Impact of Insolvency and Bankruptcy 2016 on Indian Industries
The growing world trend and rapid globalisation have led to fast tracking of
disposing off the cases related to insolvency, bankruptcy, liquidation etc. It’s
imperative to study and critically examine how the inception of IBC took place
and to also get into the nitty gritty of the said enactment. Many jurists and
lawyers are of the opinion that it was about time that something like IBC came
into action and it was the need of the hour. But first things first, what is
Bankruptcy, Insolvency and why do we need a consolidated code for the same?
Another point worthy question that arises is why do we need to modernise the
laws for bankruptcy and insolvency; is it because the old laws proved to be
What is insolvency and Bankruptcy?
The Black’s Law Dictionary defines the work “Bankrupt” as the state or condition
of a person who is unable to pay its debt as they are or has become, due. The
condition of one whose circumstances are such that he is entitled to take the
benefit of the federal bankruptcy laws. The term includes a person against whom
an involuntary petition has been filed, or who has filed a voluntary petition.
The state of insolvency on the other hand is the condition of a person or a
business that is insolvent; an inability or lack of means to pay debt. Such a
relative condition of persons or entity’s assets and liabilities that the
former, if all made immediately available, would not be sufficient to discharge
Under bankruptcy law, the condition of a person or firm that is unable to pay
debts as they fall due, or in the usual course of trade or business and
financial condition such that businesses or persons debts are greater than
aggregate of such debtors’ property at a fair value. Hence to have an effective
and adequate framework for insolvency and bankruptcy, the Central Government
proposed this legislation, entitled ‘the Insolvency Bankruptcy code 2015’ which
was introduced by Ministry of Finance, Mr Arun Jaitley in Lok Sabha on
Several pressing concerns with regard to IBC will be answered in this article.
We also need to lay emphasis on how this enactment has been a game changer in
the Indian market. No longer will the hegemony lie with only the shareholders,
and debt holders.IBC has paved way to a power shift into the hands of the
creditor. It can be expected that a creditor with a default of a mere 1 lakh,
can roll the company into liquidation. Before IBC came into existence it used to
take companies approximately 4- 5 years to dissolve its operations.
The IBC envisages filing of Corporate Insolvency Resolution Process (hereinafter
referred to as “CIRP”) by the Corporate Debtor, Financial Creditor and
Operational Creditor. However, in neither of the said proceedings, time frame
for filing of CIRP has been provided. It is imperative to point out that the IBC
is silent on the time period within which a petition for insolvency resolution
is required to be filed. Some landmark cases in the Supreme Court related to IBC
will also be examined and hence will facilitate in giving us a clear overview of
whether or not the enactment has in anyway been detrimental to the well being of
the corporate dealing or if it has indeed been a game changer and has eased the
burden as well as quickened the pace of disposing off the cases and whether due
to the power shift, it has given an equal authority to the creditor to file for
liquidation if he has been a defaulter. Its inception has not been an easy task
and a number of obstacles had to be dealt with, especially certain areas of
functioning and laws that come in the periphery of bankruptcy.
Underlying Features of the code:
The code creates time-bound processes for insolvency resolution of companies and
individuals. These processes will be completed within 180 days .If insolvency
cannot be resolved, the assets of the borrowers may be sold to repay creditors.
The resolution processes will be conducted by licensed insolvency professionals.
The insolvency professionals will be members of insolvency professional
agencies.IPA will also furnish performance bonds equal to the assets of a
company under insolvency resolution.
Information utilities will be established to collect, collate and disseminate
financial informational to facilitate insolvency resolution, which means a
transparent form of exchange of information will take place.
The National Company Law Tribunal will adjudicate insolvency resolution for
companies. The Debt Recovery Tribunal will adjudicate insolvency resolution for
The insolvency and Bankruptcy board of India will be set up to regulate
functioning of IP’S, IPA’s, and IU’s.
The increased powers given to the Reserve Bank of India (RBI) to clean up asset
quality, and to intervene in banks at an earlier stage when risks build,
represents an important positive step toward ensuring a healthy banking system
in the future as far as IBC is concerned.
The limitation of the state laws was in a way, a direct impact of IBC.
A newfound inception of the insolvency and bankruptcy board of India came into
existence through the channel of IBC.
