1. BACKGROUND :

The Insolvency and Bankruptcy Code, 2016 (‘the Code’) [1] is built up with strong institutional adjudication mechanism, time bound resolution process, quick and scientific credit information base and thus resulting into briskly disposal of insolvency and liquidation proceedings. The Code is a breath of fresh air in recent times as it makes both the individual and corporate insolvency process comprehensive yet simple. It encompasses within its ambit a wide array of persons ranging from a farmer to a multi-billion dollar businessman, from start-ups to big corporate houses. However, it is very important that every individual and corporate must understand the mechanism of the Code, rights conferred to them and available remedies in order to utilize the Code to its full potential.

The Code prescribes a two-fold insolvency resolution process, namely :

2. WHAT DOES THE CURRENT CODE AIM TO DO ?

The Code provides a time-bound process to resolve insolvency. When a default in repayment occurs, creditors can gain control over the assets of the debtor and must take decisions to resolve insolvency within a period of 180 (One Hundred and Eighty) days. To ensure an uninterrupted resolution process, the Code also provides a moratorium period to debtors from resolution claims of creditors during this period. The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

The Code provides the time limit for completion of corporate insolvency resolution process within a period of 180 days from the date of admission of the application by Adjudicating Authority to initiate the insolvency process. The period can also be extended beyond 180 days subject to maximum period of 90 days on resolution passed at a meeting of the committee of creditors by a vote of sixty percentage of the voting shares.

In any event, resolution plan is not approved within the said time limit, the Adjudicating Authority may pass an order requiring Corporate Debtor to be liquidated in the manner as laid down under the Code.

3. FRAMEWORK OF THE CODE

All proceedings under the Code in respect of Corporate Insolvency are to be adjudicated by the National Company Law Tribunal (NCLT), which has been designed as the ‘Special One Window Forum’ to tackle all aspects of insolvency resolution. The NCLT is referred to as the ‘Adjudicating Authority’.

All appeals from the orders of the NCLT lies before the National Company Law Appellate Tribunal (‘NCLAT’) [2]. All appeals from the orders of the NCLAT lies before the Supreme Court of India [3].

When resolution / restructuring of debts is not viable, the NCLT may direct for dissolution of the Company. The Code envisages a two stages process, first revival and second, liquidation as follows :

  • Corporate Insolvency Resolution Process (‘CIRP’) / Fast Track Insolvency Resolution Process (‘F-CIRP’);
  • Liquidation / Dissolution.

4.  SERIES OF JUDICIAL PRONOUNCEMENT

With almost more than two years since the introduction of the Code, there have been various challenges in the effective implementation of the Code. However, constructive interpretation by the judiciary coupled with effective amendments to the Code have helped in eradicating most of these teething issues. The Insolvency and Bankruptcy Board of India which is the regulatory and supervisory body in charge of the IBC, has done a commendable job in proactively spreading awareness and regulating the space.

Many important judgments were pronounced throughout the year, including certain landmark cases, where in Supreme Court has tried to ensure that the spirit of the Code is given primacy over procedural requirements.

Some of the key judicial pronouncements are discussed below :

4.1 Suspended Board of Directors of Corporate Debtor Entity are entitled to access the resolution plan and other related documents

In a significant judgement delivered on January 31, 2019 [4], the Hon’ble Supreme Court of India decided on an important aspect with respect to the rights of the suspended board of directors of the Corporate Debtor Entity to receive and access the resolution plan and other related documents, whose case has been admitted by the Adjudicating Authority under the relevant provisions of the Code.

Facts of the Case :

In respect of Mr. Vijay Kumar Jain, Director of Corporate Debtor (‘Appellant’) vs. Standard Chartered Bank and Ors. (as ‘Financial Creditors’), the NCLT had approved the appointment of Resolution Professional (‘RP’) to conduct Corporate Insolvency Resolution Process of Corporate Debtor Company i.e. Ruchi Soya Industries Limited (‘RSIL’). The appellant, being a member of the suspended board of RSIL, was given notice and agenda for the first meeting of Committee of Creditors (‘CoC’) and was permitted to attend the meeting of CoC. The appellant alleged that he was not granted permission to participate in subsequent meetings of CoC.

As a result, appellant filed miscellaneous application before the NCLT to allow his participation in the subsequent meetings of CoC. The appellant also executed a Non-Disclosure Agreement (‘NDA’) to keep information received through participation in the CoC meeting strictly confidential and even undertook to indemnify RP. However, NCLT vide its order dated August 1, 2018 [5] dismissed the said application of appellant with liberty to the appellant to attend the COC meetings, but not to insist upon the CoC or RP to provide information which is considered as confidential by the CoC or RP.

