Insolvency & Bankruptcy Code, 2016; Landmark Judgments of 2019

Insolvency & Bankruptcy Code, 2016- Landmark Judgments of 2019

Swiss Ribbons Pvt. Ltd & Anr. V. Union of India & Ors. (W.P. No.99 of 2018) Decided on 25.01.2019

• The Supreme Court of India in this case has upheld the constitutionality of the Insolvency and Bankruptcy Code, 2016 (“IBC”). This judgment has brought the focus back on the object of IBC to revive a corporate debtor and the efforts of a creditor as well as other stakeholders to achieve said objects.
• In the Writ Petition, the Code was challenged on various grounds, such as- question related to the selection committee comprising of more technical members than judicial members, the jurisdiction of the National Company Law Appellate Tribunal substituting the jurisdiction of the High Courts and the classification between ‘financial creditors’ and ‘operational creditors’ being arbitrary, discriminatory and violative of Article 14 of the Constitution.
• The SCI highlighted three differentiating features of the IBC:
• The admission threshold is low: it is based on the factum of default without an insolvency test.
• No class rights: the constitution of a single creditors committee comprising of only financial creditors with secured and unsecured creditors being treated equally for voting.
• Certain bidders are disqualified from participating in the resolution process.
• It was noted that the IBC is a beneficial legislation, acting for the benefit of the corporate debtor, and thus the admission of a company into Corporate Insolvency Resolution Process (CIRP) cannot be seen from a traditional lens of proceedings.
• The Supreme Court has also imported fair and equitable treatment of operational creditors as a requirement for approval of resolution plans. This was brought about by amendments to the regulations that provide that operational creditors need to be paid ahead o financial creditors.
• With respect to Section 12A of IBC: withdrawal of application admitted under Section 7,9 or 10, the SCI observed that withdrawal of a corporate debtor from the CIRP has been permitted to the time the Committee of Creditors is constituted with the approval of the NCLT. The Hon’ble Court also applied Rule 11 of the NCLT, which provides for inherent powers to it to permit the withdrawal after admission, but prior to constitution of the Committee of Creditors.

Vijay kumar Jain v. Standard Chartered Bank (Civil Appeal No.8430 of 2018) Decided on 31.01.2019

• The appeal in this case arose out of the NCLAT judgment rejecting the appellant’s prayer for directions to the resolution professional to provide all relevant “documents” including insolvency resolution plans in question, to the members of suspended Board of Directors of corporate debtor. This was to enable them to participate in meetings held by committee of creditors (“CoC”).
• The court held that every participant is entitled to a notice of every meeting of the committee of creditors. Such a notice of meeting must contain the agenda of meeting, together with copies of documents relevant for the matters to be discussed and issues to be voted upon at the meeting vide Regulation 21(3)(iii). That resolution plans are “matters to be discussed” at such meetings and the erstwhile Board of Directors are “participants” who will discuss these issues.
• At the same time the Court rejected the contention that a director simplicitor would have the right to get documents as against a director who is a financial creditor.
•  It was held that- The proviso to Section 21(2) clarifies that a director who is also a financial creditor who is a related party of the corporate debtor shall not have any right of representation, participation or voting in a meeting of the committee of creditors. Directors, simplicitor, are not the subject matter of the proviso to Section 21(2), but only directors who are related parties of the corporate debtor. It is only such persons who do not have any right of representation, participation, or voting in a meeting of the committee of creditors.
• The SCI, hence directed that the appellants be given copies of all resolution plans submitted to the CoC within a period of two weeks.

Rajputana Properties Pvt. Ltd. v. UltraTech Cement Ltd. & Ors (Civil Appeal No.10998 of 2018) Decided on 19.11.2018

