Evolving Periphery of Insolvency And Bankruptcy Code In India

Legislative Timeline of Developments in the Code

(1) Homebuyers to be Treated as Financial Creditors under Section 5(7) of the Code

Pioneer Urban Land and Infrastructure Ltd and Anr vs Union of India [Supreme Court, WP(C) No.43 of 2019, dated 09.08.2019]¹

The Petitioner challenged the explanation added to Section 5(8)(f) of the Code stating that “any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing” before the Honorable Supreme Court of India. According to the writ petition, amounts having the commercial effect of borrowing are treated as ‘financial debt’ as per Section 5(8)(f). Therefore, any amount invested by a person in a real estate project for allotment of apartments will be deemed as “financial debt” and so the homebuyers as “financial creditors”.

The Petitioners contended before the Honorable Supreme Court if homebuyers will be treated as financial creditors, then, Article 14 & 19(1)(g) would be violated, i.e., treating unequal equally and equals unequally? It was further contended that homebuyers have a separate remedy under the RERA Act for redressal of disputes between allottees and Promoters/developers.

It was decided by the Supreme Court that in real estate projects, money is raised from the allottees, against consideration for the time value of money. The amounts raised from allottees is included within section 5(8)(f) even without referring to the explanation introduced by the Amendment Act. The deeming fiction that is used by the explanation is to put beyond doubt the fact that allottees are regarded as Financial Creditors. The allottees/home buyers were included within the main provision, i.e., section 5(8)(f) with effect from the enforcement of the Code. The explanation was added by amendment in 2018 merely to clarify doubts that had arisen.

The Supreme Court also concluded as under:

• (i) The Amendment Act to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.
• (ii) The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies that are given to allottees of flats/apartments are therefore concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.
• (iii) Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by the Amendment Act is only clarificatory of this position in law.

(2) Maintenance of Application of Corporate Insolvency Resolution Process (CIRP) under Section 7 or 9 against Companies Struck Off by the ROC under the Companies Act

Mr. Hemang Phopalia Vs. The Greater Bombay Co-operative Bank Limited & Anr. [CA (AT) (Ins) No. 765/2019]²

In the aforestated matter, the financial creditor (the Greater Bombay Co-operative Bank Limited) filed an application under Section 7 of IBC (Insolvency and Bankruptcy Code) for initiation of CIRP against the corporate Debtor (Penguin Umbrella Works Private Limited). Application was admitted in the NCLT, Mumbai Bench. The appellant (Hemang Phopalia) in an appeal confirmed that the Corporate Debtor, was struck off from the Register of Companies, thus CIRP cannot be initiated against the corporate debtor.

The main issue before the Adjudicating Authority was whether an application for CIRP under section 7 or 9 can be initiated against a company which is in non-existence i.e., struck off by the ROC, under section 7 or 9 of the Code.

It was held that the Adjudicating Authority who is also the Tribunal is empowered to restore the name of the Company and all other persons in their respective position for the purpose of initiation of ‘Corporate Insolvency Resolution Process’ under sections 7 and 9 of the Code based on the application, if filed by the ‘Creditor’ (‘Financial Creditor’ or ‘Operational Creditor’) or workman within twenty years from the date the name of the Company is struck off under sub-section (5) of section 248 of the Companies Act, 2013. In the present case, application under section 7 was admitted and the ‘Corporate Debtor’ and its Directors, Officers, etc. were deemed to have been restored as per section 252(3) of the Companies Act.

(3) Initiation of Liquidation Process under Section 33 Where Resolution Plan Failed to Acquire Requisite Percent of Voting Share of Financial Creditors

K. Sashidhar vs. Indian Overseas Bank & Ors [Supreme Court, Civil Appeal No.10673 of 2018 dated 05.02.2019]³

In the aforestated matter, the Petitioner filed Civil Appeal before the Supreme Court. It was noted that in the case of the corporate debtor KS&PIPL (Kiriu Somi Steel & Power India Pvt. Ltd.), the resolution plan, when it was put to vote in the meeting of CoC held on 27th October, 2017, could get approval of only 55.73% of voting share of the financial creditors and even if the subsequent approval accorded by email (by 10.94%) was taken into account, it did not fulfil the requisite vote of not less than 75% of voting share of the financial creditors. On the other hand, the resolution plan was expressly rejected by 15.15% in the CoC meeting and later additionally by 11.82% by email.

