India: Orders Under Insolvency And Bankruptcy Code 2016 W.R.T Corporate Persons

Last Updated: 13 February 2019
Article by Manoj K. Singh, Daizy Chawla, Jatin Kapoor and Rishub Kapoor

1. Members of erstwhile Board of Directors of Corporate Debtor must be given a copy of Resolution Plan

The Division Bench of Supreme Court while hearing an appeal against the order of NCLAT in the matter of Vijay Kumar Jain versus Standard Chartered Bank & Ors., Civil Appeal NO.8430 OF 2018 allowed the appeal of ex directors and set aside the order of Appellate Authority and Adjudicating Authority of rejecting the prayer of an appellant, the erstwhile directors of the Corporate Debtor for getting copy of the resolution plans from the resolution professional.

The appellant in the matter submitted before the Apex Court had argued for their right to access the resolution plan. It was submitted by the counsel for the appellants that as per Section 24(3) of the IBC, Resolution Professional has to give notice to the members of suspended Board of Directors for participating in the Committee of Creditors (CoC) meetings and as per Regulation 21 of CIRP Regulations 2016, the notice of these meetings shall not only contain an agenda of the meetings but shall also contain copies of all documents relevant to the matters to be discussed.

Further the suspended Directors have a vital stake in the issue, and some of them may have offered personal guarantee for the corporate debtor, an approved resolution plan under Section 31(1) of IBC will be binding on the suspended Board of directors. Therefore, they claimed for the right to access resolution plans.

The Counsel for Respondents opposed the plea, contending that only the CoC was entitled to have resolution plans, as per Section 30(3) IBC read with Regulation 39(2) CIRP Regulations. Further on Relying on the Notes on Clauses to Section 24 of the Code, the respondents argued that the members of suspended Board of Directors are only permitted to participate in CoC meetings for the purpose of giving information regarding the financial status of the debtor.

The Apex Court after hearing the arguments observed that the statutory scheme of IBC and CIRP Regulations made it clear that "though the erstwhile Board of Directors are not members of the committee of creditors, yet, they have a right to participate in each and every meeting held by the committee of creditors, and also have a right to discuss along with members of the committee of creditors all resolution plans that are presented at such meetings under Section 25(2) (i)".

The Hon'ble Bench in its Judgment further held that, even assuming that the Notes on Clause 24 may be read as being a one-way street by which erstwhile members of the Board of Directors are only to provide information, we find that Section 31(1) of the Code would make it clear that such members of the erstwhile Board of Directors, who are often guarantors, are vitally interested in a resolution plan as such resolution plan then binds them.

On deliberating over the dispute whether a resolution plan falls under the definition of relevant document or not, the Supreme Court held that, "Obviously, resolution plans are "matters to be discussed" at such meetings, and the erstwhile Board of Directors are "participants" who will discuss these issues. The expression "documents" is a wide expression which would certainly include resolution plans".

The Hon'ble Court further observed that "Therefore, a combined reading of the Code as well as the Regulations leads to the conclusion that members of the erstwhile Board of Directors, being vitally interested in resolution plans that may be discussed at meetings of the committee of creditors, must be given a copy of such plans as part of "documents" that have to be furnished along with the notice of such meetings".

2. Supreme Court sustained the constitutional validity of the Code

The Division Bench of Supreme Court on 25th January, 2019 passed a landmark Judgment while hearing a multiple Civil Writ Petition in the matter of Swiss Ribbons Pvt. Ltd & Anr. v. UOI, SLP-28623 of 2018. The Apex Court in its decision not only discussed the perspective of the Insolvency & Bankruptcy Code, 2016 but also discussed the larger context of how the Tribunals are interpreting the economic legislation.

The Hon'ble Supreme Court in its judgement noted that legislation, particularly in economic matters is essentially factual and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. The constitutionality of economic legislation should therefore, be judged by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. The judgment also stands out for its noteworthy reliance on the Report of the Bankruptcy Law Reforms Committee (BLRC) to realize the need and basis for the provisions contained in the IBC.

Few of the significant challenges which were raised by the petitioners before the Hon'ble Supreme Court in multiple petitions and the manner in which the Court has dealt with them are discussed below:

i. Circuit Benches to be established

The significant challenge which was raised, was that, the National Company Law Appellate Tribunal substitutes the jurisdiction of the High Courts, the constitution of NCLAT bench only at Delhi and not at every jurisdiction where there was a High Court violates the law laid down by the Court in Madras Bar Association v. UOI.

