India: Insolvency Code: Another Look Through Rose Tinted Glasses?

Last Updated: 9 April 2018
Article by Prachi Dave and Divyata Badiani

Insolvency, explained simply, refers to an individual or an entity's inability to pay debts due from it. The recent and most illustrious enactment by the Parliament, the Insolvency and Bankruptcy Code, 2016 ("IBC") encompasses this wide-ranging arena of insolvency and bankruptcy.

Prior to the introduction of the IBC, the resolution process was governed by the Sick Industrial Companies (Special Provisions) Act, 1985 ("SICA"), Maharashtra Relief Undertaking (Special Provisions) Act, 1958 ("BRU"), Corporate Debt Restructuring ("CDR"), Joint Lenders Forum ("JLF"), etc. The CDR and its successor JLF mechanism were voluntary in nature unlike the SICA and BRU which were statutory. However the key difference between the aforesaid and the IBC remains that while the SICA and BRU applied to a specific set of borrowers, the CDR and BRU apply to specific set of lenders who have agreed to follow the said voluntary process by signing the Inter Creditor Agreement and the Debt Creditor Agreement. The IBC now seeks to include all borrowers and lenders within its fold and the insolvency resolution process under the IBC has been applauded for the attempt to revive companies in an efficient and timely manner which its predecessors failed in, due to unending delays caused by erring promoters/ borrowers leading to the ultimate failure of the resolution process in most cases.

A key question, however, which has risen in the recent cases of the insolvency resolution is whether the said process being exploited by the financial creditors. The financial creditors to several of the defaulting companies which are presently undergoing insolvency resolution process have previously entered into the erstwhile debt resolution mechanism. A classic example would similar to the case of Innoventive Industries Limited where the lenders entered into a debt resolution process prevalent under the extant laws (the BRU in the instant case). However, the lenders subsequently filed for insolvency under the IBC and one of the defenses taken by the company was that it was categorized as a "relief undertaking" under the BRU. The largely debated issue in the said case remained as to whether the stand still period under provisions of Section 4 of the BRU could override the provisions of the IBC (particularly Section 238 thereof). The NCLT inter alia held the IBC would prevail over the BRU Act as the IBC was enacted subsequent to the BRU Act and the latter law prevails over the former one. On appeal to the NCLAT, it was held that that the protection under the BRU Act cannot be extended to other legislations especially to the IBC which is a union legislation and relates to insolvency resolution. 

Another aspect of this case however requires careful consideration. Pursuant to the debt resolution process under the BRU, Innoventive and its lenders entered into a Master Restructuring Agreement ("MRA"). Typically the terms of the MRA involve waivers by the lenders of the liquidated damages, interest during the moratorium period, haircut on their returns and/or a sacrifice of the principal as the facts of the case may require ("Lenders' Waivers"). However, the NCLAT held as follows regarding the MRA:

"As far as the Master Restructuring Agreement dated 8 September 2014 (MRA) executed between the Financial Creditor and the Corporate Debtor was concerned; the Corporate Debtor cannot take advantage of the same. Even if it was presumed that fresh agreement came into existence, it does not absolve the Corporate Debtor from paying the previous debts which was due to the Financial Creditor"

Prima facie the aforementioned observation of the NCLAT seems to be perhaps in contravention of all agreed principle of Indian Contract Act, 1862 ("Contract Act").

Section 62 of the Contract Act clearly states:

"Effect of novation, rescission, and alteration of contract

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

Illustrations

  1. A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
  2. A owes B 10,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A's) estate for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.
  3. A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to credit C with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1, 000 rupees, and no new contract has been entered into."

On a bare reading of the said Section 62 it is clear that once the contractual understanding has been revised/modified, the parties are not bound to perform their original contractual obligations. In the present context, the impugned judgement of the NCLAT seems to indicate that a master restructuring agreement would not override a loan agreement which has been originally been entered into. It is relevant to note that the MRA is nothing but a subsequent contractual understanding specifically meant to override the prior understanding as contained in the original loan agreement. It is relevant to note that MRAs are based on free and unconditional consent, entered into by the parties on each side with due and legal consideration.

The question that now arises is whether the said agreement can be unilaterally terminated or rescinded. Section 37 of the Contract Act states that the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. It is therefore relevant to consider whether the IBC waives the performance of such contract by the lenders or the borrower. The IBC proceeds on the basis that the creditors have a "claim" in respect of the corporate debtor and therefore requires an underlying contractual arrangement in respect whereof a claim can be made. The loan agreement is one such arrangement. However, the question therefore which begs consideration is whether claims ought to arise under the MRA or whether the MRA has no meaning under the IBC as a contractual arrangement.

It appears that the ratio descidendi of the NCLAT appears to be in contravention of the provisions of Section 62 read with Section 37 of the Contract Act. The Supreme Court, in appeal, has upheld the judgement of the NCLAT in the Innoventive Industries. As regards whether the lenders can reclaim the dues which have been waived under the MRA once again under the IBC, the Supreme Court has not dealt with the issue since same was raised by the corporate debtor before the Supreme Court for the first time. 

If upheld, the parties may legally rescind their obligations as per their whims and fancies despite all the essentials of a contract, as under prevailing laws, being complied with and leading to utter chaos. In the meantime, this decision of the NCLAT has been widely applauded by the financial creditors as the law allow them to absolve their agreed understanding without recourse to the corporate debtor. Until the law is suitably amended and the ruling overturned, the lenders and other market players are merrily looking at the IBC through rose tinted glasses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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
 
In association with
Related Topics
 
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