Background

Pursuant to notification of the provisions relating to insolvency resolution and liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code), several applications have been made to the National Company Law Tribunal (NCLT) since mid‑December by creditors and corporate debtors themselves. Keeping up with the tight timelines under the Code, the judicial response has been swift and the NCLT has begun reviewing and admitting applications in line with the provisions of the Code. This Ergo Newsflash seeks to highlights the key takeaways of some of these early orders passed under the new law.

ICICI Bank v Innoventive Industries Limited

As a first of its kind, the NCLT (Mumbai) has, on 17 January 2017, passed an order in the matter of ICICI Bank Limited v Innoventive Industries Limited (Innoventive Order) inter alia admitting the application under the Code filed by ICICI Bank for initiating the corporate insolvency resolution process (CIR Process). An application was filed by ICICI Bank stating that the corporate debtor i.e. Innoventive Industries Limited (Innoventive) had availed a term loan facility, a working capital facility and an external commercial borrowing and had defaulted in repayment of these amounts. Accordingly, they sought initiation of the CIR Process under provisions of the Code.

Innoventive contended that it had been declared as a ‘relief undertaking’ under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRU Act) and consequently, the existing proceedings against it stand suspended until 21 July 2017. Further, the contention was also supplemented with an argument that the MRU Act has a non-obstante clause which empowers the State Government to suspend any remedy for enforcement in relation to any right or liability accrued prior to an entity being declared as a relief undertaking.

The NCLT rejected the aforesaid argument and passed an order accepting the application and declaring moratorium, observing as under:

  • Section 238 of the Code also contains a non-obstante clause similar to the MRU Act, which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Since the Code is subsequent to the MRU Act, the non-obstante clause under Section 238 of the Code prevails.
  • The suspension of liability under the MRU Code is inconsistent with the ability of a creditor to initiate the CIR Process under the Code and therefore, the overriding powers under Section 238 of the Code shall render the suspension under MRU act inoperative.
  • Declaration of moratorium keeps business as usual for employees without affecting their interest and therefore a declaration of moratorium would not be in conflict with the objective of the MRU Act (which is to prevent unemployment of the existing employees of a relief undertaking).

Innoventive moves the High Court

A writ petition has now been filed by Innoventive before the Bombay High Court against the Union of India and 18 other respondents, challenging the constitutional validity of the Code following admission of the insolvency resolution application against Innoventive by the NCLT. Based on the information available in the public domain, we understand that the constitutional validity of the Code is being challenged on the ground that it does not offer an opportunity of hearing to a corporate debtor against whom an application under Section 7 of the Code for corporate insolvency resolution has been filed before the NCLT and accordingly is in violation of principles of natural justice. The petition is coming up for hearing on 16 February 2017.

Khaitan Comment

  • The Innoventive Order sets out the objective of the Code and lays down the law which can resolve conflicts vis-a-vis non-obstante clauses of state relief undertaking enactments and the Code. However, the possibility of remedies available under the Code being challenged in future on such grounds cannot be ruled out.
  • On the challenge being made on constitutionality of the Code, it is expected that the Hon’ble Bombay High Court would recognise the principles of natural justice and prescribe that it is to be followed at the time of admission of application under the Code by the NCLT by giving an opportunity of hearing to the debtor and it may issue necessary directions in this regard which would also be in line with National Company Law Tribunal Rules, 2016. This would also be in line with the position taken by Hon’ble Supreme Court on challenge to constitutionality of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) on similar grounds. This may be particularly helpful in disputes involving operational creditors where the Code requires the debtor to file suit or initiate arbitration proceedings in case of any disagreement with the operational creditor, and where the debtor chooses not to pay the operational creditor upon a demand being made by it within a period of 10 days.

Re: Synergies – Dooray Automative Limited (SDAL)

This matter arose on account of abatement of reference of the company i.e. Synergies – Dooray Automative Limited (SDAL) before the Board for Industrial and Financial Reconstruction on account of notification of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (SICA Repeal Act). The NCLT, while admitting the application made in accordance with the provisions of the SICA Repeal Act and the Code, has granted moratorium against all proceedings including SARFAESI action which was initiated by some of the creditors of the corporate debtor. While the NCLT has admitted the application of SDAL for CIR Process, it has not given any decision on the continuation of the orders passed by BIFR, against which appeals were pending before Appellate Authority for Industrial and Financial Reconstruction prior to the notification of the SICA Repeal Act.

Khaitan Comment

In view of the provisions on saving of rights under the SICA Repeal Act, it remains to be seen whether interim orders passed under SICA would be binding on the financial creditors while formulating the resolution plan, assuming that such orders are not challenged under the Code. This is expected to be examined in the course of the next few months while such resolution plans come up before the NCLT for consideration, after being formulated by the committee of creditors.

Nikhil Mehta v AMR Infrastructure Limited

The Delhi Bench of the NCLT in the case of Nikhil Mehta v AMR Infrastructure Limited, while interpreting the vital definitions of ‘financial creditor’ and ‘financial debt’, has rejected the application on the grounds of the applicant and the amount claimed to be unpaid not falling within the scope of the respective definitions.

The applicant, Nikhil Mehta (HUF) along with the other applicants, had filed an insolvency application against AMR Infrastructure Limited for failing to pay ‘Assured Returns’. Assured Returns, as per several memorandums of understanding entered among the corporate debtor and the applicants (at the time of booking of several real estate units), were the sums of money that the applicants were promised to be paid on a monthly basis until the possession of real estate units booked by them was handed over. The applicants had argued that since the amount was in the form of an Assured Return, the failure to make such payment entitled the applicants to initiate the CIR Process under the Code. The NCLT rejected the application on the ground that the Assured Returns promised to be paid to the applicants and defaulted upon by the corporate debtor did not satisfy the definition of ‘financial debt’ and the applicants therefore, were not entitled to prefer an application under the Code as ‘financial creditors’.

The key take-ways from the order are listed herein-below:

  • The unpaid amount should satisfy the definition of ‘financial debt’ for a claim to be filed under Section 7 of the Code. For a debt to be classified as a financial debt it should have been extended for the time value of money. The NCLT deliberated upon the meaning of the term ‘time value of money’ and while relying upon several lexicons, held that time value is a price associated with the maturity period of the debt or the period during which the related income is earned. There should be a time distance between inflows and outflows and the time value is compensation for that.
  • Since the transaction pertaining to the application was purely a transaction for purchase or sale of property, an amount of return promised in connection to it does not acquire the nature of a financial debt.
  • The NCLT also held that even in the absence of the above infirmities, the present application would not be maintainable as several winding-up petitions filed against the corporate debtor before the Delhi High Court were outstanding and an official liquidator has already been appointed as a provisional liquidator, while an appeal was pending.

Khaitan Comment

This case goes down as one of the initial guiding steps for creditors filing application under the Code to determine their eligibility in triggering the corporate insolvency resolution process. The NCLT has gone into great detail to explain the meaning of the term ‘time value of money’ which has not been defined under the Code and this is expected to bring clarity on maintainability of applications which may be filed by financial creditors in future.