• The apex Court in this case dismissed the plea to seek a stay on Ultratech’s bid for Binani cement, thereby upholding the UltraTech’s bid for Binani Cement sale. The NCLAT also, in its order dated 14.11.2018 had held Ultratech’s bid valid while stating that Dalmia Bharat’s offer discriminatory.
• The NCLAT had noted that the petitioner in its resolution plan had discriminated between some of the financial creditors who are equally situated and did not balance the interests of stakeholders such as operational creditors. It was held that this act was contrary to the scheme of the code.
• It was also observed that once the resolution plan is approved by the Committee of Creditors, it is submitted to the adjudicating authority who after being satisfied that the plan meets the requirements of Section 30, may either approve or reject it.
• That the ultimate authority to approve or reject a plan vests with the adjudicating authority, and for the same it shall consider the following aspects:
• Whether the resolution plan complies with the requirements of Section 30(2) of the Code.
• Whether the plan is fair and equitable or there is an unjust discrimination not envisaged in law.
• Whether the plan adheres to the object of the Code i.e. maximizes the value of assets and balances the interests of stakeholders.

Committee of Creditors of Essar Steel India Limited V. Satish Kumar Gupta & Ors. (C.A. 8766-67/2019, Decided on 15.11.2019

• The Supreme Court of India in this case settled many important issues related to the Corporate Insolvency Resolution Process (“CIRP”) under the IBC and set aside the judgment of the NCLAT which had set aside the decisions of the CoC of Essar Steel. It also upheld the constitutional validity of the IBC (Amendment Act) 2019.
• Essar Steel was admitted for insolvency resolution before the NCLT, Ahmedabad bench in 2017.
• The original resolution plan submitted by ArcelorMittal which was then approved by the Committee of Creditors(CoC) provided that the operational creditors with an exposure of an amount above INR 1 crore would forego the entire amount.
• When the NCLT approved ArceloMittal’s plan, it directed the CoC to consider sharing 15 percent of the amount recovered from the profits made during the CIRP with thee operational creditors of Essar Steel. This decision was challenged before the NCLAT.
• The NCLAT held that resolution plan must not differentiate between financial creditors and operational creditors in the manner of payment of dues. It approved the resolution plan of ArcelorMittal but redirected distribution of proceeds amongst the creditors of Essar Steel.
• This decision was challenged by financial creditors before the Supreme Court.
• Supreme Court held the following:
• The NCLT and NCLAT must not trespass upon a commercial decision of the majority of CoC. The decision of how much and what to pay the creditors lies with CoC which must reflect three parameters of- maximizing value of assets of corporate debtor, balancing the interests of all stakeholders and ensuring that corporate debtor is kept as a going concern during the CIRP process.
• There is a difference between equal and equitable treatment and hence the financial creditors and operational creditors cannot be treated equally as it would defeat the scheme of the code.
• Sub-committees can be appointed for the purpose of negotiating with resolution applicants or for other administrative acts, though all actions of the sub-committee are to be approved by the CoC.
• The Supreme Court struck the word ‘mandatorily’ from the Section 4 of the Amendment Act of 2019 according to which a CIRP is required to be ‘mandatorily’ completed within 330 days from the commencement date. The court observed that in exceptional cases, the 330day-limit may be extended.
• The Supreme Court gave a go- ahead to the sale of Essar Steel thereby helping banks to recover almost 90 percent of their dues worth Rs.40,000 Crores.

Excel Metal Processors Limited Vs. Benteler Trading International GMBH and Anr (Company Appeal (AT) (Insolvency) No. 782 of 2019), Decided on 21.08.2019

• It was held by the NCLAT that since the NCLT has jurisdiction to entertain an application under the IBC, the parties cannot derive the advantage of the terms of the Agreement where parties agreed that any suit or case is maintainable only in Courts outside India.
• The appellant referred to the agreement between the parties stating that any suit or case is maintainable only at the Court of Germany and hence no case can be filed in India.
• The NCLAT reiterated its earlier stance in the case of Binani Industries Limited v. Bank of Baroda & Anr (Company Appeal Insolvency No.82 of 2018) wherein it was held that CIRP is not a suit or litigation or a money claim for any litigation. The object is to get resolution brought about so that the Company does not default on dues.
• According to Section 408 of the Companies Act, 2013 the NCLT has been constituted in different states. The Central Government has notified and vested power on them to deal with matters situated in the particular territory where registered offices of the companies are situated.
• Hence the appellant shall not derive advantage of the terms of agreement between the parties and the NCLT bench, Mumbai (where the office of the appellant is situated) shall have the jurisdiction to entertain the application under Section 9 of the Code.