Insolvency and Bankruptcy Code,

2016

Nitu Poddar
Vinod Kothari Consultants Private Limited
Kolkata New Delhi Mumbai

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 3

Game-Changers
• Innoventive Industries Ltd. v. ICICI Bank & Anr. (SC), Civil Appeal Nos. 8337-8338 of 2017
decided on 31.07.2017
▫ In the event of repugnancy between State laws and IBC, the Code shall prevail in respect of matters
relating to insolvency and bankruptcy

• Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and Others
(SC), Civil Appeal No. 8400 of 2017 decided on 19.09.2017
▫ Time limit for admission/rejection of application by NCLT directory
▫ Time limit for removing the defects in application directory – caveat.
▫ Section 12 timelines are mandatory

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited (SC), Civil Appeal
No. 9405 of 2017 decided on 21.9.2017
▫ Interpretation of “existence of dispute”; “and” should be read as “or”; pre-existing dispute

• Macquarie Bank Limited v. Shilpi Cable Technologies Limited (SC), Civil Appeal No. 15135
of 2017, decided on 15.12.2017
▫ Certificate from financial institutions not mandatory
▫ An authorized agent/lawyer can serve a demand notice on behalf of the OC.
 4

Constitutional Validity of IBC

• Akshay Jhunjhunwala & Anr. v. Union of India through the
Ministry of Corporate Affairs & Ors. W.P. No. 672 of 2017
▫ Validity of sections 7,8,9 challenged before Calcutta High Court

• Shivam Water Treaters Pvt. Ltd. v. Union of India [SLP (C) No.
1740/2018]
▫ High Courts not to enter into the debate pertaining to the validity of
IBC or constitutional validity of the NCLT
▫ Right to challenge the same before SC not affected
 5

Resolution, not recovery

• Prowess International Pvt. Ltd. v. Parker Hannifin India Pvt.
Ltd. [CA (AT) (Insol.) No. 89 of 2017]
▫ Insolvency Resolution Process is not a recovery proceeding to recover
the dues of the creditors.

• In line with various decisions in the context of “winding up”

petitions under Companies Act wherein it has been held that such
proceedings cannot be used as to tool to “recover” debts due from
the company.
▫ Amalgamated Commercial Traders (P.) Ltd. v. A.C.K.
Krishnaswami and Another [(1965) 35 CC 456]
 6

Initiation of CIRP in cases involving financial fraud

• Shobnath v. Prism Industrial Complex Limited [CP No. 168/ALD/2017]
▫ The intention of CIRP cannot be to interfere in cases where there are financial
irregularities, illegalities, or indications of financial fraud.
▫ Application by financial creditor for CIRP
▫ Debentures due for redemption, not paid
▫ Multiple petitions existing under section 71(10) and 73(4) of the Companies Act,
2013, collectively by 2960 debenture holders, order already passed against the CD
[regarded as “deposits”]
▫ Violations,
 Trustee not an independent person, a holding company
 Possibility of diversion of funds raised from debentures
 Lacuna in offer for sale of security (land)
 CD wanted to linger on proceedings, financial fraud
▫ Clear motive to defraud creditors/clever use of moratorium u/s 14
 Interestingly, CD was itself raising argument for admitting application
 Intention to “derail the process of execution proceedings”
▫ “Financial services” - Not obtaining authorization cannot be an escape gate to
have the “benefit” of CIRP
▫ Show cause notices issued u/s 65 of the Code
 7

Demand notice by OC u/s 8

• Era Infra Engineering Limited vs. Prideco Commercial Services
Private Limited [Company Appeal (AT) (Ins.) No. 31 of 2017]
▫ OC served demand notice u/s 271 of the Companies Act, 2013 and
relied on the same;
▫ NCLT admitted application under section 9;
▫ NCLAT set aside the order passed by AA
 Serving notice u/s 271 of CA, 2013 not a sufficient notice
 8

CIRP Period
• Exclusion of certain periods from CIRP period –
▫ stay by a court of law/tribunal/SC
▫ no RP is functioning
▫ intervening period between date of admission and RP taking charge
▫ intervening period between the date of reserving the order and passing the order
▫ CIRP, set aside by NCLAT, but the order is reversed by SC, restoring the CIRP.

• Quinn Logistics India Pvt. Ltd. v. Mack Soft Tech Pvt. Ltd. [CA(AT)
(Insolvency) No. 185 of 2018].