·One peculiar aspect of the code is that the National Company Law Tribunal (NCLT)
cannot approve a resolution plan unless it is satisfied that the plan is fully
compliant with existing laws (although it is not clear how this is supposed to
tie in with the overriding nature of the code).
·This act takes precedent over the DRT and SARFEASI ACT in insolvency related
·IBC has specified a time bound process of 180 days with an extension period of
90 days after the appointment of Resolution Professional.
Although India has taken initiatives in improving its position in both the World
Bank’s ease of doing business and also the World Economic Forum’s Competitive
Index, India still performs poorly on the time taken for debt resolution not
only in comparison with the developed G7 countries but also in comparison with
other BRICS countries.In the current scenario, NPA’s of Indian Banks stand at
INR 9.99 trillion being one of the biggest challenges faced by the Indian
Economy. The implementation of IBC has brought in to main objectives which need
to be considered; firstly, time bound process and efficient resolution and
secondly, maximize the value of recovery of stressed assets.
Certain moratoriums in other peripheral enactments would now be looked after by
the said code. One of the major boons IBC has given is its time restricted
resolution process, thereby fast tracking its functioning etc. What we have
gathered so far is that due to the growing trend and a fast paced working of the
society, it has led to this act.
NPA and its folly:
Banks give loans and advances to borrowers. Based on the performance of the
loan, it may be categorized as:
(i) A standard asset (a loan where the borrower is making regular repayments),
Or (ii) a non-performing asset.
NPAs are loans and advances where the borrower has stopped making interest or
principal repayments for over 90 days.
Further, recently there have also been frauds of high magnitude that have
contributed to rising NPAs. Although the size of frauds relative to the total
volume of NPAs is relatively small, these frauds have been increasing, and there
have beenno instances of high profile fraudsters being penalised.
The measures taken to resolve and prevent NPAs can broadly be classified into
two kinds – first, regulatory means of resolving NPAs per various laws (like the
Insolvency and Bankruptcy Code), and second, remedial measures for banks
prescribed and regulated by the RBI for internal restructuring of stressed
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a
time-bound 180-day recovery process for insolvent accounts. Under the IBC, the
creditors of these insolvent accounts, presided over by an insolvency
professional, decide whether to restructure the loan, or to sell the defaulter’s
assets to recover the outstanding amount. If a timely decision is not arrived
at, the defaulter’s assets are liquidated. Proceedings under the IBC are
adjudicated by the Debt Recovery Tribunal for personal insolvencies, and the
National Company Law Tribunal (NCLT) for corporate insolvencies. 701 cases have
been registered so far and 176 cases have been resolved as ofMarch 2018under the
What led to the rise in NPAs?
Some of the factors leading to the increased occurrence of NPAs are external,
such as decreases in global commodity prices leading to slower exports. Some are
more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAsoriginated in the mid-2000s, at a
time when the economy was booming and business outlook was very positive. Large
corporations were granted loans for projects based on extrapolation of their
recent growth and performance. With loans being available more easily than
before, corporations grew highly leveraged, implying that most financing was
through external borrowings rather than internal promoter equity. But as
economic growth stagnated following the global financial crisis of 2008, the
repayment capability of these corporations decreased. This contributed to what
is now known as India’s Twin Balance Sheet problem, where both the banking
sector (that gives loans) and the corporate sector (that takes and has to repay
these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers
lost their capability of paying back the bank. The banks at this time took to
the practice of ‘ever greening’, wherefresh loans were given to some promoters
to enable them to pay off their interest.
Noteworthy Provisions of the Insolvency and Bankruptcy Code 2016.
Who can initiate corporate insolvency?
a) Chapter ii section 6 provides for:
Persons who may initiate corporate insolvency resolution process.
Where any corporate debtor commits a default, a financial creditor, corporate
creditor or the corporate debtor itself may initiate corporate insolvency
resolution process in respect of such corporate debtor in the manner as provided
under the chapter.
So it basically means that where a corporate debtor has defaulted in paying a
debt that has become due and payable but not repaid the corporate insolvency
resolution process may be initiated in the manner as provided in the section
.Early recognition of financial distress is very important for timely resolution
of insolvency. Financial creditors are those creditors to whom a financial debt
is owed. The corporate debtor can initiate the insolvency resolution process
once it has defaulted on a debt. Operational creditors are also permitted to
initiate the insolvency resolution process. This will bring the law in line with
international practices, which permit unsecured creditors to file for the
initiation of insolvency resolution proceedings.
b) Sternness of section 29A of the insolvency and Bankruptcy Code.
