Object Vs Process: The Big Conundrum

The Code has to maintain balance among the objectives by consistently ensuring maximization of value, promotion of entrepreneurship, availability of credit and balancing the stakeholders' interests within a transparent and time-bound manner...

As far as adoption of new legislation in India goes, the Insolvency and Bankruptcy Code, 2016 (the "Code") has had a good run since its inception. The Code has, in little more than two and a half years, truly showed that debtors and promoters can be stripped off of control, priority to government dues can be altered, and insolvent body corporates can be turned around in a very short period of time.

Albeit the multiple challenges encountered in the adoption of the Code (which is common for any new legislation in India), the judiciary has speedily dealt with the same, thereby demonstrating it to be justly effective and efficient towards the efficacy of the objectives, as laid down in the Code. The industry, at large, is seemingly in cheer with the functioning of the Code and its outcomes. Lately, like other legislations, few contradictions have surfaced regarding the letter of the Code. While in the legislative sense this is warranted on account of the Code's infancy, it suffers commercial insinuations. At the outset, industries by and large prefer clear understanding and concrete foresight into the governing laws, rules and regulations, as any kind of quandary can affect, at varied degrees, the commercial viability of such industries.

Any new legislative enactment is bound to bring with it ambiguity as to its true purpose. The letter of the law often contains conflicting provisions or even grey areas which are capable of bearing many modes of constructions. In such cases, the judiciary gives a purposeful and contextual interpretation to the statute while interpreting the law in line with the object sought to be achieved. This article seeks to discuss such an interpretational issue recently faced by the judiciary, that is, the conflict between the fundamental objectives of the Code and the process which is to be adhered to, to attain the objectives.

This predicament was recently considered by the Hon'ble National Company Law Appellate Tribunal ("NCLAT") in its judgment dated November 14, 2018 passed in the case of Binani Industries Ltd. vs Bank of Baroda & Anr., ("Binani Industries"). In this case, the importance of achieving the objective of the Code was given priority over the obligation to comply with process documents, as has been elaborated below:

Object vs Process

The Code in the preamble enumerates its object which

is "An Act to consolidate and amend the laws relating

reorganization and insolvency resolution of corporate

persons, partnership firms, and individuals in a time-bound

manner for maximization of value assets of such

persons to promote entrepreneurship, availability of

credit and balance the interest of all the stakeholders

including alteration in the order of priority of payment of

Government dues...".

A recent example where this was demonstrated was in the

case of Bhushan Power and Steel Limited, where a late bid

made by one of the resolution applicants was accepted by

the Hon'ble National Company Law Tribunal beyond the

deadline set by the Committee of Creditors. Thereafter, the

Hon'ble NCLAT, vide an interim order dated May 9, 2018,

directed that the Committee of Creditors may consider the

resolution plan submitted by all the resolution applicants.

This matter is pending adjudication by the Hon'ble NCLAT,

and it remains to be seen whether the judiciary will strike

a balance between objectives of the Code and a time-bound

process.

In the case of Binani Industries, after closure of the bids in

accordance with the process documents, UltraTech Cement

offered a revised resolution plan. However, the Hon'ble

NCLAT accepted the revised resolution plan even though

the process documents did not permit its consideration by

the Committee of Creditors. The Hon'ble NCLAT observed

that the revised resolution plan took care of the objective

of the Code that is maximization of the value of assets of

the corporate debtor and also balancing the claim of all

the stakeholders of the corporate debtor. Hon'ble Justice

Shri S.J. Mukhopadhaya further observed that "...The first

order objective is 'resolution'. The second order objective is

'maximization of value of assets of the Corporate Debtor',

and the third order of objective is 'promoting entrepreneurship,

availability of credit and balance the interests'.

This order of objective is sacrosanct." The effect of

this ruling was that the Committee of Creditors was in a

position to consider and accept bids made after the deadline

prescribed under the process documents as it resulted in

maximization of value of the corporate debtor. The Supreme

Court has also dismissed an appeal filed against the

Hon'ble NCLAT judgment, a principle that has been followed

subsequently.

