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Evolution of the Insolvency Code in India: Key Takeaways

By: Madhumitha Srinivasan

It has been a year and five months since the Insolvency and Bankruptcy Code (the Code) came into force, bringing about radical changes to the debt restructuring and recovery laws in India. Apart from consolidating the provisions of insolvency and bankruptcy that were scattered amongst various Indian legislations, the Code sought to embrace international best practices and customize them for Indian conditions.

The new framework is a time bound process where cases once admitted are to be resolved within 270 days, failing which the company goes into liquidation. The data released by the MCA as of December 2017 reveals that 2,750 cases out of 4,738 cases were disposed of by the NCLT within one year. This has also encouraged large banks and financial institutions to take recourse under the Code to resolve the large NPA accounts.

Courts have brought in some amount of clarity on the scope, application and interpretation of the Code. We have touched upon some of the important court decisions in this article.

  1. Treatise on Part II of the Code: In its first path-breaking judgment under the Code, the Supreme Court in Innoventive Industries Ltd. vs. ICICI Bank[1] underlined the supremacy of the Code over other laws. The Court ruled that on proving that the debt was “due”, the application by the financial creditor will have to be admitted. It further observed that on appointment of an Interim Resolution Professional (IRP) an erstwhile director of the corporate debtor cannot file a petition on behalf of the company.

This leads us to the question as to who can prefer an appeal on behalf of the corporate debtor against an order of admission of an insolvency application. The IRP, who is appointed by the NCLT after admission of the application, has not been conferred with such powers by the Code. The only logical conclusion would be that though the board of the corporate debtor stands suspended during the corporate insolvency resolution process (CIRP), that does not by itself take away their powers/rights to prefer appeals on behalf of the company.

  1. Definition of dispute: In Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd[2]., the term “dispute” was interpreted by the Supreme Court. It was observed that while the Insolvency Bill of 2015 included the term “bonafide” in the definition of dispute, the same was omitted in the Code. The Court thus concluded that the omission was a conscious decision of the legislature, indicating that the scope of “dispute” was inclusive and not exhaustive. Therefore, the Court held that once existence of a “real dispute” was established, the petition will have to be rejected by the NCLT.

  2. Settlement of claims post admission: In the first case of its kind, the Supreme Court, invoking its inherent powers under Article 142 of the Constitution, permitted the parties in Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP[3] to withdraw the application after admission by NCLT in view of the settlement arrived at between the parties. In the subsequent cases that followed, the Court observed that the Code and the Rules did not confer powers on the NCLT and NCLAT to allow parties to withdraw a petition after its admission. It was therefore suggested that suitable amendments be made to confer such powers on the NCLT.

  3. Applicability of Limitation: NCLAT has consistently taken the view that Limitation Act is not applicable to corporate insolvency resolution process (CIRP), and that even assuming it were to be made applicable the limitation period of 3 years to file the petition would commence from 1st December 2016, i.e., the date when the Code was notified. It has been clarified that in cases where the application is filed by the corporate debtor himself, the law of limitation would not apply. However, the rider for financial and operational creditors to initiate CIRP was that inordinate delays must be explained.

If this view is accepted, it would open floodgates of litigation for recovery of money, which otherwise would be time barred. The objects of the Code clearly indicate that proceedings under the Code are not for recovery of money. Additionally, the trigger to initiate CIRP being default in payment of a debt, it is only logical that the laws of limitation be made applicable.

  1. Removal of procedural hurdles: In Macquarie Bank Limited Vs. Shilpi Cable Technologies Limited[4], the Supreme Court held that the trigger to initiate CIRP by operational creditors was:

  2. delivery of a demand notice or invoice of unpaid operational debt, and

  3. Non-payment of the operational debt by the corporate debtor within 10 days of receipt of notice or failure to reply disputing the debt within the same timeline.

Accordingly, the requirement to deliver a demand notice/invoice of unpaid operational debt was held to be mandatory.

It was clarified that the requirement to file an affidavit or certificate from financial institution was not compulsory and the operational creditor may make such an affidavit if it wanted to prove the existence and non-payment of the debt. The Court further held that procedural hurdles should not be imposed on creditors; and domestic and foreign creditors ought not to be discriminated.

On the issue of whether a demand notice can be issued by an advocate, the Court observed that the term “delivering” a demand notice was clear to establish that the intention was not to restrict the scope of authorized person to employees or officers of the operational creditor but to include other authorized agents as well..

  1. Promoters as resolution applicants: Recent amendments to the Code bar promoters of defaulting companies, related parties and connected persons from bidding for stressed assets. However, promoters who have atleast serviced their loans by paying interest are allowed to bid.

It is noteworthy to look at the recent developments in this regard, particularly in the invite for bids for Monnet Ispat and Essar Steel. Both the cases witnessed intense competition between JSW Steel and ArcelorMittal, each accusing the other of circumventing the law. The promoter of JSW Steel (who along with AION Capital was declared the successful bidder for Monnet Ispat) is related to the promoter of Monnet Ispat. On the other hand, the bid submitted for Essar Steel by Numetal, an SPV of which Rewant Ruia (of the Ruia family, promoter of Essar) is a promoter was declared ineligible by the Committee of Creditors.

The intention of the legislature is to bar promoters who are wilful defaulters whose mismanagement and fraudulent activities led to the company being declared NPA. Barring all promoters will restrict the pool of prospective applicants for stressed assets. In a country like India where the market for stressed assets is small, a more liberal approach is required to be followed.

For businesses where sector-specific experience and knowledge is imperative, promoters may be best suited to revive the business, and the decision should be left to the Committee of Creditors, who are cast with the duty of choosing the most viable resolution plan. Also, it cannot be ruled out that there are many genuine promoters, particularly those of infrastructure companies, who may have defaulted due to unfavorable market conditions.

The Code in its present form is in its nascent stages and still evolving but one cannot deny that it has indeed proved a transformative legislation so far. In the cases that landed up in the Supreme Court, even while upholding the validity of the Code, it was suggested by the Court that suitable amendments be made to plug the loopholes. Some of the suggestions include providing for withdrawal of petition post admission in the event the parties reach a settlement; and treatment of homebuyers as financial creditors.

The Insolvency Law Committee (Committee) formed by the Government submitted its report in March 2018. Some of the noteworthy suggestions made by the Committee are:

  1. Inclusion of home buyers as financial creditors by amending the definition of “financial debt”;

  2. Increase in threshold of minimum amount of default in the case of operational debts to Indian Rupees 10 lakhs (one million), to avoid frivolous litigations;

  3. Reduction of voting share for approval of resolution plan from 75% to 66% or more of the voting share of financial creditors;

  4. Limiting the scope of disqualification of a resolution applicant by deleting reference to “person acting in concert”;

  5. Clarification on the applicability of limitation law to proceedings under the Code.

One will have to now wait and see as to how the Code further evolves and becomes a robust and efficient process for resolution of insolvency.

[1] Innoventive Industries Ltd. vs. ICICI Bank – 2018 (1) SCC 407

[2] Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. – Judgment dated 21st September 2017 in Civil Appeal No. 9405 of 2017

[3] Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Managers LLP – Order dated 24th July 2017 in Civil Appeal No. 9279 of 2017

[4] Macquarie Bank Limited Vs. Shilpi Cable Technologies Limited – 2018 (2) SCC 674

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