One of the primary objectives of the Insolvency and Bankruptcy Code, 2016 is to
facilitate the adoption of a resolution plan for the corporate debtor. The
resolution plan is to serve as a benefit to not only the creditors but also to
the already stressed corporate debtor. Originally, section 5(25) of the Code
defined a resolution applicant as any person who submits a resolution plan to
the resolution professional and section 5(26) defined a resolution plan as a
plan proposed by any person for insolvency resolution of the corporate debtor as
a going concern. The said definition of the resolution applicant did not
prescribe any specific criteria or qualification, due to which any party
including the promoters of the corporate debtor or any related party could
propose a resolution plan. This scheme of things was, thereafter, criticized on
the basis that the wide scope permitted by the Code served as a loophole for
recalcitrant (uncooperative) promoters to gain a back door entry to the
management of the corporate debtor.
With a view to curb the said loophole, the Government brought forth the
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 and later the
Insolvency and Bankruptcy Code (Amendment) Act, 2018 wherein section 29A was
inserted into the Code. Section 29A laid down a broad range of disqualifications
for a person to be an eligible resolution applicant. Further, section 5(25) has
been amended to read that a resolution applicant is one who submits a resolution
plan to the resolution professional upon an invitation made under section
25(2)(h). Section 25(2) (h) was amended to the effect that the resolution
professional invite resolution plans from such applicants who fulfil the
criteria laid down by the resolution professional with the approval of the
committee of creditors keeping in consideration the complexity and the scale of
business of the corporate debtor.
Therefore, a prospective resolution applicant in order to be eligible to submit
a resolution plan shall not only meet the criteria laid down by the resolution
professional under section 25(2)(h) but shall also not fall under any of the
categories laid down by section 29A for disqualification. The NCLT, Delhi dealt
also with the provisions of Section 255 of IBC to say that the said provision
has amended various Sections of the Companies Act, 2013. However, Section 433 of
the Companies Act, 2013 remain unamended.
Changes Brought In By 2018 Ordinance
I) Homebuyers – As Financial creditors.
The 2018 Ordinance has revised the meaning of 'money related obligation' to
incorporate sums raised from 'allottees' in regard of a land venture (as
characterized under the Real Estate (Regulations and Development) Act, 2016 (RERA)).
In like manner, homebuyers will presently be qualified for a seat on the
committee of creditors (CoC) of the corporate debtor person. Notwithstanding,
given the expansive number of homebuyers for an undertaking, they will be
treated as a class of creditors and be spoken to in the CoC by an 'approved
delegate' to be named by the National Company Law Tribunal (NCLT). It is
significant that Section 18 of RERA bears allotters the privilege to Demand a
discount of the whole sum progressed by the allottee (alongside interest at the
recommended rate); or be paid advance (by the advertiser/designer) for each long
stretch of deferral till possession is given over. In bankruptcy procedures, all
things considered, the allottees (even where they have not pulled back from the
agreement) may document their cases for the whole development sum and
accumulated premium. In such cases, it should be considered if, by virtue of
documenting of such cases (for example for the development paid), the allotters
would be deemed to have call off the deal from the undertaking and if their case
against the corporate account holder can be constrained to fiscal cases just(for
example the development sum and interest).Some milestone decisions given by the
incomparable court allowing help to home purchasers is – Supertech, ,Jaypee
Infratech, Amrapali- the SC has observed that it couldn't care less if the
organization is dead, broke or bankrupt, these defaulting organizations will
start the refund as soon as it had rolled in.
An unavoidable hiccup in the way of a homebuyer.
Although the act has come as a relief, if not instant for a homebuyer, it’s
still unclear whether he is a secured or an unsecured financial creditor and the
provision doesn’t really give clarity as to when the homebuyer becomes a secure
creditor or an unsecured creditor. The biggest roadblock in the way of a
homebuyer is the fiasco of a third party interest.Many homebuyers have booked
flats by taking loans from the banks.
The general practice these banks follow while giving loans is that they enter
into a tripartite agreement with both the homebuyer and the developer.