• Velamur Varadan Anand v. Union Bank of India & Anr. [CA (AT)
(Insolvency) No. 161 of 2018];

• Rajendra K. Bhuta (R.P.) v. Guruashish Construction Pvt. Ltd., [CA (AT)

(Insolvency) No. 183 of 2018]
 9

Scope of moratorium u/s 14

• Invocation of corporate guarantee against corporate debtor in violation
of section 14
▫ Axis Bank Limited & Anr. v. Edu Smart Services Private Limited [(IB)-102
(PB)/2017]
▫ Bank of Baroda v. Binani Chemicals Ltd. [CP (IB) No. 359/KB/2017]
• Criminal proceedings out of the house
▫ Mardia Copper Products Ltd. & Others v. Commissioner of Sales Tax,
Bombay & Another, 1999(5) Bom.C.R. 245
▫ Hindustan Antibiotics Ltd. & Ors. v. M/s. Kirloskar Investments and
Finance Ltd. & Ors., 1995(5) S.C.R. 264
▫ M/S. BSI Ltd. & Anr. v. Gift Holdings Pvt. Ltd. & Anr, Criminal Appeal No.
847 of 1999, II (2000) SLT 184
• Guarantor’s assets
• Income Tax Appeals by Dept. against orders of ITAT
▫ PR Commissioner of Income Tax v. Monnet Ispat and Energy Ltd
 10

CIRP against debtors of CD

• Section 11: CD undergoing CIRP not entitled to make application
• Whether possible for the RP of the CD to initiate CIRP against
debtors of the CD?
▫ Yes
• Bar on parallel proceedings
▫ Forech India Pvt. Ltd. v. Edelweiss Assets Reconstruction Company
Ltd. & anr. [NCLAT]
▫ Jai Ambe Enterprise v. S.N. Plumbing Private Limited [NCLT]
 11

Resolution plan: Subordination of related party unsecured loans

• Application for approval of resolution plan by RP in J R Agro

Industries P Limited v. Swadisht Oils P Ltd. [CA 59 of 2018 in CP
13/ALD/2017]
▫ Operational creditors v. unsecured financial creditors
▫ Similarly ranked creditors are to be treated equally – UNCITRAL
▫ Related parties – entitlements/priorities
▫ Contractually, unsecured financial and operational creditors stand at
the same footing – discriminatory provisions of the Code
▫ Related party debt treated as an equity contribution rather than as
intragroup loan
▫ Equitable subordination by courts - to prevent a related person from
using legal mechanism to obtained advantages in priority.
 12

Resolution plan and Statutory dues

• “The resolution plan provides for not only writing off Operational
creditors but also for writing off the Income Tax dues which is
inconceivable. The amalgamation and the IT Relief without
hearing Income Tax Authorities is illegal and is barred under
Section 30(2)(e).”
▫ Swadisht Oils P Ltd. [CA 59 of 2018 in CP 13/ALD/2017]
 13

Application/Resolution Plan and

Role of adjudicating authority (1)
• While deciding on application, the actual amount of claim and
other details not required to be decided, falls in the domain of RP
▫ Mr. Satyaprakash Aggarwal & Ors. v. Vistar Metal Industries Pvt.
Ltd. [Company Appeal (AT) (Insolvency) No. 136 of 2018]
• Principles of natural justice
• Not in the domain of NCLT to decide commercial parameters for
eligibility of resolution applicant; experts like CoC to decide
▫ Kannan Tiruvengandam v. M. K. Shah Exports Ltd. & Ors.
[Company Appeal (AT) (Insolvency) No 203 of 2018]
 14

Application/Resolution Plan and

Role of adjudicating authority (2)
• Pratik Ramesh Chirana v. Trinity Auto Components Ltd.
[Mumbai NCLT]
▫ Interpretation of “If the Adjudicating Authority is satisfied . . .” in
section 31
 Satisfaction – a condition precedent– either objective or subjective or
both.
 A “satisfaction” is to be recorded in writing in the Judgment approving
the Resolution Plan.
 Pros and cons to be studied
 Greater accountability on RP and CoC to exercise diligence
 15

Liquidation before resolution

• Whether CoC can decide to liquidate without trying for
resolution?
▫ VIP Finvest Consultancy Private Limited v. Bhupen Electronics
[NCLT, Mumbai]
 No operations, no employees, only fixed assets, no resolution plan
received
 CoC decided not to seek extension and decided to file for liquidation
▫ Chivas Trading Private Limited v. Abhayam Trading Limited
[NCLT, Mumbai]
 No business prospects, no point in spending “good money” to recover
“bad money” for remote chances of recovery, insufficient assets, hard to
realise, lack of business opportunity
 16

