India: Insolvency Code: The National Company Law Tribunal Kickstarts Business

Background

Pursuant to notification of the provisions relating to insolvency resolution and liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code), several applications have been made to the National Company Law Tribunal (NCLT) since mid‑December by creditors and corporate debtors themselves. Keeping up with the tight timelines under the Code, the judicial response has been swift and the NCLT has begun reviewing and admitting applications in line with the provisions of the Code. This Ergo Newsflash seeks to highlights the key takeaways of some of these early orders passed under the new law.

ICICI Bank v Innoventive Industries Limited

As a first of its kind, the NCLT (Mumbai) has, on 17 January 2017, passed an order in the matter of ICICI Bank Limited v Innoventive Industries Limited (Innoventive Order) inter alia admitting the application under the Code filed by ICICI Bank for initiating the corporate insolvency resolution process (CIR Process). An application was filed by ICICI Bank stating that the corporate debtor i.e. Innoventive Industries Limited (Innoventive) had availed a term loan facility, a working capital facility and an external commercial borrowing and had defaulted in repayment of these amounts. Accordingly, they sought initiation of the CIR Process under provisions of the Code.

Innoventive contended that it had been declared as a 'relief undertaking' under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRU Act) and consequently, the existing proceedings against it stand suspended until 21 July 2017. Further, the contention was also supplemented with an argument that the MRU Act has a non-obstante clause which empowers the State Government to suspend any remedy for enforcement in relation to any right or liability accrued prior to an entity being declared as a relief undertaking.

The NCLT rejected the aforesaid argument and passed an order accepting the application and declaring moratorium, observing as under:

  • Section 238 of the Code also contains a non-obstante clause similar to the MRU Act, which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Since the Code is subsequent to the MRU Act, the non-obstante clause under Section 238 of the Code prevails.
  • The suspension of liability under the MRU Code is inconsistent with the ability of a creditor to initiate the CIR Process under the Code and therefore, the overriding powers under Section 238 of the Code shall render the suspension under MRU act inoperative.
  • Declaration of moratorium keeps business as usual for employees without affecting their interest and therefore a declaration of moratorium would not be in conflict with the objective of the MRU Act (which is to prevent unemployment of the existing employees of a relief undertaking).

Innoventive moves the High Court

A writ petition has now been filed by Innoventive before the Bombay High Court against the Union of India and 18 other respondents, challenging the constitutional validity of the Code following admission of the insolvency resolution application against Innoventive by the NCLT. Based on the information available in the public domain, we understand that the constitutional validity of the Code is being challenged on the ground that it does not offer an opportunity of hearing to a corporate debtor against whom an application under Section 7 of the Code for corporate insolvency resolution has been filed before the NCLT and accordingly is in violation of principles of natural justice. The petition is coming up for hearing on 16 February 2017.

Khaitan Comment

  • The Innoventive Order sets out the objective of the Code and lays down the law which can resolve conflicts vis-a-vis non-obstante clauses of state relief undertaking enactments and the Code. However, the possibility of remedies available under the Code being challenged in future on such grounds cannot be ruled out.
  • On the challenge being made on constitutionality of the Code, it is expected that the Hon'ble Bombay High Court would recognise the principles of natural justice and prescribe that it is to be followed at the time of admission of application under the Code by the NCLT by giving an opportunity of hearing to the debtor and it may issue necessary directions in this regard which would also be in line with National Company Law Tribunal Rules, 2016. This would also be in line with the position taken by Hon'ble Supreme Court on challenge to constitutionality of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) on similar grounds. This may be particularly helpful in disputes involving operational creditors where the Code requires the debtor to file suit or initiate arbitration proceedings in case of any disagreement with the operational creditor, and where the debtor chooses not to pay the operational creditor upon a demand being made by it within a period of 10 days.

Re: Synergies – Dooray Automative Limited (SDAL)

This matter arose on account of abatement of reference of the company i.e. Synergies – Dooray Automative Limited (SDAL) before the Board for Industrial and Financial Reconstruction on account of notification of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA Repeal Act). The NCLT, while admitting the application made in accordance with the provisions of the SICA Repeal Act and the Code, has granted moratorium against all proceedings including SARFAESI action which was initiated by some of the creditors of the corporate debtor. While the NCLT has admitted the application of SDAL for CIR Process, it has not given any decision on the continuation of the orders passed by BIFR, against which appeals were pending before Appellate Authority for Industrial and Financial Reconstruction prior to the notification of the SICA Repeal Act.

Khaitan Comment

In view of the provisions on saving of rights under the SICA Repeal Act, it remains to be seen whether interim orders passed under SICA would be binding on the financial creditors while formulating the resolution plan, assuming that such orders are not challenged under the Code. This is expected to be examined in the course of the next few months while such resolution plans come up before the NCLT for consideration, after being formulated by the committee of creditors.

Nikhil Mehta v AMR Infrastructure Limited

The Delhi Bench of the NCLT in the case of Nikhil Mehta v AMR Infrastructure Limited, while interpreting the vital definitions of 'financial creditor' and 'financial debt', has rejected the application on the grounds of the applicant and the amount claimed to be unpaid not falling within the scope of the respective definitions.

The applicant, Nikhil Mehta (HUF) along with the other applicants, had filed an insolvency application against AMR Infrastructure Limited for failing to pay 'Assured Returns'. Assured Returns, as per several memorandums of understanding entered among the corporate debtor and the applicants (at the time of booking of several real estate units), were the sums of money that the applicants were promised to be paid on a monthly basis until the possession of real estate units booked by them was handed over. The applicants had argued that since the amount was in the form of an Assured Return, the failure to make such payment entitled the applicants to initiate the CIR Process under the Code. The NCLT rejected the application on the ground that the Assured Returns promised to be paid to the applicants and defaulted upon by the corporate debtor did not satisfy the definition of 'financial debt' and the applicants therefore, were not entitled to prefer an application under the Code as 'financial creditors'.

The key take-ways from the order are listed herein-below:

  • The unpaid amount should satisfy the definition of 'financial debt' for a claim to be filed under Section 7 of the Code. For a debt to be classified as a financial debt it should have been extended for the time value of money. The NCLT deliberated upon the meaning of the term 'time value of money' and while relying upon several lexicons, held that time value is a price associated with the maturity period of the debt or the period during which the related income is earned. There should be a time distance between inflows and outflows and the time value is compensation for that.
  • Since the transaction pertaining to the application was purely a transaction for purchase or sale of property, an amount of return promised in connection to it does not acquire the nature of a financial debt.
  • The NCLT also held that even in the absence of the above infirmities, the present application would not be maintainable as several winding-up petitions filed against the corporate debtor before the Delhi High Court were outstanding and an official liquidator has already been appointed as a provisional liquidator, while an appeal was pending.

Khaitan Comment

This case goes down as one of the initial guiding steps for creditors filing application under the Code to determine their eligibility in triggering the corporate insolvency resolution process. The NCLT has gone into great detail to explain the meaning of the term 'time value of money' which has not been defined under the Code and this is expected to bring clarity on maintainability of applications which may be filed by financial creditors in future.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions