Insolvency and Bankruptcy Code, 2016: 2022 Recap
We bring to you the yearly wrap up on Insolvency and Bankruptcy
Code, 2016 (IBC). Here are 10 judgments delivered by the Hon’ble Supreme
Court of India on IBC.
1. Vidarbha
Power Industries Limited vs Axis Bank [Review Petition (Civil) No. 1043 Of 2022 In Civil Appeal No.
4633 Of 2021]-
The Supreme Court, in its order dated 12 July 2022, held that Section 7(5)(a)
of the IBC grants the Adjudicating Authority discretionary power to admit an
application of a Financial Creditor ("FC") under Section 7 of
the IBC for the initiation of the Corporate Insolvency Resolution Process (CIRP)
and that factors relating to the borrower's business and liquidity are not
external/anterior factors qua admission of Corporate Debtor into CIRP. The
Supreme Court compared the language of Section 7(5)(a) to Section 9(5) of the
IBC and noted the use of the word ‘may’
in Section 7(5)(a) versus ‘shall’ in
Section 9(5) to reach the conclusion that fulfilment of twin test requirements
merely gives FC the right to initiate CIRP and do not require admission of
Corporate Debtor for CIRP. The Supreme Court ruled that there is no set time
restriction for admitting an application under Section 7. The Supreme Court
also held that operational creditors and financial creditors have been
consciously differentiated in this regard because the nature of the businesses
carried out by the two categories of creditors differs, and that non-payment of
dues is likely to affect operational creditors far more adversely than
financial creditors.
The Supreme Court observed that the existence of debt and default
only gave the FC the right to apply for CIRP initiation, and that the
Adjudicating Authority was required to consider the 'expediency' of the application for CIRP initiation, taking into
account, among other things, the Corporate Debtor's overall financial health
and viability. The Supreme Court further
noted that “It is certainly not the object of the Code to
penalize solvent companies, temporarily defaulting in repayment of its
financial debts, by initiation of CIRP”. The Supreme Court ruled that the
Adjudicating Authority must consider the corporate debtor's grounds for
refusing admission.
[Keyword:
Duty of Adjudicating Authority]
2. Asset Reconstruction Company
(India) Ltd. v. Tulip Star Hotels Ltd. [Civil Appeal Nos. 84-85
Of 2020] – The Supreme Court while
deciding upon the issue of limitation held that it is well settled that entries
in books of accounts and/or balance sheets of a Corporate Debtor would amount
to an acknowledgment under Section 18 of the Limitation Act. The Court further
held that an application under Section 7 of the IBC would not be barred by
limitation, on the ground that it had been filed beyond a period of three years
from the date of declaration of the loan account of the Corporate Debtor as NPA,
if there were an acknowledgement of the debt by the Corporate Debtor before expiry
of the period of limitation of three years, in which case the period of
limitation would get extended by a further period of three years. The Hon’ble
Court further elucidated that the IBC is not just a statute for recovery of
debts. It is also not a statute which only prescribes the modalities of
liquidation of a corporate body, unable to pay its debts. It is essentially a
statute which works towards the revival of a corporate body, unable to pay its
debts, by appointment of a Resolution Professional.
[Keyword: Limitation]
3. M/s S.S. Engineers vs. Hindustan Petroleum Corporation Ltd. &
Ors. [Civil Appeal No. 4583 of 2022] – The Hon’ble Supreme Court while discussing the role of National
Company Law Tribunal (NCLT) while adjudicating upon matters on Insolvency and
Bankruptcy Code held that the NCLT, exercising powers under
Section 7 or Section 9 of IBC, is not a debt collection forum. The IBC tackles
and/or deals with insolvency and bankruptcy. It is not the object of the IBC
that CIRP should be initiated to penalize solvent companies for non-payment of
disputed dues claimed by an operational creditor. There are noticeable
differences in the IBC between the procedure of initiation of CIRP by a
financial creditor and initiation of CIRP by an operational creditor. The Apex
Court held that on a reading of Sections 8 and 9 of the IBC, it is patently
clear that Operational Creditor can only trigger the CIRP process, when there
is an undisputed debt and a default in payment thereof. If the claim of an
operational creditor is undisputed and the operational debt remains unpaid,
CIRP must commence, for IBC does not countenance dishonesty or deliberate
failure to repay the dues of an Operational Creditor. However, if the debt is
disputed, the application of the Operational Creditor for initiation of CIRP must
be dismissed.
