Hello! Welcome back to our updates on the Insolvency and Bankruptcy Code, featuring developments in the month of July 2022.
The Government has deferred introduction of a bill to amend the Insolvency and Bankruptcy Code (“IBC”) to the winter session of Parliament. The amendments will not only seek to quicken the pace of resolution, but also introduce the much-awaited framework for cross-border insolvency. It is also believed that the amendment may seek to undo the unintended consequences of the SC’s judgment in Vidarbha Industries v. Axis Bank (discussed below).
Two professors of MDI Gurgaon have analysed the data of insolvencies to argue that operational creditors are losing out significantly in cases where the companies proceed to liquidation instead of resolution. Further, they also argue that in cases where the liquidation premium was higher, the operational creditors received a lower amount than the normative distribution. The authors have asked for greater voice being given to the operational creditors in the Committee of Creditors.
Like many other personal guarantors, Anil Ambani too has challenged the vires of various provisions of the IBC pertaining to personal guarantors to corporate debtors. As was reported in our previous issue, the SC has issued notice in a bunch of such matters.
From the docket
Many industry experts believe that the Supreme Court has opened a Pandora’s box by holding that the powers of the Adjudicating Authority (“AA”) for the admission of applications filed by financial creditors under section 7 of IBC are discretionary in Vidarbha Industries v. Axis Bank (“Vidarbha Judgment”). Prior to this, the prevailing view as laid down in Innoventive Industries Ltd. v. ICICI Bank was followed – that is – if an application filed by a financial creditor was in order and the twin conditions of having given a debt and a default in repayment was shown, the AA was obliged to initiate CIRP.
In the opinion of the authors of the present post, the Vidarbha Judgment should have been limited to the specific facts of the case, instead of laying down any general position of law. In the Vidarbha Judgment, the corporate debtor had put forward the defense that a sum of Rs. 1,730 crore was realisable in its favour pursuant to orders of APTEL. This defense was not considered by the AA, which the Supreme Court felt was a relevant consideration as the sums due to the corporate debtor far exceeded the amount of debt.
National Thermal Power Corporation Limited (“NTPC”) has emerged as the successful resolution applicant after the NCLAT held that it could be considered as an eligible resolution applicant under the IBC as the period of one year as mentioned under section 29A(c) of IBC had not elapsed from the date of initiation of CIRP and classification of NTPC’s joint venture companies’ accounts as NPA.
The Supreme Court in another case, SS Engineers v. Hindustan Petroleum Corporation reiterated that the IBC is not a debt recovery mechanism and held that the AA had erroneously admitted an application when there was a pre-existing dispute regarding the alleged claim of the appellant against HPCL or its subsidiary. It was further stated by the apex court that an operational creditor can only trigger CIRP when there is an undisputed debt and a default in payment thereof. However, if the debt is disputed, the application of the operational creditor for initiation of CIRP must be dismissed.
The Punjab and Haryana High Court held that proceedings under Section 138 of Negotiable Instruments Act would remain stayed in terms of Section 96 (interim moratorium) of the IBC, even where the cheque in question was not issued to discharge a ‘corporate debt’ but issued by a personal guarantor qua a corporate debtor. The High Court held that interpretation of the terms “all the debts” and “any legal action or proceedings pending in respect of any debt” as occurring in Section 96 of the IBC, means that it would cover all debts including any debt not pertaining to a corporate debtor for whom the accused in such a complaint under Section 138 stood as a personal guarantor to. The court distinguished the Supreme Court’s judgment in P. Mohanraj v. Shah Ispat Brothers, wherein it was held that the proceedings can be initiated against the directors of the Corporate Debtor since the moratorium under Section 14 is not against the directors of the Company.
The NCLAT in Jitendra Kumar Singh v. Vishakarma Tool Works ruled that the demand notice under Section 8 of IBC could be served either at the registered office or upon the whole-time director or designated partner or key managerial personnel, if any, of the corporate debtor.
Thank you for reading. We will be back again in your inbox next month with more updates!
– Mani Gupta & Saumya Upadhyay