Important Judgments on Insolvency and Bankruptcy Code, 2016

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January 30, 2019

The Insolvency and Bankruptcy Code was formulated by the Legislature in the year 2016 with a view to consolidate e and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. Since it’s inception the Code has been under continuous scanner and amended several times. The Judiciary has also pronounced verdicts which establish the substance of the Code and aid in streamlining to newly developed law for debt recovery in India.

Supreme Court Deciphers Insolvency and Bankruptcy Code, 2016

Case name: M/s Innoventive Industries Ltd. v. ICICI Bank

In this case, the Supreme Court for the first time explained the paradigm shift in law by virtue of the newly enacted Insolvency and Bankruptcy Code, 2016 which consolidates and amends all the laws relating to the insolvency and bankruptcy process in India.

In this case, the Court expounded the legislative intent behind enactment of the Insolvency and Bankruptcy Code, 2016. The Court in the case explained the paradigm shift in Law to render guidance to Courts and Tribunals while dealing with cases under the Code. The Court stated that the moment initiation of the corporate insolvency resolution process takes place, a moratorium is announced by the adjudicating authority under the Code by which institution of suits and pending proceedings etc. cannot be proceeded with which  continues until the approval of a resolution plan as required by the Code. In the interim, an interim resolution professional (IRP) is appointed to manage the affairs of corporate debtors.

With reference to the instant case, the Supreme Court remarked that by giving effect to the State law, the intended scheme of the Code would directly be hindered to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional.

Insolvency Code: Lawyer can Issue Demand Notice on Behalf of Operational Creditor

Macquarie Bank Limited v. Shilpi Cable Technologies Ltd.

In this case, the Supreme Court settled the legal proposition under the Insolvency and Bankruptcy Code, 2016 to hold that:

  • Section 9(3)(c) of the Code is directory and not mandatory in nature
  • Demand notice under the Code can be issued by the Lawyer on behalf of the operational creditor

The two issues that were raised in this case pertained to Insolvency and Bankruptcy Code, 2016 (Code).  Firstly, whether, in relation to an operational debt, the provision contained in Section 9(3) (c) of the Code is mandatory and secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor.

With reference to the aforesaid issues, two-Judge Bench of the Supreme Court made the following observations.

Section 9(3) (c) of the Code is directory and not mandatory in nature

Here it is relevant to mention that Section 9(3) (c) of the Code provides for the documents to be furnished alongwith application for initiation of corporate insolvency resolution process by operational creditor under Section 9 of the Code.

In this context the Court made reference to the requisite elements necessary to trigger the Code under Section 9(1):

  1. occurrence of a default;
  2. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and
  3. 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 Court held that only when these conditions are met an application may be filed under Section 9(2) of the Code in the prescribed manner, accompanied with prescribed fee. Under Section 9(3), along with the application, certain other information is also to be furnished.

That under Section 9(3)(c) of the Code a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor is certainly not a condition precedent to triggering the insolvency process under the Code. The expression “confirming” makes it clear that this is only a piece of evidence, albeit a very important piece of evidence, which only “confirms” that there is no payment of an unpaid operational debt.

That the expression “initiation” contained in the marginal note to Section 9 does indicate the drift of the provision, but from such drift, to build an argument that the expression “initiation” would lead to the conclusion that Section 9(3) contains mandatory conditions precedent before which the Code can be triggered is a long shot. Equally, the expression “shall” in Section 9(3) does not take us much further when it is clear that Section 9(3) (c) becomes impossible of compliance in cases like in the instant case. It would amount to a situation wherein serious general inconvenience would be caused to innocent persons, such as the appellant, without very much furthering the object of the Act and therefore, Section 9(3)(c) would have to be construed as being directory in nature.

A Lawyer can Issue a demand notice of an unpaid operational debt on behalf of the operational creditor

In this context, the Supreme Court observed that Section 8 of the Code speaks of an operational creditor delivering a demand notice and if 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.

That both the expressions “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 expression.

That the expression “practise” under Section 30 of the Advocates Act providing for the “Right of advocates to practice” is an expression of extremely wide import, and would include all preparatory steps leading to the filing of an application before a Tribunal.

That the non-obstante clause contained in Section 238 of the Code (provisions of the Code overriding other laws) will not override the Advocates Act as there is no inconsistency between Section 9, read with the Adjudicating Authority Rules and Forms referred to hereinabove, and the Advocates Act.

