The Insolvency and Bankruptcy Code (IBC) has invited a lot of discussion in the past few years. However, 2020 has been a more challenging year with the COVID-19 virus pandemic followed by complete lockdown, isolation, and numerous companies facing the wrath of the pandemic and resulting financial challenges. Since the Code is still in its nascent stages of development, judicial pronouncements lay a very important role in clarifying the legislative intent of the Code. During the pandemic, various courts/ tribunals delivered pivotal judgments through online courts. Out of the several judgments given by courts/tribunals, we have identified, summarized and captured the 7 significant insolvency and bankruptcy rulings that we have come across in 2020 The summary of these 7 pivotal judgments is covered in this article.
1. Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited etc., 2019 SCC OnLine SC 1775
In the instant case, the Supreme Court has elaborated certain key aspects in respect of scope and ambit for adjudication of preferential transactions under section 43 of IBC, with a key emphasis on the nature of financial debt particularly in relation to third-party mortgages amongst others.
The Apex Court, after carrying out an extensive analysis of each provision of section 43, if the transaction entered into by the corporate debtor does not satisfy the three-fold requirements of sub-sections (4) and (2) of section 43 and exceptions provided under Section 43(3), it would be adjudged as a preference during a relevant time, irrespective of the fact it was so. The Apex Court has also clarified that when analyzing preferential transactions under the Code, the intention of the parties is irrelevant in determining whether the transaction is preferential. Accordingly, the Supreme Court overturned the NCLAT order and considering the mortgage transactions as preferential transactions and hence avoided.
The Apex Court, further clarified that for any debt to be ‘financial debt’ under the Code, it ought to be satisfied that the character of ‘financial debt’ falls within the meaning of section 5 (8) of the Code. The Supreme Court further observed that a person having a ‘security interest’ and a financial creditor are different things, i.e., for a person coming under the purview of a ‘financial creditor’ it needs to be established that the corporate debtor owes a financial debt to such person. Therefore, when a corporate debtor does not owe any financial debt against the third. it cannot be regarded as a financial creditor of such corporate debtor. Thus, as per section 5(8), ‘financial debt’ does not include ‘mortgage’. Hence, as per the Apex Court, third party security is not financial debt.
However, one may conclude, that the court has seemingly committed an error of law by adopting a very narrow interpretation of financial debt as laid out in Section 5(8) of the IBC 2016. Excluding third-party security transactions under the scope of IBC will initiate grave challenges for the banking system and could hinder credit flow in the system.
2. Anshul Vashishtha vs. Jayhind Steel Traders and Anr. :
As per Section 8(1) IBC, an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under subsection (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process [Section 9(1)]. After the application is accepted, the adjudicating authority shall initiate a corporate insolvency resolution process (CIRP), under Section 10 and shall thus proceed to appoint an Interim Resolution Professional under section 16 of the said Act.
In this case, the NCLAT allowed the Appeal filed against the impugned order passed by the Adjudicating Authority (NCLT) under section 9 and declared the appeal illegal and set aside the order. The NCLAT observed that the object of the Code is maximizing the value of assets of the corporate debtor and to bring it out of insolvency, not recovery of money. The Tribunal further observed that that if there is a dispute as per relevant provisions of the Code, it is incumbent on the Adjudication Authority to reject the petition/application as per provisions under Section 9 of the Code. It has already been laid down by the Supreme Court of India in Mobilox Innovations Pvt. Ltd., vs. Kirusa Software Pvt. Ltd. that wherever there is existence of real dispute, the IBC provisions cannot be invoked. Since the Hon’ble Apex Court has clearly laid down the mechanism to be operated by Operational Creditor in terms of Section 8 & 9 of the Code, it is very clear that the undisputed debt is sine qua non of initiating CIRP as also the debt should be due and payable. The Tribunal held the appeal to be allowable, as the order of the adjudicating authority did not meet the criteria laid down by the Apex Court.