By entering into such loan -cum -tripartite agreements with the banks, the
homebuyers are actually creating third party interests in favor of the banks and
are actually subrogating his rights in favor of the banks. In one such case with
similar situation, NCLT Allahabad [Ajay Walia V. M/s. Sunworld Residency
CP (IB) 11/ALD/2018]held that the homebuyer who has
subrogated his rights in favor of banks cannot be treated as a financial
The homebuyers need to be wary of the fact that if they will enter into such
tripartite loan agreements while booking a flat, they no longer will be treated
as financial creditors and it would adversely affect their rights to initiate a
corporate insolvency process against the developer.
Many homebuyers are continuing to pay EMIs for the loans they took from the bank
for their flat. This aspect of creating third-party interests in favor of the
bank and continuing to pay EMI’s for the flats whose possession they have not
really gotten well and certainly requires a further scrutiny in the Courts of
law in the background of the amended Code.
Furthermore, it has yet to be seen how effective the participation of the
homebuyers in the committee of creditors would be and their contribution in
assessing and approving resolution plans.
We also know that this may be amended sooner rather than later but as of now
it’s stagnant and of no help to the homebuyer in its entirety. Given the nature
of this enterprise it may not really come as a relief because of the unclear
provision of the act which needs to be dealt with soon.
2. Moratorium Not to Apply to Guarantors.
The 2018 Ordinance has clarified that the moratorium (an order of stay, or ban)
imposed by the NCLT under Section 14(1) (at the time of admission of an
insolvency application) will not apply to guarantee contracts in relation to the
corporate debtor’s debt.
3. Additionally, Section 61(3) of the IBC has been amended to ensure that the
NCLT (which has jurisdiction over the insolvency resolution of the corporate
debtor) will also have jurisdiction over the insolvency resolution of the
corporate guarantor (irrespective of the jurisdiction (within India) where the
corporate guarantor may have been incorporated in). This provision previously
only covered personal guarantors.
4. Lowering of Committee of Creditors Voting Thresholds.
Previously, all decisions of the CoC needed to be approved by 75% of the voting
share of the CoC members. This threshold has now been lowered to 51% except for
the following requirements:
·90% approval for withdrawal of an insolvency application post admission by the
NCLT (dealt with in more detail below).
·66% approval for resolutions:
(i) Approving extension of the corporate insolvency process beyond 180 days;
(ii) Relating to matters listed out under Section 28 of the IBC;
(iii) Approving a resolution plan; and
(iv) Replacing a resolution professional.
5. Post Admission Withdrawal
Following the Supreme Court’s decisions to permit withdrawal of insolvency
proceedings post admission (by using its inherent powers under Section 142 of
the Constitution of India) on a case specific basis, the 2018 Ordinance has
introduced Section 12A permitting the NCLT to now allow insolvency proceedings
to be withdrawn provided it has the consent of 90% of the voting share of the
CoC members. Certain additional conditions (for withdrawal) have also been
prescribed under the regulations.
I. Has the impact been positive on the banks?
The government believes that the Insolvency and Bankruptcy Code has started to
show positive results as there is improvement in Non-performing Assets (NPAs)
problem that the most banks, especially the public sector banks, are facing.
Attributing the success to IBC, it has been seen that the decline in NPA’s and
improvement in the recoveries is partly because of the resolutions that have
taken place under the new IBC and partly because the promoters of the defaulting
companies have been barred to participate in the bidding of their own firms.
Recoveries are also picking up because those debtors who fear that they are
likely to cross the red line are paying up in anticipation that IBC process may
start. Because once the IBC process starts, Section 29A comes into force. The
unintended consequence of Section 29A is that potential defaulters would not
want to be potential defaulters.
As a consequence of resolutions through IBC, and fear of Section 29A, the PSU
banks are now expecting to recover loans worth Rs 1, 80,000 Crore in the current
financial year compared to Rs 74,562 Crore in the last financial year.
The total bad loans in the system were estimated to be above Rs 12 lakh Crore.
According to rating agency India Ratings, around 45 per cent of total bad loans
of Rs 10.2 lakh Crore pertaining to the top 500 debt heavy corporate is said to
have been likely to be resolved by the end of 2018 under the IBC, while the
balance is to be resolved largely during 2019. The agency further expects Rs 4.2
lakh of the total stressed debt to become sustainable as the outcome of the
resolution process by the end of 2019.
