Subodh Sadana and Bhuvan Arora analyse judicial intervention in insolvency resolution
The Insolvency and Bankruptcy Code (IBC) has so far travelled a short journey of about 18 months where it has already faced a plethora of legal challenges. In order to overcome these challenges, parties have resorted to judicial intervention leading to resolution of several of these challenges, while the legal battle in some of the matters is still sub judice.
One must appreciate that the tribunals and the Supreme Court have been quite proactive in resolving and settling most of the issues. Certain issues have travelled from the National Company Law Tribunal (NCLT) to the National Company Law Appellate Tribunal (NCLAT) and ultimately have been settled by the Supreme Court. The issue of “dispute” was settled by the Supreme Court in Mobilox Innovations Private Limited v Kirusa Software Private Limited where it was held that there should be a pre-existing dispute, i.e. it should exist before the issuance of a demand notice by the operational creditor and a mere illusory dispute raised for the first time while replying to a demand notice cannot act as a barrier for admitting the application under the IBC.
Another issue settled by the Supreme Court relates to the withdrawal of the application in case of a settlement between the parties after the commencement of the corporate insolvency resolution process (CIRP). The Supreme Court, while exercising its jurisdiction under article 142 of the Constitution, in Lokhandwala Kataria Construction Pvt Ltd v Nisus Finance and Invt Managers LLP for the first time allowed withdrawal of the case after the commencement of CIRP pursuant to settlement between the parties.
The issue as to whether the Limitation Act applies to IBC cases was settled by NCLAT in Black Pearl Hotels Pvt Ltd v Planet M Retail Ltd where NCLAT rejected the observations of NCLT that the application was barred by limitation and the matter was remanded to NCLT for admission. Another issue was with respect to the completion of the CIRP period due to ongoing litigations where NCLAT, in Quantum Ltd v Indus Finance Corporation Ltd, held that the period of litigation i.e. the period from the application filing date to the date of passing of the order will be excluded from the CIRP.
The Jaypee Infratech case came into the limelight after a public interest litigation was filed before the Supreme Court pursuant to commencement of insolvency proceedings initiated against the company, affecting nearly 32,000 home buyers as they were neither considered as financial creditors nor operational creditors. Subsequently, the insolvency regulator amended the regulations whereby it created another category for the home buyers so that their claims could be considered. However, the right of the home buyers to initiate the insolvency application against a corporate debtor and their classification in terms of section 53 is likely to be incorporated in the IBC with the promulgation of an ordinance in this regard.
Recently, the Japyee Infratech matter again drew public attention with NCLT declaring the transactions entered into by Jaypee Infratech, i.e. mortgaging its properties with the lenders of parent company Jaiprakash Associates Limited (JAL) for a loan taken by the latter, as fraudulent, preferential and undervalued in terms of sections 43, 45 and 66 on an application filed by the resolution professional. In another matter, NCLAT in Nikhil Mehta and Sons v AMR Infrastructure Ltd gave due cognizance to the home buyers with an assured return clause and treated them as financial creditors.
There are certain practical issues that need to be resolved by way of judicial process. The issue of process of law versus maximization of value that arose in Binani Cement still needs to be addressed. In this case, on one end Rajputana Properties Private Limited (an entity owned by Dalmia Bharat Group) requested the tribunal to follow due process of law and grant its approval to the resolution plan already accepted by the committee of creditors (CoC) of Binani Cement; however, on the other end, UltraTech Cement Ltd had offered way more than Rajputana Properties Private Limited and requested the tribunal that its bid be accepted since one of the objectives of the IBC is to maximize the corporate debtor’s value of assets.
Although the tribunals/courts have been proactive, there have been certain decisions that are contrary to the provisions of IBC. One such example is in the matter of K Sashidhar v Kamineni Steel & Power India Pvt Ltd, where NCLT approved a resolution plan even though it was consented to by 66.67% of the CoC’s voting share; however, the law provides for a minimum threshold of 75%. A similar decision was also passed by NCLT, Mumbai in Edelweiss Asset Reconstruction Co Ltd v Raj Oil Mills Ltd.
The IBC is at a metamorphic stage and the country’s 12 largest insolvency cases (except two) are yet to see the light of the day. Many more complex issues will emerge and jurisprudence will be set by way of judicial intervention. However, with the passage of time and the way the regulator and the tribunals/court are actively working, it is believed that the IBC, over the course of time, will become more robust and effective in insolvency resolution.