DECIPHERING INSOVENCY CODE THROUGH JUDICIAL INTERPRETATIONS

DECIPHERING INSOVENCY CODE

PERIOD DEC16 – JUN 17

Insolvency and Bankruptcy Code 2016 (I & B Code 2016) was published in the Gazette of India on 28th May 2016. The object and reasons for the enforcement of the said Code the objective of this Code is to preserve by providing linear, time-bound and collective process; improve the time taken to return; failure to provide clear exit option to investor, increase recovery value, bring all insolvency, bankruptcy related issues under one umbrella, and to develop other avenues for  financial business oppurtunities.

The I&B Code 2016 read  with Insolvency and Bankruptcy Rules 2016 (also referred  I&B Adjudicating Rules, 2016) provides the manner and procedure to initiate the Corporate Insolvency Resolution Process. Under I & B Code 2016, the IRP proceedings can be initiated by a Financial Creditor or by an Operational Creditor or by the Corporate Debtor itself. Section 7, 9 and 10 of I&B Code 2016 respectively deals with the manner and procedure for initiating the Corporate Insolvency Resolution Process.

I&B Code 2016 are still in the stage of the evolution and the Adjudicating Authorities including Hon’ble National Company Law Appellant Tribunal [NCLAT] are trying to interpret its various provisions. In the present essay we discuss whether requisites, timelines, documentation as provided under I&B are mandatory to follow or are simply procedural in nature and can be differed.

Prior to discussing the judicial precedents as on date it would be important to refer to Section 238 of the I&B Code 2016 which to some extent clarifies the intention of the law making agencies that they since inception wanted to keep I&B Code 2016 separate and have overriding effect over other statutes. In other words, the requisites, timelines, documentation as provided under I&B 2016 become mandatory in nature.

IS IT MANDATORY TO SERVE NOTICE UNDER SECTION 8(1) OF I&B CODE 2016 BEFORE FILING THE APPLICATION UNDER SECTION 9 OF I&B CODE 2016 BY AN OPERATIONAL CREDITOR.

As per Section 9 whenever the Adjudicating Authority receives an application for initiating an Insolvency Resolution Process against a Corporate Debtor, it has to satisfy itself that all the conditions provided under Section 9(3) have been satisfied.

The conditions provided under the said section 9(3) are that the operational creditor shall, along with the application furnish:

  1. A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the operational debtor;
  2. An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
  3. A copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debt and
  4. Such other information as may be specified.

In Era Infra Engineering Limited V/s Prideco Commercial Services Private Limited, the issue before Hon’ble National Company Law Appellate Tribunal was whether the Corporate Insolvency Process Order passed by Hon’ble Adjudicating Authority and subsequent appointment of Insolvency Resolution Professional and declaration of moratorium period on the basis of an application filed by Operational Creditor under Section 9 of I&B Code 2016 was correct as the Operational Creditor had failed to issue demand notice as required under Section 8 of the I&B Code 2016. The creditor had in past served demand notice under Section 271 of Companies Act, 2013 and was relying on the said demand notice.

The Adjudicating Authority (National Company Law Tribunal, Principal Bench, New Delhi), have on receipt of the application under Section 9 of I&B Code 2016, from operational creditor i.e. Prideco Commercial Services Private Limited had triggered the Corporate Insolvency Process against the Corporate Debtor Era Infra Engineering Limited and accordingly appointed an Insolvency Resolution Professional and declared the moratorium under Section 14 of I&B Code 2016.

The Hon’ble NCLAT in the appeal set aside the order passed by Hon’ble Adjudicating Authority i.e NCLT,New Delhi and quashed all orders, interim arrangement including declaration of moratorium and appointment of Insolvency Resolution Professional. It further held that all actions taken by Interim Resolution Professional after passing of the order as illegal. The Appellant Tribunal observed that serving of notice under Section 271 of Companies Act, 2013 cannot be considered as sufficient notice as required to be served under Section 8(1) of I&B Code 2016 in the prescribed format.