Therefore, a conjoint reading of Section 30 of the Advocates Act  and Sections 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms there under would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order.

Insolvency & Bankruptcy Code – Operational Creditor Can’t Use Code as Substitute for Debt Enforcement Procedure

Case name: K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd.

In this case, the seminal issue that fell for consideration before the Apex Court was whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon?

In the case, the parties had entered into an Agreement for a Project and during the course of project, disputes arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award, whereby the Tribunal allowed the claims of the Respondent. Accordingly, three cross claims were made by the Respondent and subsequently were rejected by the Appellant.

On rejection of claim, the Respondent sent a notice to the appellant to pay the stipulated amount under Section 8 of the Insolvency and Bankruptcy Code, 2016 i.e. notice for insolvency resolution by the operational creditor. In the meanwhile, aggrieved by the Arbitral Award, Appellant also filed application to set aside award under Section 34 of the Arbitration and Conciliation Act, 1996. The NCLT (National Company Law Tribunal) admitted the Respondent’s petition for insolvency under the Code.

The Supreme Court Bench in the case allowed the appeal and set aside NCLT’s order on the following grounds:

  • To arrive at its decisions, the Two-Judge Bench of the Supreme Court made reference to Section 9 of the Code and noted that the Adjudicating Authority, when examining an application under Section 9 of the Act, will have inter alia determine 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?
  • The Apex Court observed that according to Section 9 of the Code, if any one of the aforesaid conditions is lacking, the application would have to be rejected.
  • The Supreme Court also noted that the operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures.The Court opined that the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award.
  • With reference to operation debt, the Apex Court noted that it has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.

The entire case can be accessed here.

Insolvency and Bankruptcy Code Overrides other Enactments – Supreme Court

Case name: PR. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd.

In this case, the Supreme Court has categorically held that the provisions of the Insolvency and Bankruptcy Code, 2016 (Code) will override any enactment which is inconsistent with the provisions of the Code.

The Apex Court while referring to statutory provision under Section 238 of the Code held that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act.

Section 238 of the Code states that the provisions of the Code shall override other laws.

In the foresaid context, the Supreme Court also made reference to its judgment in the case of Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors., to hold that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons.

A similar observation was made by the NCLAT in a recent case, whereby the Tribunal while referring to Apex Court’s judgment in the case of Innoventive Industries Ltd. v. ICICI Bank held that the provisions of the Code prevail over the provisions of the SARFAESI Act. Read here.

The entire case can be accessed here.

NCLAT: No Insolvency Process against Corporate Debtor when Winding Up has been Ordered

Case name: Indiabulls Housing Finance Ltd. v. Shree Ram Urban Infrastructure Ltd.

In the case, the Appellant had initiated Corporate Insolvency Resolution Process against Respondent Corporate Debtor under Section 7 of the Insolvency and Bankruptcy Code, 2016.

The National Company Law Tribunal, Mumbai Bench by impugned order dated 18th May, 2018 dismissed the application as not maintainable in view of the fact that the winding up proceeding against the ‘Corporate Debtor’ had already been initiated by the High Court of Bombay.

Thus, the issue that fell for consideration before the National Company Law Appellate Tribunal was whether an application under Section 7 of the ‘I&B Code’ is maintainable when winding up proceeding against the ‘Corporate Debtor’ has already been initiated?

NCLAT

  • In appeal the NCLAT examined catena of judgments governing the issue to hold that the High Court of Bombay has already been ordered for winding up respondent-‘Corporate Debtor’, which is the second stage of the proceeding, thus question of initiation of ‘Corporate Insolvency Resolution Process’ which is the first stage of resolution process against the same ‘Corporate Debtor’ does not arise.
  • While arriving at its judgment, the NCLAT heavily relied on the case of Forech India Pvt. Ltd. Vs. Edelweiss Assets Reconstruction Company Ltd. & Anr.[1]wherein the NCLAT observed that if a ‘Corporate Insolvency Resolution’ has started or on failure, if liquidation proceeding has been initiated against the Corporate Debtor, the question of entertaining another application under Section 7 or Section 9 against the same very ‘Corporate Debtor’ does not arise, as it is open to the ‘Financial Creditor’ and the ‘Operational Creditor’ to make claim before the Insolvency Resolution Professional/Official Liquidator.
  • The NCLAT further opined that once second stage i.e. liquidation (winding up) proceedings has already initiated, the question of reverting back to the first stage of ‘Corporate Insolvency Resolution Process’ or preparation of Resolution plan does not arise.
  • In view of the facts of the present case, the NCLAT concluded that as the High Court of Bombay has already been ordered for winding up respondent-‘Corporate Debtor’, which is the second stage of the proceeding. For the said reason, we hold that initiation of ‘Corporate Insolvency Resolution Process’ which is the first stage of resolution process against the same ‘Corporate Debtor’ does not arise.