The Hon'ble Court, while accepting the submission of the Union of India that the earlier decision in Madras Bar Association would be followed, has directed the Union of India to set up circuit benches of the NCLAT within a period of 6 months from the date of judgment and further the Administrative support of these Tribunals to come from the Ministry of Law and Justice.

ii. Classification between 'financial creditors' and 'operations creditors' under the IBC

It was argued before the Supreme Court that the classification between 'financial creditors' and 'operational creditors' under the IBC is arbitrary, discriminatory and violative of Article 14 of the Constitution of India and there is no intelligible differentia between the two types of Creditors. Even if it is assumed that valid distinction exists between the two, there is hostile discrimination against operational creditors since they have no voice on the creditors' committee.

The Apex Court held that as per Article 14, right to equality is a fundamental right and as per the settled legal position, equality can only be among equals. Therefore, if an intelligible differentia can be established between two classes, then a legislation does not violate Article 14. The Hon'ble Court after a detailed analysis of the provisions of the IBC and the Insolvency Law Committee Report, 2018 and other material concluded that key distinction between 'financial creditors' and 'operational creditors' other than involvement of large sum of money are that the Financial Creditors are generally secured as compared to the operational creditors which are unsecured. Further the Contracts with the financial Creditors are normally for finance, loans etc. where the Contracts with the Operational Creditors are for supply of goods or/and services. The Court further observed that the financial Creditors from the very beginning assess the viability of the corporate debtor. They are can engage in restructuring of the loan as well as reorganization of the corporate debtor's business when there is financial crisis, which the operational creditors do not and cannot do. Thus, stabilizing the corporate debtor as a going concern, while ensuring maximum salvage for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.

iii. Voting Rights to Operational Creditor

The Hon'ble Supreme Court while deciding the issue of no voting right to operational creditor observed that under the code, the committee of creditors is entrusted with the primary responsibility of financial restructuring. They are required to assess the viability of a corporate debtor by taking into account all available information as well as to evaluate all alternative investment opportunities that are available. Since the Financial Creditors are in the business of money lending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the Corporate Debtor. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services and are typically unable to assess viability and feasibility of business. Therefore, the position of the Operational Creditors enumerated in the code at present is no way violating any right under Article 14.

It was further held by Supreme Court that it is mandate of the Code, that unless a minimum payment is made to operational creditors, being not less than liquidation value, the resolution plan cannot be approved under section 31. So, the code takes due care of operational creditor.

iv. Tribunal can be approached under Section 12A even if Committee of Creditors is not constituted

The Supreme Court clarified that a party can approach the NCLT directly, in case the Committee of Creditors is not constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of Interim Resolution Professional). In such case the NCLT may in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of the each case.

v. Tribunal can set aside the rejection of settlement / no consent given by CoC

The Apex Court held that the Committee of Creditors do not have the last word on the subject of approving any settlement or withdrawal application. If the Committee of Creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code.

vi. Resolution Professional has no adjudicatory Powers

The Hon'ble Supreme Court observed that the Resolution Professional is given administrative as opposed to quasi-judicial powers. The Liquidator on the other hand has quasi juridical powers which can be appealed against to the adjudicating authority under Section 42 of the Code since liquidator determines the claims however the resolution professional only consolidate and verify the claims. Further, the resolution professional cannot act without the approval of Committee of Creditors in number of matters as compared to liquidator.

The Hon'ble Court further observed that Resolution Professional is really a facilitator of the resolution process, whose administrative functions are overseen by the Committee of Creditors and by the Adjudicating Authority.

vii. Constitutional Validity of Section 29A of the Code

While rejecting the challenge of the petitioners on the constitutional Validity of Section 29A of the code, the hon'ble court held that the Section 29A is not unconstitutional. Though it was clarified that the definition of relative/related person will mean persons who are connected with the business activity of a resolution applicant. In the absence of showing that such a person is connected with the business activity of the ineligible resolution applicant, such a person cannot possibly be disqualified under section 29A of the Code.

The Hon'ble Court pointed out that it is a settled law that a statute is not retrospective merely because it affects existing rights nor is it retrospective merely because a part of the requisites for its action is drawn from a times antecedent to its passing.

Further the Apex Court also held that, the legislative policy is that a person who is unable to service its own debt beyond the grace period, is unfit to be eligible to become a resolution applicant. This policy cannot be found fault with.

vii. Constitutional Validity of Section 29A of the Code

Section 53, the operational creditors will not get anything as they rank below all other creditors, the Hon'ble Supreme Court observed that reason for differentiating between financial debts, which are secured, and operational debts, which are unsecured, is in the relative importance of the two types of debts when it comes to the object sought to be achieved by the Code. It was observed that repayment of financial debts infuses capital into the economy in as much as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses.