The Hon’ble NCLAT, while deciding observed that “Admittedly no notice was issued by Operational Creditor stipulated under Rule 5 in Form 3 has not been served. Therefore, in absence of any expiry period of tenure of 10 days there was no question of preferring an application under Section 9 of I&B Code 2016“.The Hon’ble NCLAT further held that “the Adjudicating Authority has failed to notice the afore said facts and the mandatory provisions of law as discussed above. Though the application was not complete and there was no other way to cure the defect, the impugned order cannot be upheld“.

IS IT MANDATORY TO ANNEX THE CERTIFICATE FROM FINANCIAL INSTITUTION ALONG WITH THE APPLICATION FILED BY THE OPERATIONAL CREDITOR UNDER SECTION 9 OF I&B CODE 2016.

In Smart Timing Steel Limited V/s National Steel and Agro Industries Limited, the issue before the Hon’ble NCLAT was whether filing of a “copy of certificate from the “financial institution” maintaining accounts of the operational creditor confirming that there is no payment of unpaid operational debt by the “Corporate Debtor” as prescribed under clause (c) of sub-section (3) of Section 9 of the I&B Code 2016 is mandatory or directory.

The said Appeal was filed by the Appellant, who was an operational creditor who has filed a petition against the Respondent for initiating the Corporate Insolvency Process which was rejected by the Adjudicating Authority (NCLT), Mumbai, who had held that “On perusal of Section 9 of Insolvency and Bankruptcy Code, it is evident, that it is mandatory to file copy of Certificate from the Financial Institutions reflecting non-payment of the operational debt impugned, for the operational Creditor has failed to annex copy of the said Certificate as required u/s 9(3) of the Code, this petition is liable to be rejected.

The Hon’ble NCLAT, while rejecting the appeal filed by Operational Creditor held that it is clear that the word “shall” used in sub-section (3) of the Section 9’I&B Code’ is mandatory, including clause 3 therein. The Hon’ble Tribunal while deciding observed that one of the cardinal principles of interpretation of statute is that, the words of statute must prima facie be given their ordinary meaning, unless of course, such construction leads to absurdity or unless there is something in the context or in the object of the statute to the contrary. When the words of statute are clear, plain and unambiguous, then, the courts are bound to give effect to that meaning, irrespective of the consequences involved. Normally, the words used by the legislature themselves declare the legislative intent particularly where the words of the statute are clear, plain and unambiguous. In such a case, effort must be to give a meaning to each and every word used by the legislature and it is not sound principle of construction to brush aside the words in statute as being redundant or surplus, and particularly when such words can have proper application in circumstances conceivable within the contemplation of the statute.

IS THE TIMELINE OF 14 DAYS PROVIDED UNDER I&B CODE TO ADMIT AND INITIATE THE CORPORATE INSOLVENCY PROCESS IS EXTENDABLE.

In J K Jute Mills Company Limited V/s Surendra Trading Company4, the issue before the Hon’ble NCLAT was “Whether the time limit prescribed in Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as Code 2016) for admitting or rejecting a petition or initiation of insolvency resolution process is mandatory

The Hon’ble NCLAT after discussing each of the Section of the I&B Code 2016 wherein the time is prescribed held that “the object behind the time period prescribed under sub-section (5) of the Section 7, sub-section (5) of Section 9 and sub-section (4) of Section 10, like Order VIII Rule 1 of CPC is to prevent the delay in hearing the disposal of the cases. The Adjudicating Authority cannot ignore the provisions. But in appropriate cases, for the reasons to be recorded in writing, it can admit or reject the petition after the period prescribed under Section 7 or Section 9 or Section 10.

The Hon’ble Appellate Tribunal referred to various decisions of Hon’ble Supreme Court wherein the Hon’ble Apex Court has held that the mandatory provisions are to be complied within the time frame prescribed.

The Hon’ble NCLAT while deciding the case held that “the time is the essence of the code and all the stakeholders, including the Adjudicating Authority are required to perform its job within time prescribed under the Code except in exceptional circumstances if the adjudicating authority for one or other good reason fails to do so. In the case in hand we find that the Adjudicating Authority has unnecessarily adjourned the case from time to time which is against the essence of the code.”

WHETHER BENEFITS AVAILABLE IN OTHER ENACTMENT IS OF ANY RELIEF IN AVOIDING THE PROVISIONS OF I&B CODE 2016.

