Ambarin Khambati

The legislature has taken a step in the right direction by factoring in practical experience and opinion of the Adjudicating Authorities, to bring clarity and quietus to contentious issues.

The Insolvency and Bankruptcy Code, 2016 (“Code”) was enacted to promote collective insolvency as opposed to mere debt recovery by creditors, and to consolidate the multiplicity of legislations on insolvency resolution. Prior to this, the recovery time in India was unduly long and the returns were low. Consequently, financial creditors were plagued with an increasing numbers of Non-Performing Assets (NPAs). The purpose of the legislation was to give the corporate debtor the option to restructure and revive his business, making liquidation the very last resort in case the Resolution Plan failed. Keeping this goal in mind, on June 6, 2018 the President of India promulgated the Insolvency and Bankruptcy (Amendment) Ordinance (“Ordinance”), in order to make the process more facilitative towards resolution.

Clarificatory provisions

One of the most conspicuous changes has been to replace the word ‘repayment’ in the Code with the word ‘payment’. While operational debts were hitherto recognised, this is a clarificatory measure intending to clear any ambiguity surrounding what would constitute a ‘debt’. ‘Payment’ broadens the ambit of the term ‘debt’, and would also include payments owed by the corporate debtor to operational creditors for any materials supplied in the course of trade, and not just repayments of money borrowed.

An important change has also been made to the hotly contested meaning of the word ‘dispute’ in Section 8, which deals with initiation of the corporate insolvency resolution process (“CIRP”) by an operational creditor. The provision allowed for the CIRP to be held off in case of a pending dispute between the parties, if the corporate debtor brought the dispute and the record of the pendency of the suit, to the notice of the creditor.

Section 8 (2): The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor— (a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

This meant that the word ‘dispute’ would necessarily mean a legal dispute being contested in court at the time when CIRP was initiated. The Supreme Court however, in two landmark cases of Innoventive Industries v. ICICI Bank and Kirusa Software Private Limited v. Mobilox Innovations Private Limited, held that the word ‘dispute’ must be interpreted widely and ‘and’ must be read as ‘or’. This interpretation removes the requirement of there being a pending suit or arbitration and thereby prevents a premature filing of CIRP in cases where the dispute has recently arisen and there is no time to approach a court or tribunal. The ordinance incorporates this interpretation by substituting the word ‘and’ with ‘or”. The sub-clause now reads,

(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

It thereby widens the scope of the word dispute to include pre-litigation disputes, which if resolved would obviate the need to drag the business into insolvency. This is in line with the underlying principle of the legislation which seeks to prevent a company from going into liquidation by allowing it time to bring its affairs into order. However, this wide interpretation of ‘dispute’ may also create a situation where a debtor may claim a business dispute exists in order to stall the insolvency process.

Pushing for Resolution

The scheme of the Code is such that all decisions regarding the resolution plan must be taken by a Committee of Creditors (“CoC”) by a voting majority of 75%. In the matter of Kamineni Steel & Power Pvt. Ltd, the Hyderabad Bench of the National Company Law Tribunal (“NCLT”) had quashed the 75% requirement, and allowed the resolution plan to be approved by 66.67% of the CoC, keeping in mind the livelihoods of the employees which were at stake. In the backdrop of this, and in order to facilitate resolution, the ordinance has reduced the majority requirement in the CoC meetings from the steep 75% to a simple majority of 51%.

Since the intention of the Code was to promote timely resolution, a short 180 day period was set within which the resolution process must be completed. Although in practice this time would often lapse without a plan being formalized and the liquidation process would begin. The ordinance therefore, amends Section 12 to reduce the majority required by the CoC to extend the CIRP period beyond 180 days. It is reduced from 75% to 66% which still, is quite a high number to achieve.

Earlier, the insolvency process once initiated was irreversible. It would either lead to resolution or liquidation, even in a case where the parties had reached a settlement. The only possibility for withdrawal was if the Supreme Court exercised its power to do complete justice under Article 142 of the Constitution. Faced with a flood of such litigation, the Supreme Court in Uttara Foods and Feeds Pvt. Ltd v. Pharmachem recommended that the NLCT and NCLAT must be given inherent powers to withdraw the CIRP in cases where parties had reached a settlement, by an amendment to Rule 8 of the Insolvency and Bankruptcy Board (Application to Adjudicating Authority) Rules, 2016.

In accordance with this, the ordinance inserts Section 12A which now make the process reversible, allowing a withdrawal of the application if approved by 90% of the CoC. Even if the majority requirement is steep, allows the company the option to bring its affairs into order and militates against liquidation.

Applicability of Limitation

Another point of contention, prior to the ordinance, was whether the Limitation Act, 1963 would apply to initiation of CIRP. Several NCLT benches had largely differed on the issue, and many held that the claim would be barred since it was in relation to a time-barred debt as under Section 14 of the Limitation Act. The NCLAT, however, overturned this position in Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustee Ltd, where it held that there is nothing on record to show that the Limitation Act is at all applicable to the Insolvency and Bankruptcy Code. The purpose of the Code is deal with corporate insolvency and not with money claims. In Speculum Plast Pvt Ltd. v. PTC Techno Pvt Ltd, the NCLAT held that while the Limitation Act is not applicable to the Code, the Doctrine of Limitation and Prescription would still apply. If the proceedings under Section 7 or Section 9 are initiated after an unduly long delay, it would have to be seen whether it amounted to laches and resulting forfeiture of claim.

The matter was finally settled by means of the ordinance which inserted Section 238 A into the Code, making the provisions of the Limitation Act applicable to all proceedings. This has received mixed response from the industry since the ability to enforce debts which had become barred by limitation has now been lost. However, the intention of the lawmakers has been to ensure that the Code is not misused by creditors who failed to enforce their debts within the prescribed time period under other laws.

Conclusion

The Insolvency and Bankruptcy Code is a relatively new and evolving legislation. The legislature has taken a step in the right direction by factoring in practical experience and opinion of the Adjudicating Authorities, to bring clarity and quietus to contentious issues. This move will only make the process of insolvency resolution smoother and reduce the need for litigation.

The author is a 3rd year law student at National Law School of India University, Bangalore.