Judgments resolving issues facilitate resolution process in India

By Aditya Vikram Dua and Satish Anand Sharma, SNG & Partners
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Issues arising in the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, are being resolved by decisions of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), which are vested with the powers of “adjudicating authority” under the code, as well as by the Supreme Court.

Aditya Vikram Dua Senior associate SNG & Partners
Aditya Vikram Dua
Senior associate
SNG & Partners

In M/s Innoventive Industries Ltd v ICICI Bank and another, the Supreme Court addressed the question of whether state legislation providing a moratorium period of two years for debt repayment would override the “default” under the code for the purpose of admitting an application for initiating insolvency proceedings. The court held that section 238 of the code clearly stipulates that the provisions of the code will prevail over any other law, so any right of the corporate debtor under any other law cannot come in the way of the code.

In Speculum Plast Pvt Ltd v PTC Techno Pvt Ltd, the NCLAT addressed the issue of whether the Limitation Act, 1963, applies to the code. The NCLAT held that the act does not apply but where an application for initiation of the corporate insolvency resolution process under section 7 or 9 of the code has been filed after long delay, the adjudicating authority may ask the applicant to explain the delay. A stale claim of dues without explaining the delay normally should not be entertained.

In Urban Infrastructure Trustee Ltd v Neelakanth Township and Construction Pvt Ltd, the Supreme Court affirmed the decision of the NCLAT that the definition of “financial creditor” in section 5(7) of the code covers a debenture holder. Further, a financial creditor who is a shareholder of the corporate debtor can claim a debt.

Satish Anand Sharma, senior associate, SNG & Partners
Satish Anand Sharma
Senior associate
SNG & Partners

In Nikhil Mehta & Sons (HUF) & Ors v AMR Infrastructure, the NCLAT set aside the decision of the NCLT and decided that a flat purchaser with an assured return agreement would be treated as a financial creditor and could file a petition under the code for initiation of the insolvency resolution process. A home buyer without such an agreement is a consumer and neither a financial nor an operational creditor.

In Surendra Trading Company v Juggilal Kamlapat Jute Mills Co Ltd and Ors, the Supreme Court agreed with the NCLAT’s view that the period of 14 days within which the adjudicating authority is to decide to admit or reject an application to initiate the insolvency resolution process is not mandatory. The court set aside the NCLAT’s finding that the period of seven days given to applicants to rectify defects in their applications is mandatory under provisos in sections 7, 9 and 10.

The court took the view that the limit of 180 days in section 12 starts from the date of admission of the application. The court added that at times the applicant or their counsel may show laxity by not resolving objections within the time given. To tackle this, the court held that if the objections are not resolved within seven days, the applicant, when refiling the application after they are resolved, must file an application in writing showing sufficient cause for not resolving the objections within seven days.

In Mobilox Innovations Private Limited v Kirusa Software Private Limited, the Supreme Court held that where an application which is otherwise complete has been filed by an operational creditor, the adjudicating authority must reject the application under section 9(5)(ii)(d) if the operational creditor has received a notice of dispute or there is a record of dispute in the information utility: “All that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the ‘dispute’ is not a patently feeble legal argument or an assertion of fact unsupported by evidence … So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”

The court held that a dispute could be discerned not only from a suit or arbitration, but from any document related to the dispute.

The rulings mentioned above have proved to be forward looking, paving the way for ensuring a smooth insolvency resolution process and effective implementation of the code. While the code may be viewed as stringent and harsh by businesses that have obtained credit facilities, it is an effective measure to protect the interests of all stakeholders in a time-bound manner, particularly lenders.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Aditya Vikram Dua is a senior associate. Satish Anand Sharma is a senior associate and a qualified insolvency professional.

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