Similarly, in the case of corporate debtor IIL (Innoventive Industries Ltd.), the resolution plan received approval of only 66.57% of voting share of the financial creditors and 33.43% voted against the resolution plan. This being the indisputable position, NCLAT opined that the resolution plan was deemed to be rejected by the CoC and the concomitant is to initiate liquidation process concerning the two corporate debtors.

The Managing Director of the corporate debtor (KS&PIPL) appeared before the adjudicating authority (NCLT) on 6th November, 2017, and also filed a memo on 17th November, 2017, inter alia submitting that for the financial creditor who chooses not to participate in the voting, the votes and the majority be counted without their vote.

The Supreme Court looked into the scope of NCLT jurisdiction to enquire into justness of rejection of the resolution plan and decided that where resolution plan of concerned corporate debtor(s) had not been approved by requisite percent of voting share of financial creditors, i.e., 75 per cent as in October 2017, and no alternative resolution plan was presented within statutory period of 270 days, proposed resolution plan was to be disapproved and amendment to section 30(4) which came into force with effect from 6-6-2018 substituting threshold requirement of 75 per cent to 66 per cent would not be applicable and, therefore, liquidation process under section 33 was to be initiated.

(4) Applicability of Limitation Period for the Admission of Application under Section 7 of the Code

Jignesh Shah and another v. Union of India and Anr. [Writ Petition (Civil) No. 455 of 2019, Transfer Petition (Civil) No. 817 of 2019, Civil Appeal No. 7618-19 Of 2019, September 25, 2019]⁴

In the aforestated case, a winding up petition was initiated against La-Fin Financial Services Private Limited by the Bombay High Court. A letter of undertaking was given by La Fin, a group of company promoted by Jignesh Shah, on 20th August 2009, to IL&FS. La Fin in which it undertook to purchase the shares held by IL&FS in MCX (Multi-Commodity Exchange India Limited) Stock Exchange after a period of one year, but before a period of three years, from the date of investment. IL&FS exercised the option in 2012 but La Fin refused to honour the undertaking under no contractual obligation to buy the aforesaid shares. As the Code came into force on 1st December 2016, the petition was transferred to the AA as a section 7 application. It was admitted on 28th August 2018.

The moot question before the Supreme Court was whether a winding up petition, which is converted into a Section 7 application under IBC, was to be barred by lapse of time under the Limitation Act. The Supreme Court noted that in the Winding up Petition itself, what is referred to be the fall in the assets of La-Fin to being worth approximately INR 200 crores as of October, 2016, which again does not correlate with 3rd November, 2015, being the date on which the statutory notice was itself issued. This again is only for the purpose of appointing an Officer of the Court as Official Liquidator in order to manage the day-to-day affairs and otherwise secure and safeguard the assets of the Respondent Company. There is no averment in the petition that the Company’s substratum has disappeared, or that the Company is otherwise commercially insolvent. It is clear therefore that even on facts, the company’s substratum disappearing or the commercial insolvency of the company has not been pleaded.

The Supreme Court held that in winding up or commercial insolvency cases, first there is a requirement that the default should takes place, after which the debts remain outstanding. It is only on this date that the limitation period is triggered. It also clarified that the winding up proceeding is a right in rem and not a recovery proceeding. The Court concluded that the Limitation Act is applicable in cases of insolvency. It was held that winding up petition filed on 21-10-2016 being beyond the period of three-years mentioned in article 137 of the Limitation Act is time-barred, and cannot, therefore, be proceeded with any further. Accordingly, the impugned judgment of the NCLAT and the judgment of the NCLT is set aside.

(5) Administrator of Foreign Jurisdiction Attends CoC Only as Observer without Voting Rights under “Cross Border Insolvency Protocol”

Jet Airways (India) Ltd. vs. State Bank of India & Anr. [Company Appeal (AT) (Insolvency) No. 707 Of 2019, September 26, 2019]⁵

In the aforestated case, corporate insolvency resolution process had been initiated against ‘Jet Airways’ in India and a Resolution Professional (RP) was appointed. In the Netherlands, the ‘Jet Airways’ company had also been declared bankrupt and the Dutch Trustee (Administrator) had been appointed to manage the estate of the ‘Jet Airways’. Simultaneously CIRP proceedings were going on against Jet airways in two countries.

