The Insolvency and Bankruptcy Code 2016 is an important and key law related to the insolvency process in the country. In the following sections, we have elaborated the key developments related to the Codes with details of some recent case-laws related to them. We will explore these developments one by one in the following sections.
1. Increase in the threshold of minimum default amount under Section 4 of the Code
On 24 March 2020, the Central Government with its Notification No. S.O. 1205(E) exercised its powers conferred by the norms of Section 4 of the IBC to increase the minimum amount of default (under Part-II) from INR 1,00,000 to INR 1 Crore. This means that a Financial or Operational creditor can now only initiate the Company Insolvency Resolution Process (CIRP) if the default from debtor had a minimum value of Rs. 1 Crore. The said amendment was made by the Government through an ordinance in June 2020 in wake of the crisis created by the COVID-19 pandemic. However, what remained unclear was how the plight of the pending cases of initiating insolvency lying before the Adjudicating Authority which haven’t reached the new default amount will be resolved. Looking at the trend of the prevailing practice under the IBC, it is quite possible that the already admitted cases will remain unaffected and people whose application has not been admitted could face rejection on account of the stated notification mentioned above.
2. Whether a bid by an applicant seeking resolution should match the liquidation value?
In the case of Maharashtra Seamless Limited vs. Padmanabhan Venkatesh & Ors., an appeal was filed by the Resolution Applicant contending that the Appellate Authority has crossed its rights by giving directions that the worth of the resolution plan must match with the liquidation value. The Supreme Court in the case observed that there is no such provision within the Code that requires that the bid of a Resolution Applicant shall be as per the liquidation value. The valuation process is completed as per the regulations of the IBC to merely assist the Committee of Creditors (CoC) to pick a correct resolution plan.
Interpretation of Sections 43 and 44
The Supreme Court in Anuj Jain, IRP for Jaypee Infratech Limited v. Axis Bank Limited case put aside the judgment of 1st August 2019 given by the Appellate Authority. The decision was referenced to avoiding transactions made under Sections 43, 45 and 66, by the debtor company (in this case JIL). It had mortgaged its properties to get financial assistance from its company (JAL). In this case, the Supreme Court laid down certain principles to avoid some transactions under the Code which are discussed in the following sections:
To seek out if a transaction involving transfer of property or any interest of the debtor company falls squarely within the ambit of Section 43 of the IBC, the subsequent questions must be answered:
- Whether such transfer is made to favour the creditor or a guarantor?
- Whether such transfer is done for or on account of an existing financial debt or operational debt or any other liabilities owed by the debtor?
- Whether such transfer has the power to put a creditor or guarantor in a beneficial position. If so, then it must be within the norms enacted for distribution of assets in Section 53.
- If such transfer had been done to give advantage to a related party (other than an employee), then whether the same type of transfer was made in the previous two years of the insolvency commencement date. If such transfer was done for the advantage of any unrelated party, then whether a similar transaction was made in the previous one year from the insolvency commencement date?
- Whether such transfers are excluded according to sub-section (3) of Section 43?
Concerning transactions in question, the Court observed that it is true that there was no creditor-debtor relationship between the lender bank and debtor JIL but this is not the decisive factor to determine the beneficiary of those transactions. The mortgage deeds given by the debtor to secure the debts of JAL, amount to creation of interest to the advantage of JAL. The debtor company owed previous financial debts as well as operational debts and other liabilities to JAL. Thus, the transactions in question were deemed transfers for the advantage of JAL and it was regarded as a related party of the debtor JIL. It was held that the corporate debtor JIL was given a preference and such transaction was not excluded as per sub-section (2) of the Section 43 of the Code.
- Look back period in terms of Section 43(4)
Under norms of the sub-section (3) of Section 1 of the IBC, different dates are often given for enforcement of various norms of the Codes. However, after coming into force, the provisions gave a look-back period for any particular enquiry. It can’t be said that the supply itself would remain in hibernation until such a look-back period from the commencement date of the supply comes to an end. Therefore, the transaction commencing on 10.08.2015 till the insolvency commencement date will fall under scanner. The contention raised by the respondents said that the majority of the mortgages do not fall under the latest encumbrance by JIL as the properties were mortgaged before and in the said period they were only re-mortgaged. However the contention was rejected by the Court as the so-called remortgage only happened as a fresh mortgage. Thus, the transaction in question is still deemed preferential to the related party JAL by the debtor JIL during the look back period of previous two years and was not covered under Section 43(4).
