India: Development Of Insolvency Law – A Different Law Every Day!

Stability and predictability of the legal system is undeniably an essential component of the "Rule of Law" and in its absence, people have great difficulty managing their affairs effectively. The issue attains enormous proportion in the field of commercial law as there is nothing that the corporate enterprises fear more than uncertainty. There is an old management principle according to which "you can't manage what you cannot predict", which conversely implies that unless something is predictable, it cannot be managed. Corporate enterprises always want to tread the path where there is a fair amount, if not absolute, stability. Stability and predictability of the regulatory environment and the applicable laws rank high amongst the important variables enterprises consider while making investment decisions and hence, these factors have a direct bearing on the ease of doing business in a country.

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code ("the Code") is a new legislation to manage the Insolvency resolution process for corporate persons, individuals and partnership firms. The structure, functioning and even some of the provisions of the Code are of such kinds that have not existed before in any form and hence difficult to draw a pari materia with any existing provision of law.

In case of any new enactment, the law evolves and jurisprudence is settled over time. What is generally expected is that evolution of the law will relate to certain imminent clarifications to streamline the procedure and settle existing legal principles as applicable to the new enactment. However, in case of the IBC 2016, while the Code is a comprehensive piece of legislation wherein great effort has gone to detail every possible situation that may arise; the situation since its enactment is more like the goalposts are being shifted way too frequently, thereby, causing a lot of uncertainty and delay in what is proposed to be a time bound and simple process.

How the Law is 'Evolving'?

Here are some instances:

  • Flat Buyers under assured return: In Nikhil Mehta vs. AMR Infrastructure1, on 23.01.2017, while deciding the petition filed by flat buyers under an assured return program, the NCLT principal bench held that the flat buyers didn't fall in the definition of either financial or operational creditors and hence dismissed the petition. However, on 21.07.2017, the Appellate Tribunal held the flat buyers under the assured return program, to be financial creditors and directed the NCLT bench to admit the petition if complete otherwise.
  • Guarantors: In Schweitzer Systemtek vs. Phoenix ARC limited2, on 03.07.2017, the NCLT bench at Mumbai held that the moratorium in terms of Section 14 of the Code applies only to the proceeding against the corporate debtor and not to the proceedings initiated against its directors and other guarantors. In effect, recovery proceedings under DRT and SARFAESI against the guarantors would continue despite the Corporate Debtor being placed under insolvency. However, on 06.09.2017, the Hon'ble High Court of Allahabad, while deciding on Sanjeev Shriya vs. State Bank of India & Ors3, held that the moratorium would extend to the proceedings against the guarantors of the corporate debtors as well.
  • Right of Board of Directors: In Steel Konnect vs. Hero Fincorp4, on 29.08.2017, the NCLAT held that despite the board being suspended after the moratorium coming in place, the Board of Directors can initiate an appeal on behalf of the Corporate Debtor, against the insolvency petition being admitted. However, a few days later, the Hon'ble Apex court in Innoventive vs. ICICI5 held that an appeal by the Board of Birectors, on behalf of the Corporate Debtor, against the order admitting the insolvency application, would not be maintainable.
  • Power of attorney – In ICICI Bank v. Palogix Infrastructure6, on 12.04.2017, the NCLT bench at Kolkata held that specific power of attorney to initiate insolvency proceedings is required to be executed and a general power of attorney will not suffice. However, on 20.09.2017, while deciding on the appeal, the NCLAT held that power of attorney itself is not required to initiate insolvency petition and a mere authorization is good enough.
  • Limitation: In Deem Roll-Tech vs. RS Steel & Energy7, on 31.03.2017, the NCLT Principal held that the Limitation Act is applicable to the provisions of the Code. However, on 11.08.2017, in Neelkanth Township vs Urban Infrastructure Trustees8, the NCLAT held that nothing in the Code seems to suggest that the provision of the Limitation Act are applicable to initiate the Corporate Insolvency Resolution process.

Various NCLT benches across the country have taken different views on maintainability of insolvency process during pendency of winding up proceedings before Hon'ble High Courts. So much so that now a special bench has been constituted by the President of NCLT to decide on the issue. Similarly, various benches and the Appellate Tribunal have taken contrary views on several issues including Bankers Book of Evidence Certificate, Bankers Certificate regarding non-payment of debt in case of petition by operational creditor, and relaxation of 7 days period to cure defects. Recently, in Jaypee Infratech Ltd, the NCLT bench at Allahabad admitted the insolvency petition against Jaypee Infratech which, having several businesses, is a builder of residential apartments and had accepted deposits from individuals towards flats proposed to be constructed. However, in terms of priority for settling the claims, the flat buyers stood at the bottom of the pyramid i.e. below the workmen, secured creditors, statutory dues, employees and operational creditors. On a petition made by the concerned flat buyers, the Hon'ble Apex court initially suspended the insolvency proceedings only to reinstate it a few days later; however, not without a few riders i.e. deposit of 2000 crores by the parent company and submission of an interim resolution plan within 45 days. Though none of the two riders are under any existing provision of the Code, it is open to speculation if this will constitute precedence in future instances of builder-buyer disputes.

There are many more instances of such diametrically opposite stands which have been taken by various tribunals, the Appellate Tribunal and the Hon'ble High Courts on important issues of the Code and there is a fair chance that more will be witnessed by the time this article sees the light of the day. Not just the professionals involved in resolution process, but also the government of the day, the industry and even the public at large is keenly watching as to how the situation develops and how important aspects of the legislation are finally settled by the Hon'ble Supreme Court. For sure the journey will take time but it would an interesting journey nonetheless.

P.s. - It is interesting to note that not all reversals in settled principles have come while deciding appeals in the same matter. Ergo, in all likelihood multiple litigations are waiting to be triggered including instances where the resolution process is already underway. It will be interesting to watch as to how these instances are managed without compromising on the overall intent of the Code.

Footnotes

1 C.P No (ISB)-03(PB)/2017 at NCLT and Company Appeal (AT) (Insolvency) No. 07 of 2017 at NCLAT

2 T.C.P No. 1059

3 WRIT - C No. - 30285 of 2017

4 Company Appeal (AT) (Insolvency) No. 51 of 2017 5 CIVIL APPEAL NOs. 8337-8338 OF 2017

6 CP 37/2017at NCLT Kolkata and Company Appeal (AT) (InsoL) No. 30 of 2017 at NCLAT

7 Company Application No. (I.B.) 24/PB/2017

8 Company Appeal (AT) (Insolvency) No. 44 of 2017

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