An appeal was filed before National Company Law Appellate Tribunal to consider the issue as to whether separate proceedings of CIRP can take place against a common ‘Corporate Debtor’, if it takes place in two separate jurisdictions or countries.

The NCLAT made it clear that the ‘Dutch Trustee (Administrator) will work in co-operation with the ‘Resolution Professional of India’ and, if any, suggestion is required to be given, he may give it to the ‘Resolution Professional’. The draft of ‘Cross Border Insolvency Protocol’ clause is made final. It should be treated as a direction of this Appellate Tribunal and it would be mandatory to Company Appeal (AT) (Insolvency) No. 707 of 2019 to comply with the order of this Appellate Tribunal subject to the other procedures which are to be followed in terms of the ‘Insolvency and Bankruptcy Code, 2016’. In view of the aforesaid observations, the NCLAT set aside part of the impugned order dated 20th June, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench in so far it relates to the observations that the ‘Dutch Court’ has no jurisdiction in the matter of ‘corporate insolvency resolution process’ of ‘Jet Airways (India) Limited, (Offshore Regional Hub) and the consequential directions as given to the ‘Resolution Professional’ in respect of ‘Offshore proceedings. However, it was made clear that NCLAT have not interfered with the order of admission of application under Section 7 of the I&B Code filed by the ‘State Bank of India’ against ‘Jet Airways (India) Limited’, therefore, joint ‘Corporate Insolvency Resolution Process’ will continue in accordance with ‘Insolvency and Bankruptcy Code, 2016’. The appeal stands disposed of with aforesaid observations and directions.

(6) Extension of Time Beyond Mandatory Period for Completion of Resolution Plan in Case of Contravention under Section 12

Committee of Creditors of Amtek Auto Limited through Corporation Bank Vs. Dinkar T. Venkata Subramanian & Ors. [Civil Appeal Nos. 6707, 7567-7569 of 2019 September 24, 2019]⁶

In the aforementioned matter, application under section 7 to initiate corporate insolvency resolution process against corporate debtor was admitted. The resolution plan, which had consumed the time available under section 12 of the Code, had failed owing to nonfulfillment of the commitment by Liberty House. By virtue of the Amendment Bill, 2019, which came into effect from 16.08.2019, the resolution process may be permitted to be completed within 90 days from the date of the commencement of the Amendment Act.

The Supreme Court pondered on the issue whether extension of time beyond mandatory period for completion of resolution plan can be given in case of contravention of approved resolution plan. The Supreme Court noted that the recent Amendment Act permits resolution process to be completed within 90 days from the date of the commencement of the Amendment Act. It held that resolution plan given earlier having failed, so resolution professional was permitted to invite fresh offers within a period of 21 days in view of Amendment Act, 2019 with effect from 16-8-2019 as per which period for completion of resolution process was available upto 15-11-2019.

(7) Pre-Incorporation of the Moratorium Period before the Initiation of CIRP under Rule 11

NUI Pulp and Paper Industries Pvt Ltd v Roxcel Trading GmbH [Company Appeal (AT) (Insolvency) No. 664 of 2019 July 17, 2019]⁷

In this case, Roxcel Trading GmbH had filed an application under section 9 of the IBC against NUI Pulp and Paper Industries for the unpaid operational debt. The Corporate Debtor claimed that the debt is disputed therefore it sought time for filing the reply. However, Roxcel had apprehensions that the Corporate Debtor might be intending to sell its assets thus leading to abuse of the process of the IBC. Therefore, the NCLT under Rule 11 of the NCLT rules, 2016 passed an order stating that the Directors of the Corporate Debtor shall create no interests or no assets shall be sold to any third party, ordering a pre-moratorium order. This was challenged by the Corporate Debtor in the NCLAT contending that before admission of an application under section 7 or 9, the Tribunal had no jurisdiction to restrain the corporate debtor and its directors from alienating, encumbering or creating any third party interest on the assets of the corporate debtor.

