Swiss Ribbons v. Union of India WRIT PETITION (CIVIL) NO. 99 OF 2018

Category: Secured & Unsecured Creditors

The IBC (Insolvency and Bankruptcy Code, 2016) is a significant departure from prior insolvency regimes in India, and some of its key features are novel even by global standards. The key differentiating features of the IBC (Insolvency and Bankruptcy Code, 2016) (in comparison with other developed jurisdictions) are:

  1. The admission threshold is low – it is based on the factum of default without an insolvency test.
  2. No class rights –the constitution of a single creditors committee comprising of only financial creditors with secured and unsecured creditors being treated equally for voting.
  3. Disqualification of certain bidders from participation in the resolution process.The Government was able to establish to the Supreme Court that these features have worked and have led to significant results in the initial years of the law. An important factor that weighed in sustaining the law was the Government’s firm resolve to tackle the non-performing assets (NPA) crisis through the enactment of the IBC (Insolvency and Bankruptcy Code, 2016), and that the Government has been alive to the problems and has amended the law to suit the needs of the situation. The key implications of the Supreme Court judgement are as follows:

(a) The distinction between promoters / management and the corporate debtor has been judicially recognized. Displacement of the promoter or the management of a company in default can now be done relatively quickly to protect the company and its assets.

(b) The recognition that the insolvency proceedings by nature are not adversarial to the corporate debtor. The Supreme Court has concluded that the IBC (Insolvency and Bankruptcy Code, 2016) is a beneficial legislation and is for the benefit of the corporate debtor and therefore the admission of a company into Corporate Insolvency Resolution Process (CIRP) cannot be seen from the traditional lens of adversarial proceedings.

(c) The Supreme Court has imported fair and equitable treatment for operational creditors as a requirement for the approval of resolution plans. This was prompted largely by amendments to the regulations that provide that operational creditors need to be paid ahead of financial creditors (without stating the amount that needs to be paid). This also advances the law laid down by the National Company Law Appellate Tribunal (NCLAT) in Binani Industries where it was held that the creditors cannot be discriminated against. Since the Binani Industries judgement was being (wrongly) interpreted as a requirement to treat financial and operational creditors in the same manner, the Supreme Court has provided much needed clarity on what is expected for operational creditors. Bankruptcy laws in other jurisdictions also contemplate fair and equitable treatment.

(d) In addition to the provision for withdrawal under Section 12A, withdrawal of a corporate debtor from CIRP has been permitted up to the time the Committee of Creditors is constituted with the approval of the National Company Law Tribunal (NCLT). What is important, though, is that the Supreme Court applied Rule 11 of the NCLT (National Company Law Tribunal) Rules (which provides for inherent power) to permit the withdrawal after admission but prior to constitution of the Committee of Creditors. The recognition of the inherent powers of NCLT (National Company Law Tribunal) may introduce flexibility to the IBC (Insolvency and Bankruptcy Code, 2016) process in situations that are not contemplated by the Code. Further, if the Committee of Creditors rejects a settlement proposal, it can be subjected to an appeal before the NCLT (National Company Law Tribunal) and thereafter, the NCLAT (National Company Law Appellate Tribunal).

(e) The Supreme Court has also upheld Section 29A in its entirety whilst reading down the list of ‘related parties’ who have to be tested for the disqualification under Section 29A, to those who have a business connection with the Resolution Applicant. This will help in increasing the number of participants. It would also help in moderating the level of diligence required by the Resolution Applicant, the Committee of Creditors and the Resolution Professional in Section 29A compliance as regards ‘connected persons’, thereby reducing the cost and timelines of the CIRP process.

Sashidhar v. Indian Overseas Bank and Ors, CIVIL APPEAL NO.10673 OF 2018

Category:  Power of CoC (committee of creditor)

The Supreme Court at the outset provided much-needed clarity on the scope of review by the NCLT (National Company Law Tribunal), of a resolution plan “as approved” by the CoC (committee of creditor) and held that the NCLT’s jurisdiction is limited to the NCLT (National Company Law Tribunal) being satisfied that the resolution plan meets the requirements specified in Section 30(2) of the Insolvency and Bankruptcy Code, 2016 (Code). This is namely that the resolution plan contains provisions in relation to (i) priority of payments (as prescribed), (ii) management of the corporate debtor, (iii) implementation and supervision of resolution plan, and (iv) compliance with applicable law, and nothing more. Hence, the role of the NCLT (National Company Law Tribunal) while considering a resolution plan has been clearly circumscribed.

The Supreme Court further observed that the legislature, while enacting the Code, has consciously ensured that no ground is available to question the ‘commercial wisdom’ of the individual financial creditors or the collective decision of the CoC (committee of creditor) before the NCLT (National Company Law Tribunal) in approving or rejecting a resolution plan and such commercial considerations are outside the scope of judicial review. However, the Supreme Court did clarify that if the CoC (committee of creditor) were to reject a resolution plan for any of the grounds mentioned under Section 30(2) of the Code, including a decision on the eligibility of a resolution applicant under Section 29A of the Code, the said decision would be subject to judicial review.

The Supreme Court further held that the amendment to Section 30 (4) of the Code in June 2018, which introduced the requirement for the CoC (committee of creditor) to consider the feasibility and viability of a resolution plan before approval, is a mere restatement of the factors that the CoC (committee of creditor) is expected to take into consideration in any event whilst considering a resolution plan.

Additionally, the Supreme Court also held that the amendments to the Code reducing the voting percentage for approval of a resolution plan from 75% to 66%, as well as the requirement to record reasons for approval or rejection of a plan by CoC (committee of creditor) are prospective and the decisions already taken by the CoC (committee of creditor) prior to the amendment cannot be undone.

M/s Innoventive Industries Ltd. v. ICICI Bank CIVIL APPEAL NOs. 8337-8338 OF 2017

Category: – legislative intent behind enactment of the Insolvency and Bankruptcy Code, 2016

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.

PR. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., Special Leave to Appeal (C)  No. 6483/2018

Category:  Overriding Effect

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.

REFERENCES:-

https://www.linkedin.com/pulse/key-highlights-swiss-ribbons-pvt-ltd-anr-v-union-india-mukund-rawat-1d

https://indiankanoon.org/doc/17372683/

https://www.barandbench.com/columns/the-viewpoint-ibc-judgment-the-defaulters-paradise-is-lost

https://indiankanoon.org/doc/161012846/

https://www.vakilno1.com/legal-news/important-judgments-on-insolvency-and-bankruptcy-code-2016.html

This is Article is Written by Mr. Keval Tachak, Final Year Student of KES College of Law, Mumbai University.

DISCLAIMER: The above information is for educational and knowledge purpose. Proper care has been taken while drafting this article. Neither the Author nor the web publisher holds any responsibility for any mistake that may have inadvertently crept in. The Author has taken all care and effort to ensure that the legislative provisions reproduced here are accurate and upto date. However, the Author and website takes no responsibility for any inaccuracy or omission contained herein for advice, action or inaction based here upon. Reference must be made to the Official Gazette issued by the Government of India for the authoritative text of any Act, Rule, Regulation, Notification or Orders. The Author or web publisher shall not be liable for any direct, consequential, or incidental damages arising out of the use of this article.