Insolvency and bankruptcy code 2016 was enacted because the earlier legislations
were lopsided and favored the corporate debtors resulting into huge outstanding
debts to banks and financial institutions. Say for example, according to section
22 of the Sick Industrial Companies (Special Provisions) Act, 1985, the
protection also extended to the guarantors and therefore, creditors could not
proceed against the guarantors if the debtor company was declared ‘sick’ under
the said Act. The IBC further facilitates the resolution of corporate bankruptcy
in a time bound manner. Whereas the other laws of bankruptcy and liquidation
under Companies Act, 2013 or SARFAESI Act, 2002 merely introduced the term
‘creditor’ or ‘debt’, without any classification thereof, the IBC on the other
hand has introduced new and distinct concepts of Financial Creditor and
Operational Creditor where the banks and final institutions come under the first
Therefore, going by the definitions of Financial Creditor and Operational
Creditor as given in the IBC, the debts also fall into two categories. They are
financial debt and operational debt. Before proceeding with the applications
under the provisions of the Code, the Tribunal first determines whether the debt
falls within the definition of Financial Creditor or Operational Creditor as
provided under the IBC.
Changes That Banks Require
Banks and non-banking finance companies (NBFCs) have sought multiple amendments
to the IBC. These include exempting corporate debtors from bankruptcy
proceedings under the ambit of the Insolvency Code in cases where banks have
already initiated proceedings under the SARFAESI Act and also in cases where
final order and recovery certificates have been issued by the debt recovery
tribunals (DRT) in favour of banks and financial institutions.
Bankers fear that if a bankruptcy proceeding is initiated against a defaulter
company, a moratorium of 270 days would kick in as per the provisions of the
IBC, while the proceedings under the debt recovery tribunal and SARFAESI Act
remain suspended, thereby hampering the recovery and rehabilitation of such
companies. NBFCs have written to the government that they should be treated as
financial creditors and be given voting rights in approving a resolution plan
for a defaulter company. At present, Section 14(1)(c) of IBC clearly provides
that during the insolvency resolution process, as defined in the code, the code
takes precedence over the DRT and The Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Another
demand of banks is that loan haircuts taken by them should not be treated as
profit, ensuring that no preference is given to government departments under
Landmark Judgments of the Supreme Court.
a) Macquarie Bank Limited v. Shilpi Cable Technologies Limited
The said appeal raised two imperative questions:
I. Whether in relation to an operational debt, the provision contained in
Section 9(3)(c) of the Code is mandatory?
- A fair construction of Section 9(3)(c), in consonance with the object sought
to be achieved by the Code, would lead to the conclusion that it cannot be
construed as a threshold bar or a condition precedent.
ii. Whether a demand notice of an unpaid operational debt can be issued by a
lawyer on behalf of the operational creditor?
-“Section 8 of the Code speaks of an operational creditor delivering a demand
notice. It is clear that had the legislature wished to restrict such demand
notice being sent by the operational creditor himself, the expression used would
perhaps have been “issued” and not “delivered”. Delivery, therefore, would
postulate that such notice could be made by an authorized agent. It is clear,
therefore, that both the expression “authorized to act” and “position in
relation to the operational creditor” go to show that an authorized agent or a
lawyer acting on behalf of his client is included within the aforesaid
b) Mobilox Innovations Private Limited v. Kirusa Software Private Limited
What are the requisite elements necessary to trigger the code?
Section 9(1) contains the conditions precedent for triggering the Code insofar
as an operational creditor is concerned. The requisite elements necessary to
trigger the Code are:
I. occurrence of a default;
ii. Delivery of a demand notice of an unpaid operational debt or invoice
demanding payment of the amount involved; and
iii. the fact that the operational creditor has not received payment from the
corporate debtor within a period of 10 days of receipt of the demand notice or
copy of invoice demanding payment, or received a reply from the corporate debtor
which does not indicate the existence of a pre-existing dispute or repayment of
the unpaid operational debt.