Against the said order of NCLT, the appellant filed an appeal before the Appellate Tribunal, which recognized the right of appellant to attend and participate on the CoC meetings but Appellate Tribunal vide its order dated August 9, 2018 [6] denied the prayer of the appellant to have access to certain documents including sensitive resolution plan.

The appellant aggrieved by the order of the NCLAT, filed an appeal before the Hon’ble Supreme Court of India.

Apex Court Observations and Findings:

On adverting relevant provisions of the Code and arguments of parties to the dispute, Supreme Court opined that, notice of each meeting of the CoC will have to be given to suspended board of directors of the corporate debtor entity. The Supreme Court further noted that the statutory scheme of IBC makes it clear that though the suspended board are not members of the CoC, yet, they have a right to participate in each and every meeting held by the CoC and also have a right to discuss along with members of the CoC, resolution plan that are presented at such meeting.

The Supreme Court further observed that Section 31(1) of the Code make it clear once the resolution plan is passed by the Adjudicating Authority, it shall be binding on the corporate debtor together with guarantors and other stakeholders. This being the case, it is clear that the erstwhile board of directors, which consists of persons who may have given personal guarantees for the debts owed by the corporate debtor, will be bound by the resolution plan, and therefore, have a vital stake in what ultimately gets passed by the CoC’s.

The Supreme Court also made it clear that so far as confidential information is concerned, RP can take an undertaking in the form of NDA from suspended board of directors of the corporate debtor entity with an objective to maintain strict confidentiality in regard to resolution plan and other related documents.

Further, according to Regulation 39(5) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the RP shall forthwith send a copy of the order of the Adjudicating Authority approving or rejecting a resolution plan to the participants and resolution applicant. The term ‘Participants’ includes members of the erstwhile Board of Directors of Corporate Debtor.

Thus in view of above, the Supreme Court allowed the appeal and set aside the impugned order of the Appellate Tribunal.

Conclusion :

Thus, said judgement cleared the doubts regarding rights of the suspended board of directors of the corporate debtor entity, with regard to access of resolution plan and other related documents, being finalised by CoC as such resolution plan vitally affects the suspended board of directors as well. The Resolution Professional and CoC cannot ignore the principles of natural justice in so far as the members of the suspended board of directors of the corporate debtor company are concerned.

4.2 Registered Trade Union can file Insolvency Petition as an Operational Creditor on behalf of its Members

In yet another significant judgement delivered on April 30, 2019 [7], the Hon’ble Supreme Court of India decided on an important aspect with respect to the rights of the registered trade union to initiate Corporate Insolvency Resolution Process in respect of the corporate debtor company under Section 9 of the Code and held that a registered trade union can maintain a petition as an Operational Creditor on behalf of its members.

Facts of the Case :

In respect of JK Jute Mill Mazdoor Morcha (‘Appellant / Registered Trade Union’) vs. Juggilal Kamlapat Jute Mills Company Limited (‘Respondent’), NCLT (Allahabad Bench) and NCLAT vide their orders dated April 28, 2017 [8] and September 20, 2017 [9] respectively rejected the application filed by the registered trade union against the respondent under Section 9 of the Code.

The appellant had issued a demand notice on behalf of 3000 workers under Section 8 of the Code with respect to outstanding dues of workers. The respondent duly replied to the notice intimating that there was a dispute in this regard and the cases were pending before various judicial authorities. The appellant filed an application before National Company Law Tribunal, Allahabad Bench. The NCLT has accepted that the respondent cannot deny the liability for making payment of workmen’s wages but rejected the application.

As a result, the appellant filed an appeal before National Company Law Appellate Tribunal (‘Appellate Tribunal’). The Appellate Tribunal also dismissed the appeal stating that the Adjudicating Authority has rightly rejected the application.

The question arises before Appellate Tribunal is, whether the appellant / trade union are covered within the meaning of ‘person’ as defined under Section 3 (23) of the Code.

The definitions of ‘person’, ‘operational creditor’ and ‘Operational Debt’ have been reproduced below for the ready reference:-

Section 3(23) defines ‘person’ which shall includes –

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a trust;

(e) a partnership;

(f) a limited liability partnership; and

(g) any other entity established under a statue, and includes a person resident outside India.