[Keyword: Undisputed debt, Initiation of CIRP by Operational
Creditor]
4. Vallal
RCK Vs. M/s Siva Industries and Holdings Limited and Ors. [Civil Appeal Nos. 1811-1812 of 2022] - A Bench comprising of Justices B.R. Gavai and Hima Kohli of the
Hon’ble Supreme Court of India vide Judgment dated 3rd June, 2022 held that
National Company Law Tribunal (NCLT) and the National Company Law Appellate
Tribunal (NCLAT) should not sit in appeal over the commercial wisdom of the
Committee of Creditors (CoC). It was held by the Hon’ble Court that it was held
that
“24. When 90% and more of the creditors, in their wisdom after due
deliberations, find that it will be in the interest of all the stake-holders to
permit settlement and withdraw CIRP, in our view, the adjudicating authority or
the appellate authority cannot sit in an appeal over the commercial wisdom of
CoC. The interference would be warranted only when the adjudicating authority
or the appellate authority finds the decision of the CoC to be wholly
capricious, arbitrary, irrational and de hors the provisions of the statute or
the Rules.”
[Keyword: Settlement,
Commercial wisdom of CoC]
5. Kotak
Mahindra Bank Limited Vs. A. Balakrishnan & Anr. [Civil Appeal No.689 OF
2021] – The Hon’ble Supreme Court affirming the judgment of Dena Bank
(now Bank of Baroda) vs. C. Shivakumar Reddy (2021) 10 SCC 330 held that a
liability in respect of a claim arising out of a Recovery Certificate would be
a “financial debt” within the meaning of clause (8) of Section 5 of the IBC.
Consequently, the holder of the Recovery Certificate would be a financial
creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the
holder of such certificate would be entitled to initiate CIRP, if initiated
within a period of three years from the date of issuance of the Recovery
Certificate.
[Keyword: Claim out of Recovery Certificate, Financial Debt]
6. Overseas
Bank Vs. M/s. RCM Infrastructure Ltd. and Anr. [Civil Appeal No. 4750 of 2021] - The Hon’ble
Supreme Court while deciding on the issue whether proceedings under the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (hereinafter referred to as the “SARFAESI Act”) noted
that as the balance amount has been accepted by the appellant Bank on 22 March
2019, the sale under the statutory scheme as contemplated under Rules 8 and 9
of the Security Interest (Enforcement) Rules, 2002 would stand
completed only on 8th March 2019. Admittedly, this date falls much after 3rd
January 2019, i.e., on which date CIRP commenced and moratorium was ordered. As
such, the Hon’ble Supreme Court was unable to accept the argument on behalf of
the appellant Bank that the sale was complete upon receipt of the part payment.
In view of the
provisions of Section 14(1)(c) of the IBC, which have overriding effect over
any other law, any action to foreclose, recover or enforce any security
interest created by the Corporate Debtor in respect of its property including
any action under the SARFAESI Act is prohibited. We are of the view that the
appellant Bank could not have continued the proceedings under the SARFAESI Act
once the CIRP was initiated and the moratorium was ordered.
[Keyword: proceedings under SARFAESI Act, Moratorium]
7. Safire
Technologies Pvt. Ltd vs. Regional Provident Fund Commissioner & Anr. [Civil Appeal No.2212 of 2021] – The Hon’ble Supreme
Court in the said matter relying upon the judgment of this Court in Civil
Appeal Nos. 2943-2944 of 2020 etc. dated 10.03.2021 titled Kalpraj Dharamshi
& Anr. vs. Kotak Investment Advisors Ltd. & Anr. reiterated that an
appeal against the order of NCLT shall be preferred within a period of 30 days
from the date on which the order was passed by the NCLT. The Appellate Tribunal
has the power to extend the period of limitation by another 15 days. In view of
the aforesaid, it was held that Appellate Tribunal committed an error in
issuing notice in an appeal that was filed by Respondent No.1 with delay of 388
days.
