IBC 2016 | Litigation: A Tool or Weapon

Swarupama Chaturvedi*

‘…happy to note that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid.’

Justice R. F. Nariman¹

Hon’ble Supreme Court of India hailed the working of the Insolvency and Bankruptcy Code, 2016 (Code) in these words affirming its positive impact on the Indian economy. The Code has streamlined the process of resolution of insolvencies in the country. The Code envisages that once the insolvency process has commenced, it should be established as irreversible as quickly as possible and be concluded in a time bound manner. Time is considered to be the essence of the Code. However, it has been observed that during the journey of three years since the Code was enacted, there have been situations where meeting the laid down timelines has been a challenge.

With a new law in vogue, stakeholders have frequently knocked the doors of the judiciary seeking clarifications and decisions on various aspects of the Code. While these litigations have brought about clarity in interpretations of various provisions of the Code, it has also resulted in some delays in approval of resolution plans. Extension of timeline in the corporate insolvency resolution process (CIRP), under the Code, due to exclusion of time spent in litigation and consideration of the timeline provided in the Code as a directory provision, has also resulted in delays in admission. The pronouncement by the Apex Court² that the timelines provided in sections 7, 9 and 10 of the Code, for deciding a matter within 14 days as well as the time to remove a defect within 7 days, are directory and not mandatory, brought about a big shift in adherence of timelines provided in the Code.

Since litigation is touted to be one of the reasons that delays the resolution process, this article attempts to analyse the emerging jurisprudence around the provisions of CIRP under the Code and the Regulations framed under it. It explores whether resorting to litigation is indeed helpful for the development of the law or is it just a route to buy time and delay the resolution process.

THE JOURNEY ON UNEXPLORED ROADS

With the implementation of the Code, there is now an easier exit option available to entrepreneurs, enabling them to take more risks. Also, it has been seen that investors are more willing to invest as there is less uncertainty about loan repayments. As observed by the apex court, there has been a paradigm shift in the way corporate debtors (CDs) are managed during the insolvency resolution process since the Code was enacted. Creditors now assume control of the CD from the previous management and bring about a positive change. Resolution plans, which are in the interest of the CD and other stakeholders like creditors, workers and shareholders, are effected by the ‘new’ management.

The Code has led to the resolution and liquidation of various CDs, helping in realisation of claims of creditors. A number of cases have been resolved through settlement between parties as promoters fear losing the ownership of their firm upon initiation of insolvency resolution process under the Code³. In the matter of Swiss Ribbons ⁴ it was observed that total flow of resources to the commercial sector in India, both bank and non-bank, and domestic and foreign (relatable to the non-food sector) has gone up from a total of Rs. 14,530.47 crore in 2016-­2017, to Rs. 18,469.25 crore in 2017- 2018, and to Rs. 18,798.20 crore in the first six months of 2018-2019.⁵ These figures show that the Code has proved to be a successful enactment.

In the same matter, the apex court has also upheld the constitutionality of the provisions of the Code and also settled the law on various issues related to the Code. The case has established the jurisprudence, which is helping the Adjudicatory Authority (AA) to decide issues on routine basis and thereby reducing the litigation under the Code in general.

Experience of Roadblocks

As is the case with any newly enacted legislation, which is in its nascent stage of development, the Code is bound to face situations, which might not have been foreseen at the time of its enactment. This has resulted in mainly four types of situations can be identified:

• a situation not covered by any of the existing laws;
• a situation, where there is a provision in law but some clarification is needed;
• a situation which was not ready for any intervention by law leading to a lack of acceptability; and
• a situation regarding the exclusion of a class or classes of people from the applicability of the law.

Settlement of disputes after admission of the application for insolvency is a classic example of the first type of situation mentioned above. Various definitions like debt, claim etc. come in the second category, where judicial intervention offered the necessary clarifications. Third category comprised mostly of debtors, who sought intervention of the judiciary to understand the objectives of the enactment of the Code and to understand if their interest is equally important as the interest of the creditor. Fourth type of situation can be well explained with the example of home buyers. The demand of home buyers⁶ to be treated like a financial creditor (FC) is a reflection of the expectations that the general public has with the Code, which is to balance the interest of all the stakeholders.

JUDICIARY: THE SAVIOUR

In the above backdrop, the Code’s implementation also saw situations where legal help was sought by different parties and this is where the appellate Courts came into action. National Company Law Appellate Tribunal (NCLAT) and the apex court have worked towards developing the jurisprudence of this Code and have been constantly guiding AAs. It is also important to note that despite having a huge number of appeals, the disposal rate is swift. It must be acknowledged that the judiciary has been the savior for not only all stakeholders but also for the Code and every institution which is a part of the functioning of the Code. Some of the issues settled by the apex court are discussed below to show how some emergent situations, experienced during the journey of the Code, were tackled and solved.