Section 5(20) defines ‘Operational Creditor’ –

‘Operational Creditor’ means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Section 5(21) defines ‘Operational Debt’

‘Operational Debt’ means a claim in respect of the provision 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;

The NCLAT observed that, even if it is accepted that the Appellant/Trade Union come within the meaning of ‘person’ but the appellant / trade union does not fall within the meaning of ‘Operational Creditor’.

The Appellate Tribunal discovered from the aforesaid definitions that following persons can claimed themselves as ‘Operational Creditor’ :-

(a) The person who has claim in respect of provision of goods (supplied) to the Corporate Debtor;

(b) Person who have provided services to the Corporate Debtor, including those who are in employment and

(c) Central Government, State Government and Local Authorities, who are entitled to claim debt in respect of dues arising under any Law for time being in force.

On perusal of the afore-said definitions, NCLAT is of the view that a workman or employee who had rendered services to the corporate debtor individually are covered within the meaning of ‘Operational Creditor’. However, the trade union or association of workmen / employee, does not fall within the purview of ‘Operational Creditor’ as no services are rendered by the such Workmen’s Association / Trade Union to the Corporate Debtor to claim any dues (referred to be term as ‘debt’).

In absence of any liability or application in respect of any claim which is due to Workmen Association / Trade Union from Corporate Debtor and as they do not provide any service to the corporate debtor, the question of default of debt does not arise and therefore they cannot claim to be ‘Operational Creditor’ for preferring any application under Section 9 of the Code.

NCLAT further observed that, in respect of each workman, there will be separate cause of action, separate claim and separate date of default. Also, there may be workmen / employees who are member of the Workmen Association / Trade Union but may not have any claim at all.

The appellant aggrieved by the order of the NCLAT, filed an appeal before the Hon’ble Supreme Court of India.

 Apex Court Observations and Findings:

On adverting relevant provisions of the Code and arguments of parties to the dispute, Supreme Court is of the opinion that the order passed by the Appellate Tribunal is incorrect since trade union represents its members who are workers, to whom dues may be owed by the employer, which are certainly debts owed for services rendered by each individual workman, who are collectively represented by the trade union.

Further, Supreme Court observed that instead of one consolidated petition by a trade union representing a number of workmen, filing individual petitions would be burdensome as each workman would thereafter have to pay various insolvency costs involved. Looked at from any angle, there is no doubt that a registered trade union which is formed for the purpose of regulating the relations between the workmen and their employer can maintain a petition as an operational creditor on behalf of its members.

Thus, the Hon’ble Supreme Court allowed the appeal and set aside the order of the Appellate Tribunal.

Conclusion :

Thus, this judgement cleared the doubts regarding the rights and liabilities of the registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members with regard to filing the insolvency petition before the Adjudicating Authority to initiate the Corporate Insolvency Resolution Process against Corporate Debtor on behalf of their members.

4.3 Adjustment / Setoff is admissible under Insolvency and Bankruptcy Code, 2016, especially when Moratorium is in operation

The Hon’ble National Company Law Tribunal, Mumbai Bench vide its order dated May 1, 2019 [10], decided the rights of Operational Creditor with respect to set off / netting off any previous dues recoverable from corporate debtor against the total amount payable to corporate debtor on commencement of insolvency resolution process.

Facts of the Case :

In respect of Bharti Airtel Limited and Bharti Hexacom Limited (’Airtel Companies / Applicants / Operational Creditors’) vs. Shri Vijaykumar V. Iyer (‘Resolution Professional’) acting as Resolution Professional on behalf of Aircel Limited and Dishnet Wireless Limited (‘Aircel Entities / Corporate Debtors’), the National Company Law Tribunal, Mumbai Bench (‘NCLT’) vide its order dated May 1, 2019 has directed Resolution Professional (‘RP’) to honour the legal and equitable right of Airtel Entities to apply ‘set off’ on account of mutual dealings for an amount of approximately INR 1120 millions during Corporate Insolvency Resolution Process (‘CIRP’).

Aircel Entities (for brevity, also referred to as ‘Seller Entities’) were entered into Spectrum Trading Agreements (‘STA’) with Airtel Entities (for brevity, also referred to as ‘Buyer Entities’) for the transfer of right to use the Spectrum in favour of ‘Airtel Entities’. The Department of Telecommunications (‘DOT’) demanded bank guarantees from Aircel Entities as a condition for granting the requisite approval.