- Whether the transaction under scanner was made within the ordinary course of business
An activity is considered ‘business’ if there’s a course of dealings, which are continued or started with the motive of profit. Even furnishing security could be considered a normal business practice, if it resembles ‘ordinary course of business done by a specific corporate entity’ and falls in the category of ‘the undistinguished common flow of business’. The activity should not arise out of ‘any special or particular situation’ not covered under the law. The standard business or financial affairs of the debtor JIL do not comprise giving mortgages to secure the loans as part of its activity that too at the cost of financial health of the firm. As noticed, JIL was already reeling under financial stress due to immense debts with a number of the lenders already declaring it as NPA. It was also under tremendous pressure to honour its commitment to the buyer of properties. Considering these circumstances, it was held that the transfers in question were not done as part of the ordinary business activities or as common financial affairs of the debtor JIL.
- Interpretation of Section 43(3) (a)
Concerning interpretation of Section 43(3) (a), the Supreme Court held that “we don’t have any hesitation in accepting the submissions made by the appellants related to the contents of clause (a) of sub-section (3) of Section 43 involve interpretation with a purpose to ensure that the business operates as per the intention of the legislature and achieves its vowed objectives. Thus, the expression “or”, which looks like a disjunctive in the expressions “corporate debtor” or transferee”, must be read as “and” and so the conjunctive of the expressions would now be “corporate debtor” and “transferee”.
- Whether lenders of JAL might be categorised as financial creditors of JIL
A person who has only interest in taking over the assets of corporate debtor (like the third party securities), albeit falling within the category of ‘secured creditor’ due to collateral security extended by the debtor, would nevertheless stand outside the sect of ‘financial creditors’ as per the definitions given in sub-sections (7) and (8) of Section 5 of the IBC.
3. Applicability of the IBC on a Government Company
In case of Hindustan Construction Company Limited & Anr. v. Union of India & Ors., a constitutional challenge was made to the IBC. It was contended that the provisions of the IBC were applied arbitrarily on the Petitioner. Thus, an automatic-stay on the arbitral awards in its favour should be granted under the Arbitration and Conciliation Act of 1996 as a result of which the monies can’t be paid off to the Petitioner’s creditors for the debt. On the other hand, any debt worth more than INR One Lakh owed to a financial or operational creditor which remains unpaid will attract the application of the IBC against the Petitioner. It was contended that application of these provisions were arbitrary, discriminatory, and violated Article 14 and 19(1)(g) of the Indian Constitution. It was thus contended that, for the Petitioner to recover their debts from Government Companies and NHAI, the definition given for ‘corporate person’ or business person in Section 3(7) of the IBC should be read without the words “with limited liability” written within the third part of the definition or use Section 3(23)(g) of the IBC to define ‘person’, fir the application of above provision.
The Supreme Court observed that as per definition in the Section 3(7) of IBC a ‘corporate person’, means a company as defined in Clause 20, Section 2 of the Companies Act 2013. The Supreme Court held that by observing the definition given in the Companies Act, it’s quite clear that the three entities who owed debt under the arbitral awards given to Petitioner No.1 (Government companies), would be subsumed within the primary entity as per the given definition. Now regarding the IBC’s applicability to NHAI, the Court held that NHAI is a statutory body which functions like an extended branch of the Central Government. It performs government duties which obviously can’t be appropriated by an RP (resolution professional) under the IBC, or by any other corporate body. Also, it mandated that such authority cannot be wound up under the Codes.
4. Reverse Corporate Insolvency Resolution Process
In the case of Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd through IRP & Ors, the original applicants (i.e. the flat allottees) wanted CIRP resolution but wanted the approval of the resolution plan from a 3rd party (Resolution Applicant). In such a scenario, Uppal Housing Pvt. Ltd. (One of the project promoters) was directed to cooperate with the RP and disburse the amount (remaining after the quantity already disbursed) from outside as a Lender (the financial creditor) to ensure that the project is completed within the given time-frame. The amount released by the Uppal Housing Pvt. Ltd. and the amount going to be generated from dues of the Allottees (Financial Creditors) during the CIRP will be directed to be deposited within the account of the Corporate Debtor to rescue the corporate going through concern.
