Insolvency code: Judicial trends

Authored by Abhishek Tripathi and Avantika Shukla

The Insolvency and Bankruptcy Code, 2016 (IBC), is considered to be among the biggest achievements of the National Democratic Alliance (NDA) government. With the NDA coming back to power, it can be assumed that the IBC will receive a greater push. The role of adjudicating authorities will be crucial and recent judgments show that the courts have risen to the challenge.

The Supreme Court has led the way by showing the necessary urgency in disposing of insolvency matters, and the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have followed in its footsteps by upholding the sanctity of the process and developing a cohesive insolvency jurisprudence.

In the Swiss Ribbons case, the Supreme Court, in upholding the constitutional validity of the code, and making a distinction between operational and financial creditors, clearly expressed its support of the fundamental design of the corporate insolvency resolution process (CIRP) under the code. Further, the Supreme Court has also upheld the validity of the distribution waterfall mechanism of the code, section 12A, which deals with the withdrawal of insolvency proceedings, and section 29A that deals with persons ineligible to be resolution applicants and the relaxation of the rules applicable to micro, small and medium enterprises. The supervisory roles of the NCLT and the NCLAT were affirmed by the court by holding that they may permit the withdrawal of insolvency proceedings at any stage.

Further, in K Sashidhar v Indian Overseas Bank, the Supreme Court has been forthright in recognizing that the Committee of Creditors (CoC) is the primary custodian of the CIRP and has refused to intervene in its commercial decisions. The judgment may go a long way to prevent frivolous litigation by unsuccessful resolution applicants and other stakeholders, who may wish to drag out the CIRP for their vested interests.

However, this may not prevent the intervention of the NCLT or NCLAT when the CoC or its members act mala fide. This was clearly demonstrated by the NCLT in the case of Edelweiss Asset Reconstruction Company Limited v Bharati Defence and Infrastructure Limited, where the lead financial creditor, which had super majority in the CoC, initiated the insolvency process and was also the resolution applicant. The NCLT, however, rejected the resolution plan approved by the CoC and made a liquidation order.

On the effect of moratorium under the code on criminal proceedings, the NCLAT has followed Delhi High Court in holding that the moratorium under section 14 of the code does not apply to criminal proceedings or any penal action taken pursuant to the criminal proceeding or any act having the essence of crime or criminal proceeds.

Delhi High Court had held that proceedings under the code do not have primacy over proceedings under the Prevention of Money Laundering Act (PMLA). The NCLAT went on to hold that attachment under PMLA will not be affected by the moratorium under the code. The high court order, however, may create some discomfort to creditors because it has held that property that was not necessarily acquired through money laundering may also be attached under the PMLA proceedings.

In some relief to employees and workmen, in Alchemist Asset Reconstruction v Moser Baer India Limited, the NCLT has held that provident fund, pension fund and gratuity dues of a corporate debtor do not form part of the liquidation estate, and therefore may be recovered in priority before the distribution waterfall.

While dealing with the rights of corporate guarantors, the NCLAT has held that insolvency proceedings may be initiated against a corporate guarantor even in the absence of a similar proceeding against the principal borrower. However, where insolvency proceedings have been initiated against a guarantor for a claim, the same lender may not be permitted to initiate CIRP against a second guarantor in respect of the same claim.

The promoters also have a few straws that they can clutch on to. There appears to be a rise in the number of cases where schemes of arrangement under section 230 of the Companies Act, 2013, are proposed as a means of debt recovery or resolution after the failure of the CIRP and making of the liquidation order.

The NCLAT has also permitted promoters to submit such schemes to the liquidator for its consideration. Filing of competing schemes with promoters and including tainted promoters in the mix may cause some unintended delays in the liquidation process. It will be interesting to see how the courts handle it when the situation arises.