Pursuant to said condition imposed by DOT, Aircel Entities approached Airtel Entities to submit bank guarantees on behalf of Aircel Entities. For this purpose, both parties entered into Letter of Understanding (‘LOU’), wherein parties agreed that an amount of INR 4537.3 millions would be retained by Airtel Entities (in lieu of bank guarantees issue on behalf on Aircel Entities) from the total consideration amount of approx. INR 40227.5 millions under the STAs. Pursuant to LOU, Airtel Entities had submitted bank guarantees of approx. INR 4537.3 millions to the DOT on behalf of Aircel Entities.

On commencement of CIRP of Aircel Limited on March 12, 2018 and Dishnet Wireless Limited on March 19, 2018, the Airtel Entities lodged claim and filed Form-B [11] to recover INR 1452 millions from Aircel Entities, describing the previous unpaid invoices to be payable by the Corporate Debtor to the Operational Creditor.

On termination of bank guarantees due to commencement of CIRP of Aircel Entities, the Airtel Entities released the amount of INR 4537.3 millions (retained earlier) by way of payment of INR 3418 millions to Aircel Entities and set off of INR 1120 millions against the dues of approx. 1452 millions owed by Aircel Entities to Airtel Entities.

The controversy at the heart of the case is that whether it is allowable to set-off the amount due to the Corporate Debtor from the amount to be recovered during CIRP?

Adjudicating Authority Observations and Findings:

On adverting relevant provisions of the Code and few respective case-laws represented by learned counsels of both parties, the NCLT upheld the normal course of business transaction in which if an amount is payable by one party to another party, the net amount is paid after factoring of payment due minus payable recoverable. NCLT further noted that in case if no insolvency proceedings were involved, then this simple principle of netting-off as per normal accounting principle would have been applied.

NCLT had lightened the provisions of Section 14(1)(d) of the Code for the legal proposition, ‘the Adjudicating Authority shall by order declare moratorium to prohibit the recovery of any property by an owner where such property is occupied or in the possession of the corporate debtor’. The Hon’ble Tribunal also drawn its attention on the definition of ‘Property’ as defined under Section 3(27) of the Code, which includes ‘‘money, actionable claim, goods, land etc.”

On perusal of the afore-said definitions, NCLT opined that Section 14(1)(d) of the Code has taken into consideration only one type of situation, when a creditor has to recover any property which is in possession of the corporate debtor. But in present scenario, the position is reverse, because the major amount (i.e. INR 4530 millions) is to be recovered from the operational creditor by the corporate debtor, however, as against that only sum of INR 1120 millions is the property of the said operational creditor, that too not in the possession of corporate debtor.

NCLT further observed that if set-off is not granted in this reverse situation then Resolution Applicant may or may not propose a correct resolution plan. It is necessary that a Resolution Applicant must be aware of the correct outstanding balances appearing on the date of commencement of Insolvency in the balance sheet, ought to be net balances and not gross balances to demonstrate economically viable resolution plan.

NCLT further lightened the provisions of Section 18(1)(f) of the Code, wherein it is prescribed the duties of Resolution Professional and one of them is ‘to take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, whether that asset may or may not be in possession of the corporate debtor’.

NCLT also noted the exception carved out in Section 18(1)(f) that certain assets shall not be included while taking action by RP under Section 18(1)(f) of the Code. The exception includes, ‘‘assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangement including bailment’’.

Thus, RP can take control / custody over an asset belonging to or in possession of the Corporate Debtor but the exception is that if an asset, although in possession of the corporate debtor but held under trust or contractual arrangement shall not be taken over by the RP. This provision of the Code is squarely applicable on the present situation that a sum of INR 1120 millions (amount arising on account of unpaid invoices for the services provided by Airtel Entities to Aircel Entities), although said to be under ownership of the corporate debtor, but the right is arising out of a contractual arrangement. Unpaid Invoices are nothing but in the nature of a contractual obligation emerging from the services provided.

Thus, said unpaid invoices are the assets of the Operational Creditor i.e. Airtel Entities, although not in direct control / possession of the Corporate Debtor but out of the ambits of Section 18(1)(f), being an asset under contractual obligation of payment by the corporate debtor to the operational creditor.

NCLT observed that in case if an asset is in possession of the corporate debtor then in spite of the applicability of ‘Moratorium’, if that asset came into existence out of a contractual obligation then set-off or adjustment is required to be allowed so that the RP be not entitled to take control over such asset.