Reversibility of Liquidation Order

• Section 11: CD in respect of whom a liquidation order has been
made not entitled to make application for CIRP.
• BLRC Report
• Whether withdrawal possible on request of creditors
▫ V Navneetha Krishnan v. Central Bank of India, Coimbatore
[NCLAT]
 demand of CoC to be met
▫ Idea of law is “creditors’ remedy”
 17

Liquidation: Discharge of employees &

retrenchment compensation
• Liquidation order, deemed notice of discharge
• Whether “retrenchment” under Industrial Disputes Act, 1947
• Whether retrenchment compensation payable?
• Section 25FFF of ID Act, 1947
▫ Workmen entitled to compensation, as if the workmen have been
retrenched
 Amount same as “retrenchment compensation”
 Avoidable vs. unavoidable circumstances
• Textile Labour Association v. Official Liquidator Of Jubilee Mills
Limited (in Liquidation), 2000 99 CompCas 189 Guj, (2000) 4 GLR
147
• A. Shanmugham v. Official Liquidator, High Court, 1992 75 CompCas
181 Mad
 18

Exclusions from liquidation estate

• Assets acquired on hire purchase, in Manasuba & Co. P. Ltd., Re, (1973)

• Amount received by way of deposit: Dinshaw & Co. (Bankers) Ltd. v. Mst.
Krishna Piary, (1941) general rule of exclusion of trust money, and holding
that where money is deposited by a person with a Bank as security for the
good behaviour of an employee, the deposit is trust money

• New Bank of India Limited v. Pearey Lal (1962): amount held for remittance
was held as trust money

• An advance received in respect of a contract which was under negotiations

retains its character of trust money, upon the failure of negotiations. Kodak
Ltd. v. South Indian Film Corpn. Ltd., (1937)
 19

Assets sold in liquidation and rights of revenue authorities

• Leo Edibles & Fats Limited v. The Tax Recovery Officer [Writ Petition No. 8560 of 2018], in
Andhra High Court

▫ IT Dept. claimed charge over the immovable property sold in liquidation, pursuant to the attachment
proceedings of the TRO

▫ Held, IT Dept. does not enjoy the status of a secured creditor, on par with a secured creditor covered by
a mortgage or other security interest, who can avail the provisions of Section 52 of the Code. At best, it
can only claim a charge under the attachment order, in terms of Section 281 of the Act of 1961.

▫ Rationale: The attaching creditor does not acquire, by merely levying attachment, any interest in the
property.

▫ It is therefore clear that tax dues, being an input to the Consolidated Fund of India and of the States,
clearly come within the ambit of Section 53(1)(e) of the Code. If the Legislature, in its wisdom, assigned
the fifth position in the order of priority to such dues, it is not for this Court to delve into or belittle the
rationale underlying the same.

▫ even if the order of attachment constitutes an encumbrance on the property, it still does not have the
effect of taking it out of the purview of Section 36(3)(b) of the Code. The said order of attachment
therefore cannot be taken to be a bar for completion of the sale effected by the fifth respondent under
the provisions of the Code.
 20

Treatment of guarantor’s assets in liquidation

• Comparison: section 14
• Whether can be “liquidated” alongwith the assets of CD
▫ Punjab National Bank v. Vindhya Vasini Industries Limited, [C.P. (
IB)-1170(MB)]
 Placed reliance on section 60(2)
 Held, liquidator can put hands on guarantor’s assets
 21

Liquidator, as an “aggrieved” person for appeals

before NCLAT
• Appeals under section 61 – whether liquidator can be “aggrieved”
person
▫ Claim by a financial creditor part rejected by liquidator
▫ NCLT order in favour of the financial creditor
▫ Appeal by the Liquidator
 fiduciary for all creditors
 beneficial liquidation, at the instance of CD
 22

Delayed filing of claims in liquidation

• Entitlement of the late creditor w.r.t. distribution already made
▫ Nothing explicit in the Code
▫ Section 177 of the Code, section 72 of PTIA, 1909, section 73 of PIA,
1920, and rule 178 of the Companies (Court) Rules, 1959
• UCO Bank v. Nicco Corporation Limited – in liquidation [NCLT,
Kolkata Bench]
 23

Vulnerable Transactions
• IDBI Limited v. Jaypee Infratech Limited [CA 26/2018 in CP No.
77/ALD/2017]
▫ Mortgage of an immovable property belonging to the CD to secure
the debt of a related party (that is, the holding company and also the
principal contractor, i.e. OC).
 Effect of reducing the direct liability of the related party
 Without receipt of any consideration
 Look back period is to be determined on the basis of ultimate beneficiary