The New Insolvency Regime

The Insolvency & Bankruptcy Code, 2016 and enactments to it, plus rulings of the NCLT, NCLAT, and finally the SC have brought forth a new set of precedents. Read on to know...

A year since it was kick-started, several issues concerning the scope and object of the provisions and applicability of other enactments to the Insolvency & Bankruptcy Code, 2016 arising from the rulings of the Hon’ble National Company Law Tribunal and the National Company Law Appellate Tribunal have been adjudicated upon by the Hon’ble Supreme Court. The new insolvency regime brings forth a new set of precedents. This Article discusses some of the judgements:

An application barred by time is still accepted for Insolvency Resolution

The new regime does away with the concept of filing an application for Corporate Insolvency within a prescribed period of limitation. Unlike the previous enactments, if an application was brought after the period prescribed under the Limitation Act, 1963, it would be barred by time.

A financial creditor had issued debenture certificates towards the issue of Optionally Fully Convertible Debentures in the years 2007, 2008, and 2009. These were to be redeemed within 5 years and a redemption premium towards the OFCDs on the date of its maturity was to be paid to the financial creditor. The redemption certificates matured and became due in the years 2011, 2012, and 2013. The debtor defaulted in repaying on all dates of maturity and hence the application for recovering dues. Although the limitation period lapsed, the corporate debtor between the years 2012 and 2017 had been acknowledging that the principal amount had been in dispute, through his audited balance sheets of the years 2012, 2013, and 2014 as well as the un-audited balance sheets of the years 2015 and 2016. This, in the opinion of the Hon’ble National Company Law Appellate Tribunal, amounts to a default in the continuing course of action. The financial creditor then filed an application under Section 7 for initiating Insolvency Resolution Process in April 2017.

The Hon’ble National Company Law Appellate Tribunal as well as the Counsel representing the Appellant were unable to substantiate if the Limitation Act, 1963 would apply to an application initiated under the Insolvency & Bankruptcy Code, 2016. Moreover, the (Here something seems to be missing. Please clarify.) remains silent as to the applicability of the Limitation Act, 1963 for initiating the CIRP. Dismissing the appeal, preferred by the Appellant in Neelkanth Township Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd., the Hon’ble Supreme Court vide its order dated August 23, 2017¹ has kept open the issue of applicability of the Limitation Act, 1963 to the insolvency proceedings.

Directory nature of period on acceptance – Rejection and rectification of errors in an application

Application for initiating Insolvency Resolution Process can be made under Sections 7, 9, and 10 of the Insolvency & Bankruptcy Code, 2016. The Hon’ble National Company Law Appellate Tribunal in deeming the 14-day period of acceptance or rejection as directory by its judgement in JK Jute Mills v. Surrendra Trading Company² had stated that the task of ascertaining the existence of a default is delegated upon the Registry during which the Adjudicating Authority cannot have cognizance of the applications. The Hon’ble Supreme Court held that procedural provisions in a statue (Here do you mean “statute”. Please clarify.) may not be held to be mandatory if no prejudice is caused and therefore deemed the 14-day period to be directory. In deciding this issue, emphasis was placed on PT Rajan v. TPM Sahir & Ors³, which discusses when a provision of statue (Here do you mean “statute”. Please clarify.) can be deemed as mandatory or directory. Emphasis was also placed on Kailash v. Nanhku & Ors⁴, where the Hon’ble Supreme Court held the word ‘shall’ as to mean ‘may’ to further the object of the enactment. However, it did not furnish any reason in deeming the 7-day period on rectifying defects as mandatory.

On an appeal preferred by Surrendra Trading in deciding the issue of the 7-day period, the Hon’ble Supreme Court held both 14-day period and 7-day period as directory stating that since the proviso and non-obstante clauses dealt with the pre-adjudication stage, it would have no significant impact over the scope and object of the Insolvency & Bankruptcy Code, 2016 or in formulating a resolution since an applicant does not get anything unless the defects are removed.

Admissibility of a Banker’s Certificate issued by a foreign bank

Each of the Sections 7, 9, and 10 of the Insolvency & Bankruptcy Code, 2016 prescribes furnishing of certain documents. Amongst the required documents is a certificate issued by a bank showing a default in payment by a debtor. In the event it is not furnished by the applicant creditor, the application is rejected. The conclusion arrived at by the Hon’ble National Company Law Appellate Tribunal in Macquarie Bank v. Uttam Galva Metallic Limited₅ had cast an embargo upon a foreign creditor from making an application under Section 9(3)(c)⁶ to the tribunal since the bank issuing the certificate showing the default was a foreign bank and did not fall within the meaning of Section 3(14)₇ . According to the Appellate Tribunal, the use of the word ‘shall’ contained in proviso (1) of Section 9 read with clause (3)(c) is mandatory, thus discriminating against operational creditors who did not hold a bank account in any of the financial institutions as described under Section 3(14). Excluding an operational creditor having no bank account would be against Article 14. This would cause general inconvenience to the Appellant.

On account of the general inconvenience to the operational creditor, the Appellant preferred an appeal. In Macquarie Bank v. Shilpi Cable Technologies₈, the Hon’ble Supreme Court reversed the ruling of the Appellate Tribunal, opening the gates for foreign creditors to resolve their disputes in India. Relying upon the judgement of the Hon’ble Supreme Court in State of Haryana v. Raghubir Dayal₉, it was held that deeming the provision mandatory would not further the object of the Act and result in serious general inconvenience to an operational creditor producing a banker’s certificate from a foreign bank. Further, the words contained in Form 5, Part V, Item 7 and the words ‘if available’ in Annex III lead to the conclusion that such documents are not necessary to initiate an application for Corporate Insolvency Resolution Process.

Delivery of a demand notice by an Advocate – Construing Section 8

The second issue which arose in Macquarie Bank v. Shilpi Cable Technologies dealt with the construal of the word ‘deliver’₁₀ in Section 8 and construal of the words ‘authorized to act’ and ‘position in relation to the operational creditor’ contained in Form 3 and Form 5. The words contained in Form 3 and Form 5 implied that any individual authorized by the operational creditor could deliver a demand notice. However, neither of the provisos to or the Explanation in Section 8 made a mention of an Advocate to serve a notice on behalf of the operational creditor. This led to the question whether an Advocate could deliver a demand notice on behalf of an operational creditor.

The Hon’ble Supreme Court, relying upon a judgment delivered by a 5-judge bench in Ex. Captain Harish Uppal v. Union of India and Another₁₁, held that the term ‘practise’ in Section 30₁₂ of the Advocates Act connotes a wider meaning and would include all preparatory steps consequential in filing an application before the Tribunal. Relying upon the judgement in Balchand Jain v. State of M.P₁₃, the Hon’ble Supreme Court arrived at a conclusion that the non-obstante clause in Section 238₁₄ would have no overriding effect on the Advocates Act. Emphasis has also been placed upon the decision in Renu Sagar Power Co. Ltd. v. General Electric Company, wherein the court arrived at a conclusion that the expressions ‘in relation to’ and ‘authorized to act’ are wide enough to include a lawyer and any agent representing the operational creditor.