Interpretation of the Objectives of the Code

In the matter of M/s Innoventive Industries Ltd. v. ICICI Bank & Anr,⁷ the apex court gave a detailed judgement, which clarified most of the aspects of the Code. In this case, it was observed that since this was the first application moved under the Code, it was necessary to deliver a detailed judgment that would serve as a piece of guidance to all Courts and Tribunals and they would take cognisance of a paradigm shift in the law. It said that the entrenched managements are no longer allowed to continue if they cannot pay their debts. It was further observed that one of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.⁸

This judgement was a loud and clear message that this law was the need of the hour and it was there to stay for the betterment of the economic health of the nation.

Settlement after Admission

In the matter of Lokhandwala Kataria Construction Pvt. Ltd v. Nisus Finance and Investment Managers LLP,⁹ the issue was whether in view of Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the NCLAT could utilise the inherent power recognised by rule 11 of the National Company Law Tribunal (NCLT) Rules, 2016 to allow a compromise between the parties involved in a case, after admission of the matter. The question arose because in the impugned order, NCLAT has held that the inherent power could not be so utilised. On appeal, the apex court agreed with the stand taken by the NCLAT on the aforesaid question of law and utilised its powers under Article 142 of the Constitution and put a quietus to the matter by allowing settlement between the parties.

After this case, there were many cases that were filed before the apex court for grant of similar relief. This became a contentious issue as the apex court was invoking Article 142 multiple number of times, much more than it had ever in the past. Since the same issue was coming up before the apex court in numerous cases, it observed in the matter of Uttara Foods and Feeds Pvt Ltd v. Pharmachem, that instead of such orders coming to the apex court (as only the apex court can utilise its powers under Article 142 of the Constitution of India), the relevant Rules be amended by the competent authority so as to include such inherent powers. It further observed that this would obviate unnecessary appeals being filed before this Court in matters where such an agreement had been reached. The apex court also directed that a copy of the order of the judgement of Uttara Foods be sent to the Ministry of Law and Justice immediately. The amendment has resolved the issue and now there is a provision to permit such a settlement.

Rights of Operational Creditors

In the matter of Mobilox Innovations Pvt Ltd. v. Kirusa Software Private Ltd , ¹¹ the apex court dealt with the issue of existence of dispute and settled the law on this issue. It has considered questions such as initiation of insolvency resolution process by operational creditors (OCs) and as to what would constitute a ‘dispute’, entitling the debtor company to have the AA reject the application.

The apex court observed that there can be situations where a debtor company may have a dispute with an OC, which may not have escalated to a court or arbitral tribunal. Issues like this were resolved in one judgement, imparting clarity on the issue and setting a precedent to follow in similar situations, which ultimately reduced the burden of litigation on future CIRPs.

Copy of the Resolution Plan to Ex-Directors

In Vijay KumarJain v. Standard Chartered Bank & Ors.¹², the apex court allowed ex-directors to get a copy of the resolution plans from the resolution professional. It was considered that some of the suspended directors may have offered personal guarantee for the CD and the approved resolution plan under section 31(1) of the Code would be binding on the suspended board of directors, therefore, they had right to access resolution plans. This judgement gave a sense of satisfaction to ex-directors who otherwise had started to feel completely ousted in the process. The Issue of Related Party

While rejecting the challenge of the petitioners on the constitutional validity of section 29A of the Code in case of Swiss Ribbons,¹³ the apex court 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 being able to prove 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. It further 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 time 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.

The Issue of Home buyers

A group of home buyers of Jaypee approached the apex court for the first time in the matter of Chitra Sharma V. Union of India along with many connected matters, several intervention and applications for being impleaded in the matter, for inclusion in the class of FCs. It directed for an arrangement wherein home buyers could convey their intention to receive their money back or continue with the possession of their flat.

While the aforesaid petitions were under consideration before the apex court, the Government amended the Code to include home buyers in the list of FCs. The Government has been following the functioning of the Code closely and proactively dealing with issues in its implementation. With the aforesaid amendment, the issue of the status of home buyers got resolved. However, stakeholders are continuing to approach the Courts for any issue related to the Code. This is how the Code’s jurisprudence is evolving and developing faster than any other law.

LEARNING FROM EXPERIENCE

The apex court has upheld the constitutionality of the Code in its entirety while observing that the flow of financial resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid. While this is a positive acknowledgement by the apex court, there were also concerns shown by different stakeholders. As the Government is closely following the functioning of this Code, observations have been taken positively by the government and there have been amendments to resolve those concerns. Many amendments have been made to the Code, and to the subordinate legislation made thereunder, based upon Committee Reports which are looking into the working of the Code.

One such concern flagged is the adherence of timelines provided in the Code. To understand the gravity of this issue one has to analyse the days taken by some of the CIRPs, which have been delayed by over 450 days due to litigations. Jaypee, Essar Steel, Shushan Power and Steel, Lanco Infra, and Alok Industries are few such examples. Time is the essence of the Code as outcomes are calculated in terms of time, value and money. Considering the essence and spirit of this law, it was necessary to prioritise adherence to the set timeline. While avoiding litigation can be one of the aspects, it must be noted that litigation (not withstanding its major role) is not the sole reason for the delay in the CIRP.

