The Code has attracted the NPA-laden Indian Banks, entrepreneurs (Indian and International), and professionals like CAs CS and lawyers alike. However, it was inevitably hit by challenges and complexities in its interpretation and implementation like any other law in its nascent stage. But with number of trend setting decisions delivered by the judiciary coupled with timely effective amendments to the Code, many of IBC’s teething issues have been eliminated. We shall discuss here some of the key developments vis-à-vis IBC in 2019.
Key amendments and Government initiatives to streamline chinks in the IBC mechanism
There were number of notable judgements passed by the Apex Court under the Code in the year 2019, many of which are likely to go down as the landmark judgments.
The Code survived the test of constitutional validity, when the Supreme Court upheld the Code in its entirety in the case of Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. The judgment inter alia marked the rationale behind the differential status of financial creditors (FCs) and operational creditors (OCs); clarified the role of a resolution professional who acts as the facilitator to the resolution process; and stated that the Code is not a mere recovery legislation for creditors but actually provides an opportunity for a debt-ridden organization (popularly known as the Corporate Debtor) to be back on its feet.
In an another notable judgment of the year, the Supreme Court in the matter of K. Sashidhar vs. Indian Overseas Bank curtailed the jurisdiction of the Adjudicating Authority being the National Company Law Tribunal (NCLT) by observing that the NCLT has no jurisdiction and authority to analyse or evaluate the commercial decision of the Committee of Creditors (CoC) and to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors. This judgement apart from emphasizing on commercial wisdom of CoC under the Code, can also be foreseen to cut down on needless litigation and the resultant delays.
In the case of Vijay Kumar Jain vs. Standard Chartered Bank & Ors., the Apex Court held that the members of the suspended Board of Directors of a corporate debtor are vested with right to receive insolvency resolution plans submitted before the resolution professional so that they could effectively participate in the meetings of Committee of Creditors (CoC).
The Supreme Court in the case of Pioneer Urban Land & Infrastructure Ltd. & Anr. vs. Union of India & Ors. upheld the constitutional validity of the introduction of homebuyers as “financial creditors” to the Code, made by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, enabling homebuyers to trigger the Code against the real estate developer.
In one of the most discussed cases under the code, the case of Essar Steel Limited, the Supreme Court delivered its judgment which would probably be the final judgment of the case. While deciding this judgement the Supreme Court laid down several key parameters under the Code. The Apex Court held that requirement of completing the corporate insolvency resolution process within 330 days from the insolvency commencement date as introduced by the 2019 Amendment Act was not mandatory. It further held that the CoC can delegate its administrative powers or power of negotiation with the resolution applicants to a smaller committee (sub-committee) since such acts, in the ultimate analysis would be required to be approved and ratified by the CoC. It also held that the prospective resolution applicant has a right to receive complete information as to the CD, debts owed by it, and its activities as a going concern and as such it cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted. To put an end to uncertainty, parameters were laid down for limiting the scope of judicial review of Adjudicating Authority and Appellate Authority to interfere in the merits of a business decision taken by the requisite majority of CoC. Lastly, the Supreme Court has re-emphasized the primacy of the commercial wisdom of the CoC in relation to resolution of the corporate debtor as well as difference in treatment of unequally placed creditors based on its earlier decisions in Swiss Ribbons and K. Sashidhar cases.
A noteworthy demarcation of jurisdiction of NCLT vis-à-vis the High Courts was observed in the case of M/s Embassy Property Developments Pvt Ltd vs. State of Karnataka and Ors. The Supreme Court held that though NCLT and NCLAT would have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon disputes arising under other public laws, especially when the disputes revolve around the decisions of statutory or quasi-judicial authorities, which can be corrected only by way of judicial review of administrative action.
Apart from the Judiciary; the Legislature, the MCA, and IBBI have played equally important roles in development of the Code. Amidst the lingering need to fill in certain existing critical gaps to ensure streamlining of corporate insolvency resolution process (“CIRP”), the legislature and the IBBI made timely interventions and amendments which ensured that the Code does not have similar fate as some of the similar other Acts such as SICA and RDDB.
The Insolvency and Bankruptcy Code (Amendment) Act, 2019 was introduced to further strengthen the objectives of the Code. This amendment provides for the timely conclusion of cases, specifies minimum pay-outs to operational creditors in any resolution plan, infuses greater flexibility for corporate restructuring for maximizing value of assets, and removes the voting deadlock for a class of financial creditors (such as the homebuyers).
The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 were issued on November 15, 2019, which provide a generic framework for insolvency and liquidation proceedings of Financial Service Providers (FSPs) other than banks.
Notification of application of Code to personal guarantors of corporate debtors coupled with corresponding Insolvency Resolution Process Rules and Bankruptcy Rules were introduced from November 15, 2019 and enforced from December 1, 2019 with the purpose that insolvency resolution and bankruptcy of personal guarantors under the IBC would complement the insolvency resolution of the corporate debtor. It is aimed at bringing much needed borrowing discipline and propelling a cultural change in banking relationships.
Certain further amendments made to the Code by way of the Insolvency and Bankruptcy Amendment Ordinance, 2019 passed on December 28, 2019. The Key highlights of the said ordinance are ─ (i) the notified debts that would qualify as 'last mile funding options' to 'prevent insolvency' would be considered as interim finance and would thereby enjoy highest priority in the insolvency or liquidation process under the IBC; (ii) threshold limit of minimum of 100 allottees or 10% of the total number of allottees (whichever is lesser) has been imposed on homebuyers seeking to file an application against real estate project developers; (iii) extension of moratorium to prohibit termination of arrangements or agreements relating to supply of critical goods and services or conferment of rights by any government authorities; and (iv) immunity to successful resolution applicants from any liability of the corporate debtor in relation to an offence committed prior to the commencement of insolvency and against any action including sale or attachment of the corporate debtor’s property in relation to such offence.
In addition to the aforesaid series of events, decisions of the Apex Court in the case of Bhushan Power and Steel Ltd. and SEBI on the common issue of primacy of IBC over other laws, in the case of Orchid Pharma on the issue of rejection of a proposed resolution plan which is less than the liquidation value and in the case Piramal Enterprises on the issue of initiating multiple CIRPs in relation to a common debt are still awaited. The Code’s fine tuning through various pro-active amendments as well as clarificatory judgments has proved to be the straw that stirs the drink. Nevertheless, it cannot be denied that the Code has rescued several sick and distressed companies from their premature death.
The Code remains to be a welcomed change when compared to other regimes of winding up and BIFR, which used to take on several occasions more than a decade to reach their conclusion. Quoting Dr. M. S. Sahoo, the chairperson of IBBI, the recovery is only a by-product of rescue of the companies; in the long term, the Code will promote entrepreneurship, availability of credit and utilization of resources, and consequently would push up GDP growth by few percentage points.
The authors, Mayur Shetty, Associate Partner, Rajani Associates and Chintan Gandhi, Associate, Rajani Associates