NCLT deliberated as to whether the NCLT has inherent powers under rule 11 of NCLT rules to alienate powers of the Directors of the Corporate Debtor. While deliberating on the same, it noted after perusal of rule 11 that it is clear that the (Adjudicating Authority) can make any such order as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal. From the provisions of rule 11, it is clear that once an application under section 7 or 9 is filed before the Adjudicating Authority, it is not necessary for the Adjudicating Authority to await hearing of the parties, or for passing order of ‘Moratorium’ under section 14. In order to ensure that one or other parties may not abuse the process of the Tribunal or for meeting the ends of justice, it is always open to the Tribunal to pass appropriate interim order. It was held that once a CIRP application is filed, Tribunal need not await hearing of parties and it can pass interim order restraining corporate debtor misusing process of Tribunal.

(8) No Discrimination in the Distribution of Proposed Amount under a Resolution Plan

Standard Chartered Bank v. Satish Kumar Gupta (Essar Insolvency Case) [Company Appeal (AT) (Ins) Nos. 242/2019 and Ors.]⁸

In this case, Financial Creditors of the Essar Steel India Limited had filed an application for CIRP under section 7 of the IBC. In the ‘corporate insolvency resolution process’ initiated against ‘Essar Steel India Limited’ (‘corporate debtor’), the ‘Committee of Creditors’ approved the ‘Resolution Plan’ submitted by ‘Arcelor Mittal’ (‘Successful Resolution Applicant’) which was approved by the NCLT with certain modifications by impugned order. The Order had been challenged related to distribution of assets to different ‘financial creditors’ and the ‘operational creditors’ on the ground of discrimination or the modification of ‘Resolution Plan’ as suggested by the Adjudicating Authority.

The Supreme Court considered the following main issues with regard to the – (i) treatment of the secured and unsecured creditors, (ii) determining of the powers of the CoC, (iii) powers in relation to the powers of accepting the resolution plan and the constitutional validity of the section 12(3) and section 30(2) of the IBC.

The Supreme Court differentiated with regard to the payment of debts to the Secured and Unsecured creditors. It urged on the fact that the unequals cannot be treated equally. Thus, a resolution plan cannot be rejected on the ground that the plan is unjust or unfair to a certain class of creditors, if the interest of each class of the creditor has been looked into. The Supreme Court also stated that the CoC has the total powers over the running of the business of the Corporate Debtor, hence such vital powers cannot be delegated to any other person or sub committees. But the Supreme Court clarified that the Sub Committees can be instituted for other purposes such as performing of administrative functions etc.

According to Section 12(3) of the IBC, mandatory timeline of 330 days for completion of CIRP, if not complied with, would result in the liquidation of the corporate debtor. The Supreme Court partially struck down the section in which the word ‘mandatory’ was considered as arbitrary and unreasonable under article 14 of the Indian Constitution and it also held up with the rights of the carrying out business under Article 19(1)(g). Whereas, Section 30(2) of the IBC provided for the minimum payment that to be made to dissenting financial creditors as well as the operational creditors. The Supreme Court held that this section was a mere guideline that the CoC needs to follow while it arrives at any decision regarding the resolution plan and any such decision must be taken taking the feasibility and the ground realities. Thus, section 30(2) was upheld by the Supreme Court.

In this case, it was held that where huge discrimination had been made by ‘Committee of Creditors’ in distribution of proposed amount to ‘operational creditors’ qua ‘financial creditors’, i.e., majority of ‘financial creditors’ had been allowed 99.19 per cent of their claim amount, whereas it was ‘NIL’ in favour of ‘operational creditors’, resolution plan submitted by resolution applicant was not rejected but was modified to safeguard rights of operational creditors and other financial creditors. ‘Financial creditors’ cannot be discriminated on ground of ‘Secured’ or ‘Unsecured financial creditors’ for purpose of distribution of proposed amount amongst stakeholders in ‘Resolution Plan’ by ‘Resolution Applicant’.

(9) Liquidation Estate or Assets of Corporate Debtor Not to Include Sum Due to Workmen/Employees from PF, Pension and Gratuity Fund

State Bank of India v. Moser Baer Karamchari Union [Company Appeal (AT) (Insolvency) No. 396 of 2019]⁹

In this case, the ‘corporate insolvency resolution process’ was initiated against the ‘corporate debtor’, under section 7 of the Code, wherein the order of liquidation was passed by the Adjudicating Authority (NCLT), and the workmen stood discharged under section 33(7). According to the liquidator, the payment of the gratuity fund, the provident fund and the pension fund was denied preferentially and included the same for the payments under the waterfall mechanism under section 53 of the ‘I&B Code’.