-The confirmation from a financial institution that there is no payment of an
unpaid operational debt by the corporate debtor is an important piece of
information that needs to be placed before the adjudicating authority, under
Section 9 of the Code, but given the fact that the adjudicating authority has
not dismissed the application on this ground and that the appellant has raised
this ground only at the appellate stage, we are of the view that the application
cannot be dismissed at the threshold for want of this certificate alone.
c) Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan
An arbitration proceeding cannot be started after imposition of moratorium and
that that the effect of Section 14(1) (a) is that the arbitration that has been
instituted after the aforesaid moratorium is non est (Non estfactum is a defense
in contract law that allows a signing party to escape performance of an
agreement which is fundamentally different from what he or she intended to
execute or sign) in law.
d) Nikhil Mehta & Sons &Ors. v. M/s AMR Infrastructure Ltd
(NCLT DELHI), C.P NO (ISB)-03(PB)/2017, decided on 23.01.2017.
In this case the NCLT has ruled that a purchaser of real estate, under an
‘Assured-Return’ plan, would be considered as Financial Creditor for the
purposes of IBC and is, therefore, entitled to initiate corporate insolvency
process against the builder, in case of non payment of such Assured/Committed
return’ and non delivery of unit. NCLAT further went on to rule that the debt in
this case was disbursed against the consideration for the time value of money
which is the primary ingredient that is required to be satisfied in order for an
arrangement to qualify as Financial Debt and for the lender to qualify as a
Financial Creditor’ under the scheme of IBC.
e) K.S. Rangasamy v. State Bank of India
It was observed that if the corporate debtor is ready to pay the total amount
with interest as the requirement deems then it will be open to the financial
creditor to settle the dispute. If the Resolution Applicant proposes lesser
amount and more time than the amount and time proposed by the appellant. In such
case, it will be also open to the concerned person to move before an appropriate
forum to make the settlement absolute.If the offer of the promoters is better
than the resolution plan, leeway has been provided to approach the appropriate
forum to get the settlement recorded.
f) Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private
The Hyderabad bench of the NCLT, in an insolvency petition against Kamineni
Steel & Power India, allowed a resolution plan approved by 66.67% of its
committee of creditors. The Hyderabad NCLT said in its order that Section 30 (4)
does not say whether such percentage is out of the total voting share of the
financial creditors or those present during meetings of the CoC. “Since IBC is a
new code and still evolving, the above percentage has to be read with various
circulars issued by the Reserve Bank of India” it observed. The National Company
Law Appellate Tribunal (NCLAT) has struck down an order passed by the bankruptcy
court that approved a resolution plan for Kamineni Steel & Power despite the
fact that it failed to receive the mandatory 75 per cent vote share, a
pre-requite according to the Insolvency and Bankruptcy Code (IBC) to get the
plan endorsed by the court.
g) JK Jute Mills and co vs. Surendra Trading co
Petition was filed against inability to pay dues, Relief by way of status quo
was granted, and an appeal was filed against the order of NCLT. The point of
contention remained whether appeal would be allowed. It was held that the object
behind the time period prescribed under code is to prevent the delay in hearing
the disposal of the cases. NCLT could not ignore the provisions of the code. But
in appropriate cases, for the reasons to be recorded in writing it should be
admitted or rejected, the petition after the time period prescribed under
section 7 or section 9 or section 9 or section 10.Such provisions is in
procedural in nature, a tool of aid in expeditious dispensation of justice ad is
directory. The time was the essence of the code and all the stakeholders,
including the Adjudicating authority had unnecessarily adjourned the case from
time to time, which was against the essence of the code. Application was
defective and not admitted within the specified time. Even if it was presumed
that additional time was to be granted to the operational creditor, the defects
had not been removed within time. Hence, appeal was hereby allowed and directed
to the adjudicating authority to reject the petition.
h) Jagmohan Bajaj v Shivam Fragrances Ltd
It was contested on the initiation of corporate insolvency resolution process by
financial creditor-Admission of petition in respect of non repayment of
financial assistance. Ground of pendency of application under sections 241 and
242 of the companies’ act 2013 before Tribunal was raised in appeal whether IBC
having Overriding effect on any other law as mandated under section 238.IBC is a
special law having overriding effect on any other law as mandated, therefore
statutory process could not be made subservient to adjudication of an
application under sections 241 and 242 of the companies act 2013, thus appeal
filed by shareholder of the corporate debtor against admission of petition under
section 7 was dismissed. Financial creditor granted financial assistance to
corporate debtor, but the corporate debtor had committed default in repayment of
the financial assistance. It was held that the shareholders had neither disputed
the factum owing the debt to the financial creditor nor assailed the order of
admission of the petition under section 7 on the ground that the debt was not
payable. Statutory right of the financial creditor satisfying requirement of
section 7 to trigger insolvency resolution process could not be made subservient
to adjudication of an application under sections 241 and 242 of the companies
act 2013.Hence the appeal was dismissed.