It was further held that during the CIRP of a Real estate corporate debtor, if allottees or Financial Institutions/Banks ( Financial Creditors) or Operational Creditors of any project initiated CIRP against the corporate Debtor, it must be confined to the actual project and cannot affect other project(s) of same real estate firm (Corporate Debtor). Thus, all the assets of the Corporate Debtor cannot be liquidated. The assets of the Corporate Debtor of that specific project must be liquidated or resolved to balance the creditors like allottees, financial institutions like banks, and operational creditors of that project. It had been held that CIRP should be on the project basis and as per the approved plan of the competent authority. Other allottees or financial institutions/banks or operational creditors of other projects will not be allowed to file a claim before the IRP concerning another project and such claim won’t be entertained.
5. Interpretation of Section 32A
In JSW Steel Ltd. v. Mahender Kumar Khandelwal case, within the CIRP of Bhushan Power & Steel Limited (‘Corporate Debtor’), the resolution plan submitted by the JSW Steel Limited (‘Resolution Applicant’) was approved by the respective Adjudicating Authority (AA) through its order released on 5th September 2019 with some conditions. Post the approval of insolvency plan, the Directorate of Enforcement of Central Government on 10th October 2019, attached assets of the corporate debtor by application of Section 5 Prevention of Money Laundering Act, 2002. This was done while the monitoring committee was observing the change of management. One of the questions raised before the Appellate Authority in the case was whether after the approval of a thr resolution plan under Section 31 of the IBC, is it under the rights of the Directorate of Enforcement to attach the assets of the Debtor firm on the allegations of money laundering by the Promoters. In this scenario, it was held that under Section 32A, the Directorate of Enforcement does not have the right to attach the assets of the Debtor firm, once the resolution plan is approved. Further, it was also held that the Directorate of Enforcement is not empowered under the IBC to decide whether JSW Steel Limited is ineligible for the actions under Section 29A or Section 32A (1) (a) of the Codes or not. This can only be determined by the Committee of Creditors or the Adjudicating Authority.
Later the Enforcement Directorate pleaded in the case that Section 32A introduced w.e.f. 28th December 2019 was prospective and cannot be applied to a resolution plan which has been approved under Section 31 of the IBC. The Appellate Authority (AA) rejected the plea of ED and held that a thorough reading of Section 32A(1) and (2) suggests that the ED and any other investigating agencies don’t have the right attach assets of a corporate debtor, once the Resolution Plan is approved. Thus, the criminal investigations in progress against the corporate debtor will stand abated. Section 32A of the IBC does not suggest in any manner that the benefit provided is merely for resolution plans which are yet to be approved.
Another issue in the case was whether the resolution applicant (creditor) was a related party of the corporate debtor? It was contended by the Directorate of Enforcement that as per Section 32A (1), the liability of the debtor firm shall not cease due to the rationale that JSW Steel Limited is a related party of the debtor. This was said due to the fact that M/s. Bhushan Power & Steel Limited (‘Corporate Debtor’) and JSW Steel Limited were associated as stakeholders with 24.09% and 49% equity holding in a venture company named M/s. Rohne Coal Company Private Limited respectively. In this case, the Appellate Authority (AA) noted that such person (‘Resolution Applicant’) can’t be held ineligible as per terms of Section 32A (1) (a) on the basis of being a ‘related party’.
To Conclude….
So, through various case laws we have been able to get a clear understanding on various developments in IBC. IBC has evolved since its introduction through various amendments and the interpretations by different courts in cases like those mentioned above. Various Insolvency law firms have a deeper understanding of these codes. If you want to recover your debt through insolvency, then you must consult a legal firm to understand debt recovery through insolvency in a deeper way. These insolvency firms generally have a lot of specialists that help both the creditors and Debtors who want to use the IBC as a tool for debt resolution or company liquidation.