3. The Hon'ble NCLAT while hearing an appeal filed during the pendency of the proceeding before Ld. Adjudicating authority in IDBI Bank Vs Odisha Slurry Pipeline Infrastructure Limited, Company Appeal (AT) (Insolvency) No. 51 of 2019 held that Adjudicating Authority should not hear any third-party application at the time of hearing the application filed under Section 7 of the Code. NCLAT order is though restricted to the application filed under Section 7 by Financial Creditor and same is inspirit of the Code which provides that for admission "default" needs to be proved. Further the financial creditor uses the platform of I&B Code as a last resort when all other options are not of any help. Any hearing been given to third party in such case may delay the proceedings.

The order of NCLAT have not given any observation w.r.t such restriction on Application filed under Section 9 (by operational creditor) or Section 10 (by corporate debtor) may be for the reason to avoid the abuse of the Code by the Applicant for their ulterior motive and to protect the rights of genuine financial creditors or third party.

4. Adjudicating Authority has no jurisdiction to decide any issue after passing of Order under section 31 of the Code and Appeal once the Resolution Plan is approved and Resolution Applicant has taken charge cannot be filed ex director of Corporate Debtor

The Hon'ble National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed against the order of the National Company Law Tribunal, ('NCLT – Guwahati') Bench in the matter of Assam Company India Ltd. Vs Numazar Dorab Mehta & ors. (Company Appeal (AT) (Insolvency) No. 82 of 2019) wherein the Hon'ble Appellant Authority (NCLAT) observed that an order under section 31 of the Code was passed, and Corporate Debtor is now under the control of Resolution Applicant, thus an appeal filed Appellant through its Director is not maintainable. Further the Hon'ble NCLAT held that as no decision was taken by the Adjudicating Authority, nor any finding given with regard to the issues placed before them since Adjudicating Authority have no further jurisdiction to decide any issue after passing of an order under section 31 of the Code.

5. The exercise of the option leads to a transaction of sale and purchase of goods. The non-exercise of such option would lead to creation of a Financial Debt

The Hon'ble National Company Law Appellate Tribunal (NCLAT) dismissed an appeal filed by the promoters 'MCX Stock Exchange Limited' (MCX-SX)' against an order of the Adjudicating Authority ('NCLT – Mumbai') in the matter of Pushpa Shah & Anr. Vs IL&FS Financial Services Limited & Anr. (Company Appeal (AT) (Insolvency) No. 521 of 2018) wherein the Ld' Adjudicating Authority held that reading of the agreement Share Purchase Agreement and Letter of Undertaking executed between the Respondent and Corporate Debtor, it is clear that the terms of transactions involved not only the purchase of shares but it shows the date by which the amount of transaction was to be repaid by the 'Corporate Debtor' for such purchase of shares. Further there exists an element of 'time value of money', particularly, when one of the conditions related to 'internal rate of return of 15%' on the transaction, and the Corporate Debtor had agreed to reverse the transaction by purchasing the shares within a specified time along with the payment of 15% accrual. Therefore, the amount invested by the Respondent initially will be considered as Financial Debt and the Respondent as Financial Creditor. The Hon'ble Appellate Authority observed that the Financial Creditor (respondent in Appeal) has disbursed the amount and Corporate Debtor has raised the amount with an object of having economic gain and if the clauses of two principal documents are read together, it clearly provides the date by which the debt was to be repaid by the Corporate Debtor.

6. The CIRP cannot be initiated against two Corporate Guarantors simultaneously for the same set of debt and default – NCLAT-(1)

The Appellate Authority in the matter of Dr. Vishnu Kumar Aggarwal vs. M/s. Piramal Enterprises Limited (Company Appeal (AT) (Insolvency) No. 347 of 2018 held that Section 7 Application against the Corporate Guarantor is not maintainable in cases where the CIRP has already been admitted against the other Corporate Guarantor for the same very claim and default.

The Appellate Authority in its judgement held that "There is no bar in the 'I&B Code' for filing simultaneously two applications under Section 7 against the 'Principal Borrower' as well as the 'Corporate Guarantor(s)' or against both the 'Guarantors'. However, once for same set of claim application under Section 7 filed by the 'Financial Creditor' is admitted against one of the 'Corporate Debtor' ('Principal Borrower' or 'Corporate Guarantor(s)'), second application by the same 'Financial Creditor' for same set of claim and default cannot be admitted against the other 'Corporate Debtor' (the 'Corporate Guarantor(s)' or the 'Principal Borrower'). Further, though there is a provision to file joint application under Section 7 by the 'Financial Creditors', no application can be filed by the 'Financial Creditor' against two or more 'Corporate Debtors' on the ground of joint liability ('Principal Borrower' and one Corporate Guarantor', or 'Principal Borrower' or two 'Corporate Guarantors' or one 'Corporate Guarantor' and other 'Corporate Guarantor'), till it is shown that the 'Corporate Debtors' combinedly are joint venture company."

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