i) Innoventive industries Ltd v ICICI Bank ltd
This case was used to refer in the Jagmohan Bajaj v Shivam Fragrances Ltd
It was contested on initiation of corporate insolvency resolution process by
financial creditor. All liabilities were suspended as per notifications of the
state government. It was held that the corporate debtor only raised the plea of
suspension of its debt under the Maharashtra act which, therefore was that no
debt was due in law. The adjudicating authority correctly referred to the non-obstante
clause in section 238 and arrived at a conclusion that a notification under the
Maharashtra act would not stand in the way of the corporate insolvency
resolution process under the code. Hence the Tribunal rightly admitted the
application initiation of corporate insolvency resolution process.
j) Cheran Properties Ltd. vs. Kasturi and sons Ltd & Ors
. Civil Appeal
10025/2017 decided on 24.04.2018
The court held that since the award postulates a transmission of share to the
Claimant, the directions contained in the award can be enforced only by moving
the tribunal for rectification in the manner contemplated in law.
k) Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan
Private Limited & Ors
(SC) Civil Appeal no 16929 of 2017
The Supreme Court held that an arbitration proceeding cannot be started after
imposition of moratorium. Further, it was held that the effect of Section
14(1)(a) of the IBC is that the arbitration that has been instituted after the
aforesaid moratorium is non est. in law.
l) Brilliant Alloys Private vs. Mr. S. Rajagopal & Ors
, Special Leave to
Appeal (C) No(s)-31557/2018 decided on 14.12.2018.
In this case an application was filed by the Resolution Professional of the
corporate debtor before NCLT for withdrawal of CIRP on the ground that all
claims of operation and financial creditors of the corporate debtor are settled.
However, the application for withdrawal was filed under Section 60 (5) of the
IBC instead of Section 12A because the settlement happened after the issue of
invitation for expression of interest under regulation 36A of CIRP Regulation.
NCLT Chennai dismissed the application on the ground that since regulation 30A
imposes condition for withdrawal application that it has to be filed before
invitation for expression of interest; NCLT cannot pass an order allowing the
withdrawal ignoring the conditional clause.
m) Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited
(SC), Civil Appeal No.8400 of 2017 decided on September 19, 2017.
At the outset, the Supreme Court held that the mandate of sub-section (5) of
section 9 or sub section (4) of section 10 is procedural in nature, a tool of
aid in expeditious dispensation of justice and is directory. It was further held
that provision f removing the defects in an application within seven days is
directory and not mandatory in nature. The court clarified that while
interpreting the provisions to be directory in nature, if the objections are not
removed within seven days, the applicant while refilling the application after
removing the objections, file an application in writing showing sufficient case
as to why the applicant could not remove the objections within seven days.
n) Sandeep Kumar Gupta resolution Professional v Stewarts & Lloyds of India
Ltd. & Anr
. Company Appeal (AT) (Insolvency) No.263 of 2017 decided on
The NCLAT ruled that Resolution Professional’s performance did not amount to
misconduct, but as the Adjudicating Authority was not satisfied with the
performance of the RP, it was well within its jurisdiction to engage another
person as RP or Liquidator.
o) Rajputana Properties Pvt.Ltd. v. UltraTech cement Ltd & Ors
Appeal no 10998 of 2018.
The Supreme Court upheld the order passed by the NCLAT that approval of the NCLT
is not a mere requirement/formality. Even though the NCLT is not permitted to
alter the terms of the plan, the ultimate authority to approve or reject a plan
vests with NCLT and fort that it should consider the following aspects:
(i) whether the plan complies with the requirements of Section 30(2)?
(ii) Whether the plan is fair and equitable or there is any unjust
discrimination not envisaged in law?
(iii) Whether the plan adheres to the object of the code i.e. maximizes the
value of assets and balances the interests of all the stakeholders? Only if the
aforesaid questions are answered in satisfactory, the plan is confirmed, if not
the NCLT may deny its confirmation.
p) Shah Bros Ispat Pvt. Ltd v. P. Mohan raj & Ors
. 2018 SCC Online NCLAT
415 decided on 31.07.2018.
