Innoventive Industries v. ICICI Bank: A Creditor-Friendly Approach in Insolvency Law

Innoventive Industries v. ICICI Bank: A Creditor-Friendly Approach in Insolvency Law.

[Sakshi Dhapodkar]

The author is a fourth-year student of National Law Institute University, Bhopal.

The Supreme Court on August 31, 2017 delivered its first substantive ruling under the Insolvency and Bankruptcy Code, 2016 (the “Code”). In the case of Innoventive Industries Ltd. v. ICICI Bank Ltd.,[1] the Supreme Court rejected a determined challenge to the insolvency proceedings put forth by the corporate debtor (Innoventive), and ruled in favour of the financial creditor (ICICI Bank). In doing so, the Court re-emphasized the creditor-friendly nature of the Code.

After Innoventive entered into financial difficulties due to labour problems, it agreed upon a corporate debt-restructuring plan with the creditors. On December 07, 2016, ICICI Bank initiated a corporate insolvency resolution process (the “CIRP”) under the Code, and to that response, the corporate debtor took shelter under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (the “Maharashtra Act”) under which Innoventive’s liabilities were suspended by way of moratorium. The National Company Law Tribunal (the “NCLT”) admitted ICICI Bank’s application initiating the CIRP by holding that the Code would prevail over the Maharashtra Act in view of the non-obstante clause under section 238 of the Code. The NCLT also declared a moratorium as obligatory by the Code. On appeal, although the National Company Law Appellate Tribunal (the “NCLAT”) did not disturb the findings of the NCLT, on the point of law, it did not find any repugnancy between the Code and the Maharashtra Act. It is against the order of the NCLAT that Innoventive appealed to the Supreme Court.

The main question before the Supreme Court was whether there was any conflict between the Code and the Maharashtra Act. Innoventive argued that given the moratorium already placed under the Maharashtra Act, there was no debt payable and the provisions of the Code will not be applicable. The Court hence focused on the issue of repugnancy and analyzed the case of Deep Chand v. State of UP[2] under article 254 of the Constitution. The Court observed that the Maharashtra Act derives its power from Entry 23, List II (State List)[3] in the Seventh Schedule to the Constitution whereas the Code is attributable to Entry 9, List III (Concurrent List).[4] This made it crystal clear that by giving effect to the earlier State law, the scheme which may be adopted under the Parliamentary statute will directly be barricaded and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional (IRP) prescribed under the Code. It was also stated that the moratorium imposed under section 4 of Maharashtra Act would clash with the moratorium imposed under sections 13 and 14 of the Code to such an extent that the insolvency resolution procedure under the Code might not move forward.

The second issue in question was whether Innoventive was under an obligation to pay and, if yes, whether the debt payable was conditional upon infusion of funds by the creditors (which infusion was stipulated in the master restructuring agreement). The Supreme Court observed that the plea of failure to pay on account of non-release of funds was raised in the second application filed by Innoventive, clearly indicating that the argument was an after-thought. Further, the plea was raised beyond the 14-day period, the time prescribed under the Code for determining existence of a default. Substantively, upon analysis of the said restructuring agreement, the Court found that the payment obligations of Innoventive were unconditional and not subject to the infusion of funds by the creditors.

Another question before the Court was whether a director of a sick management could bring an application of CIRP under the Code. The Court explained that once the insolvency proceeding was admitted by the NCLT and the moratorium declared, the directors of the company are no longer in management. Hence, it is likely that the directors would have to file objections in their individual capacity as interested “aggrieved persons” rather than as directors of the company. Although the Supreme Court indicated its stand, it did not decide on this specific corporate insolvency perspective.

Examining the policy and background of the Code, the Supreme Court adopted a credit-friendly approach. The Supreme Court’s assertion of the creditor-orientation of the Code will arguably strengthen the hands of creditors, whether financial or operational, and incentivize them to take more companies into the insolvency process. At the same time, the question remains whether creditors now have more power to abuse. With reference to the other incidental question pertaining to the 14-day period for determination of default, it must be noted that the Supreme Court has time and again reemphasized on the strict application of time periods prescribed in the Code. As regards the last issue as to who can challenge the proceedings, the Supreme Court made a stand that if the challenges are brought from the corporate debtor’s side, they must be in the name of former directors and in their individual capacity. This judgment provides assurance that there would be stricter compliance of the Code and more credit-friendly decisions in future.

[1] Innoventive Industries Ltd. v. ICICI Bank Ltd.,  2017 (11) SCALE 4.

[2]Deep Chand v. State of UP,  1959 Supp. (2) SCR 8.

[3] Entry 23, List II: Social Security and Social Insurance; Employment and Unemployment.

[4] Entry 9, List III: Bankruptcy and Insolvency.

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