India: Amendments To The Insolvency And Bankruptcy Code, 2016 To Apply Prospectively

Introduction

A Mumbai Bench of National Company Law Tribunal ("NCLT") in a recent matter of Wig Associates Pvt Ltd [CP No 1214/I&BC/NCLT/MB/MAH/2017] has taken the position that the amended provisions of the Insolvency and Bankruptcy Code 2016 ("IBC"), as amended by Ordinance No 7 of 2017 dated 23 November 2017, in particular, §29A, will not apply to insolvency proceedings which have already commenced prior to the applicable date of 23 November 2017 ("Amendment Ordinance"). The said ordinance crystallized into the Insolvency and Bankruptcy Code (Amendment) Act 2017 on 18 January 2018 ("Amendment Act").

Facts

Owing to an admitted debt of ₹48,514,000 to Bank of Baroda (the sole financial creditor), M/s Wig Associates ("Corporate Debtor") filed a petition dated 19 July 2017 under §10 of the IBC for initiating a voluntary corporate insolvency resolution process ("CIRP"). This petition was admitted on 24 August 2017 and an Interim Resolution Professional ("IRP") was appointed.

Thereafter, Mr Mahendra Wig ("Resolution Applicant"), who was the guarantor of the Corporate Debtor, approached Bank of Baroda in that capacity and offered a one time settlement ("OTS") by moving applications on 30 October 2017 and 14 December 2017. The OTS, amounting to c.₹35,500,000, was approved and sanctioned by Bank of Baroda through its letter dated 27 March 2018.

During the course of the third meeting of the committee of creditors ("CoC") held on 5 April 2018, Bank of Baroda informed the IRP that it had approved and sanctioned the OTS offered by the Resolution Applicant and informed the IRP that it wishes to explore the option of treating the offer as a Resolution Plan, pursuant to the "Expression of Interest" issued on 4 April 2018.

The OTS was treated as a Resolution Plan and was approved by a 100% vote of the CoC. The Resolution Plan was thereafter placed before the NCLT for recording its satisfaction as per §31 of the IBC.

Issue before the Tribunal

The legal issue before the NCLT was whether the Resolution Applicant could have submitted a Resolution Plan given the bars under §29A(h) of the IBC, introduced by the Amendment Act, with respect to 'Connected Persons'. The provision provides that a guarantor of the corporate debtor is a 'Connected Person' and, therefore, not entitled to submit a resolution plan.

NCLT's Decision

The NCLT recognised that if the Amendment Act were to apply to the instant proceedings, then the Resolution Applicant would have been barred from submitting the Resolution Plan by virtue of §29A(h) of the IBC.

However, the NCLT proceeded to conclude that the amended §29A of the IBC would not apply to the instant proceedings for the simple reason that the Amendment Act came in to force on 23 November 2017, which was the date of the Amendment Ordinance. It also observed that the Amendment Act categorically clarifies this position that the amendments, including the provisions of §29A, would come into force only from 23 November 2017.

The forum reasoned that since the amended §29A of the IBC alters vested legal rights of parties, it should apply prospectively, unless expressly or impliedly applied retrospectively by the legislature. The NCLT relied on various decisions of the Supreme Court and, particularly, the decision in Videocon International Ltd v SEBI [(2015) 4 SCC 33] before observing that once a game has started in a playground, it is unfair to alter the rule of the game till it finishes.

It was also held that insolvency proceedings are continuous proceedings which cannot be halted, altered or changed once they commence and until finalisation. Per §5(12) of the IBC, the "insolvency commencement date" "means that date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under s 7, 9 or 10, as the case may be". In the instant case, the petition under §10 of the IBC was admitted by the order of the NCLT dated 24 August 2017 and this would be the date from which the insolvency proceedings would be deemed to have commenced. This, as per the NCLT, also supports its conclusion that the Amendment Act would not apply. 

The NCLT accordingly held that the resolution plan submitted by the guarantor is eligible for consideration.

Conclusion

The decision of the NCLT in applying the Amendment Act prospectively appears to be in line with earlier decisions of the Supreme Court of India which have clearly laid down the law on the application of an amendment. It, however, remains to be seen if the reasoning of the NCLT (Mumbai Bench) is adopted by the other benches across the country, especially in some high-profile cases which have been the source of much controversy in recent times.

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