3. C. John vs. Jitender Kumar Jain, 2020 SCC OnLine NCLAT 182 :
Section 63 of the Insolvency and Bankruptcy Code, bars any suit or proceedings in a civil court or any other authority in any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code. As per section 60 of the Code, the Adjudicating Authority, in relation to any insolvency resolution and liquidation for corporate persons, including corporate debtors and personal guarantors thereof, shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.
Further, Section 238 of the Code grants IBC an overriding effect by insertion of a non-obstante clause and ensuring that provisions of the Code will continue to be in full force even, if they are inconsistent with any other law of the country. It is also stated in section 231 of the Code, that no civil court shall have the jurisdiction in any matter where the Adjudicating Authority or the Board is empowered by, or under, this Code to pass any order and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any order passed by such Adjudicating Authority or the Board under this Code. Section 33 of the Code bars every suit or proceeding instituted against the Corporate debtor, when a liquidation order has been passed.
In this case, NCLAT set aside the order of the NCLT and quashed the civil suit against the Corporate Debtor. The Tribunal further observed that, even though the filing of a civil suit is barred in terms of the code, the correct course for the liquidator is to approach the Court where the civil suit was pending and point out the pertinent provisions of law. Also, the NCLT should not quash the proceedings pending before the Court.
4. Ravindranath Reddy vs. G. Kishan & Ors. :
Section 5(20) of the Code defines the operational debt as 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.
In the present matter of Ravindranath Reddy, the Tribunal interpreted the scope of Operational debt with respect to the service sector. The issue that came before the Tribunal was –
Whether a landlord by providing lease, will be treated as providing services to the corporate debtor, and hence, an operational creditor within the meaning of Section 5(20) read with Section 5(21) of the Insolvency and Bankruptcy Code, 2016?
Unlike goods, services are intangible and a large part of the business industries is present in the service sector. Any sum of money is classified as an operational debt when the amount falls under the ambit of ”claim” as defined under Section 3(6) of the Code. Also, when such a claim falls within the confines of the definition of ”debt” under Section 3(11) of the Code, meaning it should be by way of a liability or obligation due from any person. Thirdly, when such a ”debt” strictly falls within the scope of ”operational debt” as provided in Section 5(21) of the Code, i.e. the claim should arise in respect of:
- provision of goods or services including employment; or
- a debt in respect of the repayment 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.
and if the claim does not fall under any of the three categories as mentioned above, the claim cannot be classified as an operational debt.
The Indian Appellate Insolvency Tribunal, namely, the National Company Law Appellate Tribunal (NCLAT) held in the present case that, any debt arising without nexus to the direct input to the output produced or supplied by the corporate debtor, cannot, in the context of the IBC, be considered as an operational debt, even though it is a claim amounting to debt and therefore, lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition of Operational Debt.
5. Kuntal Construction Pvt. Ltd. vs. Bharat Hotels Ltd. :
Section 61 of the Insolvency and Bankruptcy Code, 2016 provides for appeals from the National Company Law Tribunal (NCLT) to the National Company Law Appellate Tribunal (NCLAT). Similarly, Section 62 of IBC provides that an appeal from the order of National Company Law Appellate Tribunal on a question of law shall lie before the Supreme Court. Such appeal shall be filed within a period of 90 days. The issue of whether an application under Section 9 of the Code will be maintainable, in case of pre-existing dispute was decided by the NCLAT in the present case. As per section 9 of IBC, the operational creditors of a company may initiate corporate insolvency resolution process if a default has been occurred.
An appeal was filed under Section 61 of IBC, to initiate the Corporate Insolvency Resolution Process (CIRP) against the respondent or corporate debtor for an outstanding amount of Rs 14 89,966. The NCLAT, dismissed the Appeal against the NCLT order for rejecting the application filed under section 9 on the grounds of pre-existing dispute. The Tribunal observed that, since there was a dispute existing prior to the issuance of Section 8 notice and IBC is not intended to substitute a recovery forum, the insolvency provisions cannot be invoked. While dismissing the petition on merits, the NCLAT elucidated that :
”No one can take a recourse saying a judgment was not communicated to them as it is the duty of the counsel to keep a track of the status after the matter is reserved for pronouncement.”
It further held that non-communication of the judgment is not a valid ground for requesting condonation of delay.
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