[Keyword: Limitation of filing Appeal]
8. New
Delhi Municipal Council Vs. Minosha India Limited [Civil Appeal No. 3470 of
2022] – The Hon’ble
Court while deciding on the issue whether Section 60(6) of the IBC 23 does
contemplate exclusion of the entire period during which the moratorium was in
force in respect of corporate debtor in regard to a proceeding at the hands of
the corporate debtors stated that an application under Section 7, 9 or 10, does
bring in a period which is intended to bring a corporate debtor back to life if
possible, ‘a period of calm’, in the words of the respondent. But this is a
period during which the management of the corporate debtor is displaced,
ironically, a period of turbulent churning. While it may be true that
proceedings by the corporate debtor through the resolution professional is
contemplated, it is not impossible to contemplate that the resolution professional
for whatever reason it may be, does not discharge his duties and conduct
proceedings in all matters as he should. As far as understanding the meaning of
Section 60(6) is concerned, there cannot be a slightest doubt that the period
of Moratorium is excluded even in the case of a suit or application brought by
a corporate debtor, viz., in regard to the period of the moratorium.
[Keyword: Proceedings by Corporate Debtor, Moratorium, Role
of IRP]
9. Sunil
Kumar Jain and others vs. Sundaresh Bhatt and Ors. [Civil Appeal No. 5910 of
2019] – The Hon’ble Court while deciding on an appeal preferred by the
workmen/employees of M/s ABG Shipyard Limited working at Dahej and Mumbai
against the impugned order dated 31.05.2019 passed by the NCLT not granting any
relief to them with regard to their claim relating to salary, which they
claimed for the period involving Corporate Insolvency Resolution Process and
the prior period held that the wages and salaries of the workmen/employees at
Dahej Yard and the employees at Mumbai Head Office, except those who worked
during the CIRP period, cannot be included and/or considered as CIRP costs and
therefore they have to be paid as per the waterfall mechanism mentioned in
Section 53(1)(b) & (c) of the IB Code.
[Keyword: wages of employees]
10. Amit
Katyal vs. Meera Ahuja and Others [Civil Appeal No. 3778 OF 2020] – In the present
case the Supreme Court while stating that the object and purpose of the IBC is
not to kill the company and stop/stall the project, but to ensure that the
business of the company runs as a going concern, permitted the original
applicants to withdraw the CIRP proceedings stating the following reasons:
“8. In the present case, as observed hereinabove, although the COC was
constituted on 23.11.2020, there has been a stay of CIRP proceedings on
3.12.2020 (within ten days) and no proceedings have taken place before the COC.
It is to be noted that the COC comprises 91 members, of which 70% are the
members of the Flat Buyers Association who are willing for the CIRP proceedings
being set aside, subject to the appellant and the Corporate Debtor – company
honouring its undertaking given to this Court as per the settlement plan dated
3.2.2022. 9. Therefore, in the peculiar facts and circumstances of the case,
where out of 128 home buyers, 82 home buyers will get the possession within a
period of one year, as undertaken by the appellant and respondent No.4 –
Corporate Debtor, coupled with the fact that original applicants have also
settled the dispute with the appellant/Corporate Debtor, we are of the opinion
that this is a fit case to exercise the powers under Article 142 of the
Constitution of India read with Rule 11 of the NCLT rules, 2016 and to permit
the original applicants to withdraw the CIRP proceedings.”
[Keyword: CIRP, homebuyers]
This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Partner).
You can direct your queries or comments to the author at info@factumlegal.com
Disclaimer-
The contents of this article should not be construed as legal opinion.
This article is intended to provide a general guide to the
subject matter. Specialist advice should be sought about your
specific circumstances. We expressly disclaim any financial or other
responsibility arising due to any action taken by any person on the
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