed a section 9 application  made on a breach of warranty, wherein, the central proposition was whether a dispute existed before the Demand notice issued u/s 8 or not. Although, the Supreme Court rejected the application on the ground of ‘pre-existing’ dispute and did not analyze the aspect of breach of warranty, impliedly including the same under operational debt. The Court finally cleared the position of law, stating that the IBC’s pre-existing dispute standard is not equivalent to the “preponderance of probability” principle. Thus, we can understand that the amount involved in the breach of warranty is also an operational debt. Is the advance made for the contract an operational debt? Not only in the written contracts but also the advance offered in oral contracts amounts to

[By Masad Khan & Ameya Sharma] The authors are students of NALSAR University of Law, Hyderabad. INTRODUCTION In the case of Ashok Kumar Sarawagi v. Enforcement of Directorate, the National Company Law Appellate Tribunal, New Delhi (“NCLAT/ Appellate Authority ”) upheld the decision of National Company Law Tribunal (“NCLT/ Adjudicating Authority”) declaring that it is not empowered to deal with the matters falling under Prevention of Money Laundering Act, 2022 (“PMLA”) and rejected   Mr. Sarawagi’s prayer of staying impugned provisional attachment order against the corporate debtor under PMLA after the initiation of Corporate Insolvency Resolution Process (“CIRP”). In this article, the authors have argued that the aforesaid decisions are bad in the eyes of the law and the Adjudicating Authority should have stayed the provisional attachment order issued against the corporate debtor.  BRIEF BACKGROUND OF THE CASE The CIRP was commenced on 20 November 2019 in respect of Kohinoor Steel Private Limited, or the Corporate Debtor, and Mr. Ashok Kumar Sarawagi was appointed as its Resolution Professional. On 31 December 2021, after two years of initiation of CIRP, a provisional attachment order against the property of corporate debtor was issued by the Enforcement Directorate (“ED”) under Section 5 of the PMLA. The impugned order was challenged by the resolution professional under Section 14 and Section 238 of the Insolvency and Bankruptcy Code (“IBC”). The NCLT placed reliance on the NCLAT’s judgement in Varrsana Ispat Limited Vs. Deputy Director of Enforcement wherein it held that provisions under the PMLA relate to ‘proceeds of crime’ and Section 14 of the IBC is not applicable to such proceedings. Also, in its order, the NCLT holds that it is bound by the full bench judgement of the NCLAT in the case of Kiran Shah v. Enforcement Directorate.  MISPLACED RELIANCE ON VARRSANA AND KIRAN SHAH Both, the NCLAT and the NCLT, placed consequential reliance on the Varrsana and the Kiran Shah judgements and held that they were bound by the precedents. In both these cases, the property was attached by ED much prior to initiation of CIRP. However, in the instant case, the provisional attachment order was issued after nearly two years of the initiation of CIRP. It signifies that the facts of the present case are manifestly different from the facts in the aforementioned cases. The Supreme Court, in several judgements, has held that ‘a decision is precedent on its own facts’[i] and even a close similarity between one case and another is not enough to consider it as precedent because a single significant detail may alter the entire aspect.[ii] Hence, the Varrsana and the Kiran Shah judgements cannot be considered as precedent in the present case and the reliance placed by the Adjudicating Authority on them is heavily misplaced. INCONSISTENCY WITH THE ESTABLISHED LAW While relying heavily on the cases mentioned above, the Adjudicating Authority as well as the Appellate Authority may have missed certain judgements that are acutely similar in their factual scenarios to the present case. Importantly, the NCLAT held in the case of Directorate of Enforcement v. Manoj Kumar Agarwal that there cannot be any attachment of a corporate debtor’s property or assets under the PMLA during the continuation of CIRP. In this case, the Appellate Authority has categorically laid down the law with respect to the impugned controversy and it should have been followed by the NCLT and the NCLAT alike. In JSW Steel Ltd vs. Mahender Kumar Khandelwal, a judgement delivered by NCLAT, herein the tribunal upheld ED’s decision to attach after the approval of the resolution plan. However, the outcome of this judgement would have been entirely different had it not been for the restrictions of prospective legislation. The amendment to Section 32, which inserted Section 32A, of the IBC was brought in during the pendency of this case, and hence could not be retrospectively applied. Notwithstanding this limitation, it is clear that the tribunal would have favoured the  corporation, i.e., an injunction against the attachment order under PMLA would have been duly issued as per orders. The present case was brought after Section 32A of the IBC came into effect, hence, its application renders the impugned order of the NCLT inconsistent with the IBC. Arguably, the Supreme Court’s judgement in Ghanashyam Mishra & Sons (P.) Ltd. V. Edelweiss Asset Reconstruction Co. Ltd. is highly relevant in the present context. This case gave primal importance to the fulfilment of the objectives of the IBC and declared the binding nature of a resolution plan once it was approved. It unequivocally expresses the binding nature of the approved CIRP on the Central as well as State Governments and any local authority. It is also essential to bring to the fore that Section 238 of the IBC categorically provides that it shall prevail in case of inconsistency between two laws, as has been cited in the aforementioned judgment. The verdicts delivered in the aforementioned cases clearly lean in favour of putting on hold the attachment orders during CIRP in the long-standing dispute between IBC and PMLA. It is further pertinent to acknowledge that the factual matrices of the above precedents corroborate well with the present case. These cases find equal relevance in the context of the present controversy at hand. While JSW Steel is based on similar facts, the Ghanashyam Mishra judgement deals with the high value of trust placed by the Supreme Court on the IBC in the realm of corporate legislation and resolution. Hence, these judgements should have been followed consistently by the tribunals in the present case. ILL-EFFECTS OF THE RULING The NCLAT decision, in the present case, has jeopardised the legitimate interests of the corporate debtor’s creditors, including its workers and employees, without having any of their fault. They would not have the chance or remedy to recover any debts owed to the corporate debtor. The CIRP procedures would become ineffective due to the impugned attachment order since no one would be interested in purchasing the corporate debtor’s attached property or assets. The liquidation procedure that

[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,