‘Moser Baer Karamchari Union’ being financial creditor filed company application with the prayer that the directions be issued to the liquidator to exclude the amount due to them towards ‘provident fund’, ‘pension fund’ and gratuity trust fund’ from the waterfall mechanism envisaged under section 53 and pay them the ‘provident fund dues’, ‘pension fund dues’ and ‘gratuity fund dues’ as these would not constitute part of the liquidation estate.

NCLT, by impugned order allowed the company application and held that the ‘Provident Fund Dues’, ‘Pension Fund Dues’ and ‘Gratuity Fund Dues’ cannot be part of section 53. The ‘State Bank of India’, a ‘secured creditor’, has challenged the order in instant appeal. A Financial Creditor filed an appeal on the ground that workmen’s dues have the same meaning as assigned in section 326 of the Companies Act, 2013, which includes PF, pension and gratuity fund.

The NCLAT held: “In terms of subsection (4) (a) (iii) of Section 36, as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/liquidation assets of the ‘Corporate Debtor’, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed under Section 53(1), does not arise…”

(10) No Attachment of Properties under Provisions of PML Act During Moratorium Period

SREI Infrastructure Finance Ltd. v. Sterling SEZ & Infrastructure Finance Ltd. [M.A.NO.1280/2018 C.P. 405/2018, 2019]¹⁰

In this case, Section 7 petition was admitted against the corporate debtor and the Interim Resolution Professional was appointed, who was subsequently confirmed as Resolution Professional (RP). Subsequently, the Directorate of Enforcement (ED) provisionally attached the assets belonging to the corporate debtor. The RP intimated the ED about the initiation of the CIRP and imposition of moratorium and requested it to withdraw the said attachment on the properties and assets of the corporate debtor as the RP was required to take charge and custody of the same.

The ED raised defence that the Audit Report from the banks that had granted loan to the corporate debtor showed that the said loan funds were used for non-mandated purposes and payments were made to non-existent parties and there were unjustified payments to the Directors, etc. It was further contended that the properties so attached constituted the value of proceeds of crime. It was also submitted that the moratorium declared by the Adjudicating Authority would not be applicable to the criminal case initiated under the PML Act by the ED or by the CBI.

As per the provisions of section 14(1)(a), where moratorium on any kind of proceedings is imposed by the Adjudicating Authority, particularly this attachment is a legal proceedings which squarely falls under the ambit of the said sections of I&B Code. Since, the attachment order passed by the PML Act, Court is hit by the provisions of section 14 and considering the overriding effect of I&B Code under section 238, the attachment order under PML Act is a nullity and non-est in law and hence it will not have any binding force.

The proceedings before the Adjudicating Authority under the PML Act in respect of attached properties is a civil proceedings, the Adjudicating Authority under PML Act does not have jurisdiction to attach the properties of the corporate debtor undergoing corporate insolvency resolution process. Thus, the attachment order under the PML Act is a nullity and non est in law and the Resolution Professional can proceed to take charge of the properties and deal with them under the I&B Code as if there is no attachment order.

Highlights of the 2020 Enactment:

• The code has now given the power to the creditors that they can initiate an insolvency resolution if the company fails to make any payments to them. In the case of real-estate companies, at least 10% of homebuyers or 100 such individuals, whichever is less, can start the process.
• The creditors will not be able to initiate the process if they have failed to provide the necessary supplies to the company if the company has paid the current dues during the moratorium period.
• If the management of the company changes prior to the process then the company will not be held liable for any offense (immunity under Section 32A).
• The process can only be started after the appointment of IRP (Insolvency Resolution Professional) on the date of application (also called date of start of the procedure) to the National Company Law Tribunal (NCLT).

The IBC stands as a transformative economic pillar in India. By proactively refining thresholds, harmonizing judicial precedents, and balancing creditor rights with corporate revival, it provides a resilient foundation for sustainable commercial enterprise.