The entire case can be accessed here.

NCLAT: I&B Code Prevails over SARFAESI Act

Case name: Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd.

In the case, the NCLAT while referring to Supreme Court’s verdict in Innoventive case has ruled that when two proceedings are initiated, one under the Insolvency and Bankruptcy Code, 2016 (I&B Code) and the other under the SARFAESI Act, 2002, then the proceeding under the I&B code shall prevail.

The appeal in the case was preferred by the Financial Creditor i.e. Canara Bank against the NCLT’s (National Company law Tribunal) order, whereby the application preferred by Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (application for initiation of corporate insolvency resolution process by operational creditor) against the Corporate Debtor i.e. M/s. Sri Chandra Moulishvar Spinning Mills Private Limited was admitted by the Tribunal.

The Appellant’s main grievance in the case was that he had already initiated proceedings under the SARFAESI Act, 2002 for recovery against the Corporate Debtor.

The NCLAT in view of the issue involved in the case, made reference to Supreme Court’s verdict in the case of Innoventive Industries Ltd. v. ICICI Bank, whereby the Apex Court was of the view that if the application under Section 9 is complete and there is no ‘existence of dispute’ and there is a ‘debt’ and ‘default’ and then the Adjudicating Authority is bound to admit the application.

Thus, NCLAT upheld NCLT’s decision and also noted that such action cannot continue as the I&B code will prevail over SARFAESI Act, 2002.

NCLAT’s Order can be accessed here.

Insolvency & Bankruptcy Code- Corporate Debtor Can’t Maintain Appeal- NCLAT

Case name: Radius Infratel Pvt. Ltd. …Appellant Vs. Union Bank of India

In the present case, the National Company Law Appellate Tribunal (NCLAT) has reiterated Supreme Court’s holding in the landmark case Innoventive Industries Ltd. Vs. ICICI Bank and Ors.[1]whereby the Apex Court had held that once an insolvency professional is appointed to manage the Company, the erstwhile Directors who are no longer in management, obviously cannot maintain an appeal on behalf of the Company.

In the instant case, the Company being the Corporate Debtor had preferred appeal against order passed by National Company Law Tribunal, whereby the Tribunal had admitted Financial Creditor’s i.e. Union Bank of India application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for appointment of the Interim Resolution Professional.

While relying on Apex Court’s verdict in Innoventive Industries, the NCLAT dismissed the appeal and observed that we dismiss the appeal being not maintainable in view of decision of Hon’ble Supreme Court in “Innoventive Industries Ltd. Vs. ICICI Bank and Ors.”

NCLAT’s order in the case can be accessed here.

NCLAT- Proceedings under Section 138 of NI Act doesn’t Cover Moratorium Order under I&B Code

Case name: Shah Brothers Ispat Pvt. Ltd. v. P. Mohanraj & Ors.

In this case, the National Company Law Appellate Tribunal was primarily concerned with the issue whether the order of moratorium will cover a criminal proceeding under Section 138 of NI Act, which provides punishment of imprisonment for a term which may extend to three years or with fine which may extend to twice the amount of cheque or with both?

While deciding the aforesaid issue, the Tribunal delved into the law relating to moratorium as enumerated under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code).

The Respondent in the case submitted that the proceeding under Section 138 of the Negotiable Instrument Act i.e. dishonor of cheque due to insufficient funds,  is covered by clause of Sub-section (1)(a) of Section 14 of I&B Code, therefore, proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority cannot proceed.

The NCLAT in the case while brushing aside the Respondent’s contention noted that as Section 138 of NI Act is a penal provision, it empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim.

It was also opined by the Tribunal that imposition of fine cannot 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, thus offence under Section 138 of NI Act does not come within the purview of Section 14 of the Code. In fact no criminal proceeding is covered under Section 14 of I&B Code.

NCLAT’s order can be accessed here.