In Innoventive Industries Limited V/s ICICI Bank Limited, the issues before the Hon’ble NCLAT were as follows:

  1. Whether a notice is required to be given to the Corporate Debtor for initiation of Corporate Insolvency Resolution Process under I & B Code, 2016 and if so, at what stage and for what purpose?
  1. Whether ‘Maharashtra Relief Undertaking (Special Provisions) Act (Bombay Act XCVI of 1958)'(herein- after referred to as MRU Act 1958) shall prevail over I & B Code 2016. In other words, whether a Corporate Debtor who is enjoying the benefit of MRV Act, can be subjected to I & B Code 2016? And
  2. Whether in a case where Joint Lender Forum (JLF) have reached agreement and granted permission to the Corporate Debtor prior consent of JLF is required by financial creditor before filing of an application under Section 7 of the I & B Code 2016?

The Appellant in the present case has approached Hon’ble NCLAT against the order of Hon’ble Adjudicating Authority who after checking the application filed by the financial Creditor under Section 7 has triggered the Corporate Insolvency Process against the Corporate Debtor after getting itself satisfied that there is a default.

The Hon’ble NCLAT after hearing both the parties have held as in some of the cases initiation of Insolvency Resolution Process may have adverse consequences on the welfare of the Company. Therefore, it will be imperative for the “adjudicating authority” to adopt a cautious approach in admitting Insolvency Application by ensuring adherence to the principle of natural justice. Though in the present case in hand, it was observed by the Hon’ble NCLAT that opportunity was given to the Corporate Debtor to defend himself before admitting the application.

Furthermore, with respect to the protection of any other enactment like in the present case the Appellant were taking the benefit of Maharashtra Relief Undertaking (Special Provisions) Act. The Hon’ble Appellant Authority held that Section 238 of the I & B Code, 2016 is non-obstante clause which overrides the operation of the MRU Act. As per Section 238 of the I & B Code, 2016 the provisions of the Code are to are to be given effect to notwithstanding anything contrary contained any other law or any instrument having effect under such law.

  1. SECTION 238 STATES AS FOLLOWS:

“238 – The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in anti other law for the time being in force or anti instrument having effect by virtue of any such law.”

With respect to the last question, the Hon’ble Appellant Tribunal held that for initiation of corporate resolution process by financial creditor under sub-section (4) of Section 7 of the Code, 2016, the ‘adjudicating authority’ on receipt of application under sub-section (2) is required to ascertain existence of default from the records of Information Utility or on the basis of other evidence furnished by the financial creditor under sub- section (3). Under Section 5 of Section 7, the ‘adjudicating authority’ is required to satisfy-

  1. Whether a default has occurred;
  2. Whether an application is complete; and
  3. Whether any disciplinary proceeding is against the proposed Insolvency Resolution Professional.

Once it is satisfied, it is required to admit the case but in case the application is incomplete application, the financial creditor is to be granted seven days’ time to complete the application. However, in a case where there is no default or defects cannot be rectified, or the record enclosed is misleading, the application has to be rejected. Beyond the aforesaid practice, the ‘adjudicating authority’ is not required to look into any other factor, including the question whether permission or consent has been obtained from one or other authority, including the JLF(Joint Lender’s Forum of Consortium of banks).Therefore, the contention of the petition that the Respondent has not obtained permission or consent of JLF to the present proceeding which will be adversely affect loan of other members cannot be accepted and fit to be rejected.

CONCLUSION:

It is no doubt that I&B Code 2016 can be considered as law which is strict in nature as the Adjudicating Authority has to decide whether to initiate the Corporate Insolvency Resolution Process within a time span of 14 days. However, at the same time if we step in the shoes of the Creditors (Operational as well as Financial Creditor) for them they have got a ray of hope that there outstanding will be repaid soon as other forums like filing of recovery suits, winding up petition as well as filing of application before Debt Recovery Tribunal are lengthy process.

As mentioned in the object and reason of the I&B Code 2016 also, the objective of the Act is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.

The content of this article is intended to enhance readers interest in  the subject. Expert’s advice should be sought about your specific circumstances.

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