The NCLAT held that Section 138 of the N.I Act is a penal provision which
empowers the court of competent jurisdiction to pass order of imprisonment of
fine, which cannot be held to be proceeding of any judgment, decree of money
claim. It was further concluded that imposition of fine cannot be held to be a
money claim or recovery against the corporate debtor nor order of imprisonment,
if passed by the court of competent jurisdiction on the directors, they cannot
come within the purview of Section 14 of the I &B Code, 2016. Hence no criminal
proceedings are covered under Section 14 of the IBC
q) Transmission Corporation of Andhra Pradesh Limited vs. Equipment
Conductors and Cables Limited
Civil Appeal No. 9597 of 2018 decided on
In this case the NCLAT without discussing the merits of the case and also
without stated how the amount was payable, given wielded threat to the Appellant
by giving a one chance, 'to settle the claim, failing which this Appellate
Tribunal may pass appropriate orders on merit'. The Supreme Court relied on the
decision in Mobilox case and held that while examining an application under
Section 9 of the Act, the Adjudicating Authority will have to determine (i)
Whether there is an "operational debt" as defined exceeding Rs 1 lakh, (ii)
Whether the documentary evidence furnished with the application shows that the
aforesaid debt is due and payable and has not yet been paid and (iii) Whether
there is existence of a dispute between the parties or the record of the
pendency of a suit or arbitration proceeding filed before the receipt of the
demand notice of the unpaid operational debt in relation to such dispute. With
these observations the NCLAT order was set aside.
The way forward.
Some point worthy merits of this act are that, most loans that land up for in
insolvency proceedings are likely to have already been restructured by the banks
in the past. The fact that repayment has failed even after such restructuring,
raise serious questions on the credit-worthiness of the loaners. Hence, barring
promoters of such companies is only logical. Thus, the ordinance creates the
scope for disqualifying an existing promoter or including a rank outsider into
the bidding process. Certain drawbacks of this act areThe Insolvency and
Bankruptcy Board of India (IBBI) is the regulator, which was set up under the
IBC.But several advisory committees of the IBBI, entrusted with corporate
insolvency & liquidation, are chaired by several top corporate leaders.This
could be tricky for the credibility of IBC and the recent ordinance may be
misused to defeat the very objective of penalizing the errant promoter.
Banks will only lose more,if these designs help in side-tracking loan recovery
and aid influential people to purchase distressed assets at low prices.One of
the major hurdles being faced in speedy resolution of the CIRP cases is
inadequate infrastructure at NCLT, procedural inefficiencies and legal hurdles.
Nearly 6,000 petitions have been filed under IBC at NCLT until now. To address
this there are only 11 NCLT benches across the country which are catering to
these petitions as well as other cases. Over the next couple of years we expect
a cascading effect of financial stress on the vendors of some of these large
Insolvent companies and business groups.
There have been several pressing concerns and eyebrows raised with regard to
IBC. The most important one being the appointment of certain corporate leaders
as the members of board committee of IBBI, this has been criticised thoroughly
and questions have been raised with regard to the credibility of the functioning
of the board as well the implementation of the said code. There have been talks
on whether the board would be able to maintain transparency and discretion when
it comes to assessing a case and whether or not there would be a scope of some
kind of misuse and manhandling of a case. One may wonder if the committee
members would be unbiased and would function in a non partisan manner.
However it cannot be denied and it certainly is praise worthy that the code has
raised immense hope of faster recovery, lesser defaults and a stronger lending
and investment sector in India.Furthermore this code has also facilitated in a
turnaround or turn over, operation of creditors (whether secure or
unsecured).This act has limited the regulatory aspect, yet has broadened the
scope of how insolvency and bankruptcy could be consolidated in one statute,
providing immense relief to aggrieved parties like the bank sufferers and it has
impacted the NPA sector tremendously where in the return of the money has taken
place at a praiseworthy scale. This will most likely go down in history as Mr.
Arun Jaitley’s legacy.
Written by: Dev P. Bhardwaj
- Central Govt. Standing Counsel
459, Lawyers’ Chambers, Delhi High Court, New Delhi-110003