Keeping in view the importance of time in the debtor-creditor relationship and CIRP, there is greater emphasis on the need for time-bound disposal at application stage. Therefore, the deadline for completion of CIRP, within an overall limit of 330 days, was introduced by a recent amendment to the Code, which will include time for any extension granted and the time taken in legal proceedings in relation to the process. This Amendment Act also makes a provision for pending matters which are over 330 days. The Amendment has stipulated that such pending matters be resolved within 90 days.

Litigation: An Instrument to develop Jurisprudence

While litigation has indeed delayed the process, it has also played a major role in the implementation and effective functioning of the Code. When the Code got enacted, there were queries from every corner, but solution of every issue was received from the judicial pronouncements. It is unfair to now say that many days were lost to the litigation process and how exclusion of those days has delayed the process. It is imperative balanced to note that days taken by the courts in the interpretation of the Code would save the time of all future CIRPs on similar issues and queries. It is also necessary to analyse the time taken by the courts to decide a civil appeal as opposed to insolvency appeals. Such an analysis would reveal that the courts do show concern to the timeline provided in the Code.

CONCLUSION

The Code has brought high hope and aspirations due to the influence it has had on the economy of the country. It is an important law which has had a strong impact on business and the economy. ^1 Since this law helps all stakeholders, delays in admission of applications and extended timelines for resolution process are a matter of concern. Everyone, including the AA and regulatory authorities, have shown their commitment to implement the Code despite working under constraints and limitations.

Some steps can be taken to reduce litigation. Sending insolvency resolution professionals for a mandatory short refresher course before they give consent for the term can be the first step. It is also necessary that the AAs are aware about judgements passed by various courts and for that they need to have a research team that can update the courts about various interpretations of the Code. This will help in avoiding conflicting views leading to further litigation. It is also suggested that the power to give exclusion of days from CIRP should be limited to the discretionary power provided under Article 142 of the Constitution. Going further, when AA gets sufficient infrastructure, more number of Information Utilities become functional and insolvency professionals gain sufficient experience, it is expected that CIRP processes would be able to adhere the timelines prescribed under the Code.

Notes:-

¹ Justice R.F. Nariman, in the matter of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., (2019) 4 SCC 17 (hereinafter ‘Swiss Ribbons’)

² Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and Others, (Civil Appeal No. 8400 of 2017)

³ It was further observed by apex court in Swiss Ribbons, that approximately 3300 cases have been disposed of by the AA based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over Rs. 1,20,390 crore. 80 cases have since been resolved by resolution plans being accepted. Of these eighty cases, the liquidation value of 63 such cases is Rs. 29,788.07 crore.

⁴ Supra note 1.

⁵ Supra note 1, observed that the amount realized from the resolution process is in the region of Rs. 60,000 crore, which is over 202% of the liquidation value. As a result of this, the Reserve Bank of India has come out with figures which reflect these results. Thus, credit that has been given by banks and financial institutions to the commercial sector (other than food) has jumped up from Rs. 4952.24 crore in 2016­2017, to Rs. 9161.09 crore in 2017- 150 2018, and to Rs. 13195.20 crore for the first six months of 2018- 2019. Equally, credit flow from non-banks has gone up from INR 6819.93 crore in 2016-2017, to Rs. 4718 crore for the first six months of 2018-2019.

⁶ Home buyers of Jaypee Group before Supreme Court, in Chitra Sharma v. Union of India, (<.P. (C) No. 744 of 2017 and other connected matters).

⁷ (2018)1 SCC 407 (hereinafter ‘Innoventive’)

⁸ The Hon’ble Court discussed in Innoventive case that the time taken in insolvency in other countries and then observed that as per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the United Kingdom (1 year), US (1.5 years) and South Africa (2 years). The World Bank’s Ease of Doing Business Index, 2015, ranked India as country number 135 out of 190 countries on the ease of resolving insolvency based on various indicia.

⁹ Civil appeal No. 9279 of 2017.

¹⁰ Civil Appeal No. 18520 of 2017.

¹¹ Civil Appeal No. 9405 of 2017.

¹² Civil Appeal No. 8430 of 2018.

¹³ Supra note 1.

¹⁴ Supra note 6

¹⁵ Swarupama Chaturvedi (2017). Triggering the Corporate Insolvency Resolution Process by the Operational Creditor Under Insolvency and Bankruptcy Code 2016. Amity International Journal of Juridical Sciences, Vol-3.

Source- https://ibbi.gov.in/uploads/whatsnew/2456194a119394217a926e595b537437.pdf

*(Author Ms. Swarupama Chaturvedi is an Advocate on Record in the Supreme Court of India and former Assistant Professor in NLSIU Bangalore.)