The Binani Industries case sets a precedent as it allows

maximization of the value of distressed assets and sets out

a view at a macro level that the judiciary will not reject any

resolution plans outrightly keeping in view the fundamental

objectives. At the same time, if the order of objective

as laid down in the case of Binani Industries is strictly

followed without any harmonious construction thereof,

it will create uncertainty as it may give room for an

interpretation that the process to be followed in insolvency

resolution cases can be compromised at the cost of achieving

the fundamental objectives. Such an interpretation can

hamper the prospects of effective and time-bound insolvency

resolution, as it opens avenues for long time indulgence

in the process and poses high risk of lengthy and costly

litigations. A negative precedent seemingly is also set, that

is, allowance of any low-bid resolution applicant to make a

higher amount resolution plan after the highest resolution

plan has been approved in coherence of the time-bound

process.

However, as the Hon'ble NCLAT observed in the case of

Binani Industries, the process of insolvency resolution

and the approval of the resolution plan is in the domain

of the Committee of Creditors. The Code does not spell

out the shape, color, and texture of the resolution plan,

which is left to the imagination of the stakeholders. This

gives wide potential for resolution plans to be customized

and the corporate insolvency resolution process to be

flexible depending on the facts of each case, in order to

achieve maximization of value. Accordingly, resolution

plans which are received within the overall timeframe

prescribed under the Code and prior to the final approval of

the Committee of Creditors can always be considered, even

if such approval is restricted in terms of a process document

designed by the Committee of Creditors and the resolution

professional.

Conclusion

Any challenge to the objectives of the Code is driven

by judicial action, which, in upholding the object and

avoiding the mischief caused by the conflicting or ambiguous

provisions, have at multiple instances overridden the

literal word of the Code. While such judicial action is

essential in feeding longevity to the Code, absolute

overriding action of the Courts can have numerous

unfavorable consequences.

We have already seen an example where the judiciary

has struck down process to protect the object of the Code.

This was evident in the case of Central Bank of India vs

Resolution Professional of Sirpur Paper Mills Limited &

Others. The Regulations framed under the Code earlier

allowed for differential treatment between operational and

financial creditors (i.e., payment of liquidation value to

dissenting financial creditors and a minimum of liquidation

value to operational creditors) which was disregarded by

the Hon'ble NCLAT by its order dated September 12, 2018.

While this was limited to equal treatment of creditors

with regard to distribution of resolution proceeds, this is

an extension of the rule to grant equal say to all creditors when it comes to conducting insolvency resolution

process. Recently, while hearing various challenges to the

validity of the Code, the Hon'ble Supreme Court observed

whether operational creditors should have a say in the

Committee of Creditors and get voting rights proportionate

to the debt owed to them. Although the Supreme Court

asked the government to mull over the issues raised by

operational creditors, it has given a clear indication of how

the Supreme Court interprets the process should be handled,

in order to achieve the objectives of the Code. However, it

is yet to be observed how the position of the operational

creditors vis-à-vis the financial creditors will evolve over

times to come.

While the above seems to be the trend that is being followed

in interpreting the Code, there are examples available

where the process has been followed strictly, often to the

detriment of the object, i.e., value maximization. This was

seen in the case of Arcelormittal India Private Limited vs.

Satish Kumar Gupta & Ors., where the Hon'ble Supreme

Court vide its judgment dated October 4, 2018 allowed

Arcelormittal India Private Limited and Numetal Limited

to re-submit resolution plans within a fixed time, even

though both were initially ineligible under Section 29A of

the Code. However, a subsequent proposal from Essar Steel

Asia Holdings Limited (72% shareholder of ESIL) submitted

to the Committee of Creditors was rejected on the ground

that it was not within the mandate of the Supreme Court's

decision and the process laid down in the Regulations, even

though it provided for better value as opposed to the abovementioned

resolution applicants.

Apropos, the Code has to maintain balance among the

objectives by consistently ensuring maximization of

value, promotion of entrepreneurship, availability of

credit and balancing the stakeholders' interests within

a transparent and time-bound manner. Only then the

Insolvency and Bankruptcy Code, 2016 will be utterly

successful in India, ensuring speedy insolvency resolution

of corporate persons.

Disclaimer – The views expressed in this Article are personal views and do not, in any manner, represent the views or stand of Axis Bank.