The Tribunal in this case, ruled against the contentions of the Resolution Professional and allowed the applicant to set-off the amount of INR 1120 millions while making the payment of the amount retained out of the total consideration settled as per STA.

Conclusion :

Thus, this judgement cleared the doubts regarding the rights and liabilities of the operational creditor with regard to payment of outstanding dues after making deductions (as set-off or adjustment or net-off) previous dues, if any, despite of the fact that the Corporate Debtor is undergoing from insolvency process.

5. ENCAPSULATE:

In light of significant amendments and judicial pronouncement made by the regulatory bodies, the Code is a huge step towards the ease of doing business in India and has the potential of solving chronic issues relating to insolvency and bankruptcy of corporate and individuals.

The Code accepts the biggest truth, that businesses and individuals may falter in repaying their debts and thus allows them to make a new start. While facilitating failed firms to wind up endlessly and bankrupt individuals to come out of their debt trap, the Code can pave the way to resurrection also.

After Goods and Service Tax (GST), this Code is probably the most important legislative reforms of our times, as it is expected to resolve the prevailing Non-Performing Assets (NPA) crisis, the resultant logjam in the availability of credit and the consequential impact on GDP growth.

—————–

[1] Insolvency and Bankruptcy Code, 2016

[2] Section 61 of Insolvency and Bankruptcy Code, 2016

[3] Section 62 of Insolvency and Bankruptcy Code, 2016

[4] Supreme Court judgement delivered on January 31, 2019

Vijay Kumar Jain Vs Standard Chartered Bank & Ors. (Supreme Court of India), Appeal Number : Civil Appeal No. 8430 of 2018, Date of Judgement/Order : 31/ 01/2019

[5] NCLT pronounced order on August 1, 2018

https://ibbi.gov.in//webadmin/pdf/order/2018/Aug/STANDARD%20CHARTERED%20BANK%20MA%20518-2018%20CP%201371-2018%20%20NCLT%20ON%2001.08.2018%20FINAL_2018-08-09%2009:46:45.pdf

[6] NCLAT pronounced order on August 9, 2018

https://ibbi.gov.in//webadmin/pdf/order/2018/Aug/9th%20Aug%202018%20in%20the%20matter%20of%20Vijay%20Kumar%20Jain%20Vs.%20Standard%20Chartered%20Bank%20Ltd.%20&%20Ors.%20CA%20(AT)%20No.%20442-2018_2018-08-20%2011:14:26.pdf

[7] Supreme Court delivered judgement on April 30, 2019

https://ibbi.gov.in//webadmin/pdf/order/2019/Apr/In%20the%20matter%20of%20JK%20Jute%20Mill%20Mazdoor%20Morcha%20Vs%20Juggilal%20Kamlapat%20Jute%20Mills%20Company%20Ltd%20through%20it%20Directors%20Civil%20Appeal%20No.%2020978-2017_2019-04-30%2022:35:45.pdf

[8] NCLT pronounced order on April 28, 2017

https://ibbi.gov.in//webadmin/pdf/order/2019/May/In%20the%20matter%20of%20Juggilal%20Kamlpat%20Jute%20Mills%20Company%20Ltd%20CA%20No.(IB)%2036-ALD-2017_2019-05-16%2009:43:17.pdf

[9] NCLAT pronounced order on September 20, 2017

https://ibbi.gov.in//webadmin/pdf/order/2017/Sep/12th%20Sept%202017%20in%20the%20matter%20of%20JK%20Jute%20Mill%20Mazdoor%20Morcha%20Vs.%20Juggilal%20Kamlapat%20Jute%20Mills%20Co.%20Ltd.%20CA%20(AT)%20(Insolvency)%20No.%2082-2017_2017-09-18%2011:55:47.pdf

[10] NCLT pronounced order on May 1, 2019

https://nclt.gov.in/sites/default/files/final-orders-pdf/DISHNET%20WIRELESS%20LTD%20%26%20AIRCEL%20LTD%20MA%20230-2019%20IN%20CP%20302-2018%20%26%20MA%20219-2019%20IN%20CP%20298-2018%20NCLT%20ON%2001.05.2019%20FINAL_0.pdf

[11] Form B – Proof of Claim by Operational Creditor except Workmen and Employees under Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Author Bio

Qualification: LL.B / Advocate
Company: Wadia Group
Location: Mumbai, Maharashtra, IN
Member Since: 09 Sep 2019 | Total Posts: 1

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