Landmark Judgements of IBC of The Year 2021 – By Ms. Shalmoli Ghosh

Landmark Judgements of IBC of The Year 2021

The author has identified top five judgments of the year 2021 delivered by the Supreme Court of India each from the month of January to May, concerning the Insolvency and Bankruptcy Code, 2016. These rulings of the Apex Court will have far reaching consequences and undeniably serve as precedents in the world of insolvency.

MANISH KUMAR V UNION OF INDIA [(2021) ibclaw.in 16 SC, dated 19.01.2021]

In the instant case, the petitioners who were mostly allottees under the real estate projects challenged the constitutional validity of Sections 3,4 and 10 of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 that amends Section 7(1) of the Insolvency and Bankruptcy Code, 2016 and incorporates three provisos to the said section, adds a new explanation (Explanation II) in Section 11 and inserts a new section i.e. 32 A respectively.

The petitioners contended that the impugned amendments defeat the very objective of the code since the legislative intent behind the enactment of the code was to enhance the ease of carrying out business in India. They were of the opinion that the amendments are restrictive in nature, causing hindrance to the allottees in recovery of their claims. On the contrary, the respondents confuted that the amendments are perfectly valid as they are incorporated in order to prevent multiplicity of proceedings and reduce the burden of pending cases before the already overburdened adjudicating authorities. The petitioners also argued referring the landmark case of Pioneer Urban Land and Infrastructure Ltd. and Anr v. Union of India [2019] ibclaw.in 13 SC and Ors that the legislature was now estopped by promissory estoppel from enacting the impugned amendment act which imposed additional conditions for triggering corporate insolvency resolution process under the code. To this, the Hon’ble Supreme Court responded that: “A supreme legislature cannot be cribbed, cabined or confined by the doctrine of promissory estoppel or estoppel. It acts as a sovereign body.” The principle argument of the petitioners is that the amendments are arbitrary, unreasonable and are in contravention of Article 14, 19(1)(g), 21 and 300A of the Constitution.

The Supreme Court upheld the constitutional validity of the impugned amendments rejecting all the averments put forth by the petitioners, albeit with directions issued under Article 32 of the Constitution of India and expressed an observation that: “There is nothing like a perfect law and as with all human institutions, there are bound to be imperfections. What is significant is however for the court ruling on constitutionality, the law must present a clear departure from constitutional limits.”  

PHOENIX ARC PRIVATE LIMITED V SPADE FINANCIAL SERVICES LIMITED & ORS [(2021) ibclaw.in 03 SC, dated 01.02.2021]

In the instant case, Phoenix Arc Private Limited and Yes Bank Limited, two of the financial creditors filed an application under Section 60 (5) (c) of the Insolvency and Bankruptcy Code, 2016 before the NCLT for removal of two entities, AAA Landmark Private Limited and Spade Financial Services Private Limited, from the Committee of Creditors (Coc) constituted for corporate insolvency resolution process (CIRP) initiated against AKME Projects Limited, a Corporate Debtor on the ground that they are “related parties”.

The NCLT were of the opinion that the two aforementioned entities did not qualify as “financial creditors” under Section 5 (7) of the code since the transactions between them were collusive in nature and consequently they were not eligible to participate in the meeting of CoC. Therefore, it did not venture to consider the question regarding whether they are related parties or not. On the contrary, the NCLAT held that two entities were “admittedly” financial creditors of the corporate debtor but being “related parties” to the corporate debtor, they were disqualified to be a part of the CoC. Aggrieved by the ruling of the NCLAT, both the parties appealed to the Supreme Court. The contention of Phoenix before the Apex Court was that though the NCLAT rightly ruled that the two entities were related parties and hence could not be included in the CoC, the observation that Spade and AAA were financial creditors were erroneous in nature.

Before going into the decision of the Supreme Court, it is of utmost importance to understand that the sole purpose of exclusion of related parties from the CoC is to obviate differences of opinions and to ensure that the CoC is not sabotaged by any “related parties” of the corporate debtor.

The Supreme Court altered the decision of NCLAT and held that Spade and AAA are not financial creditors since collusive transactions are anathema to the objectives of IBC. Also, the Apex Court affirmed that the two entities are related parties within the meaning of the Section 5 (24) of the code and hence, they are excluded from the meeting of the Committee of Creditors.

In the light of the objectives of the code, another interesting observation made by the Supreme Court is that: “while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder.”

INDUS BIOTECH PRIVATE LIMITED V KOTAK INDIA VENTUTRE (OFFSHORE) FUND [(2021) ibclaw.in 52 SC, dated 26.03.2021]

In the instant case, Kotak India Venture (Offshore) Fund, in congruence with the terms of shareholders’ agreements and share subscription agreements had subscribed to the equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) in Indus Biotech Private Limited. Kotak preferred to convert their OCRPS into equity shares in accordance with the regulations 5(2) of SEBI (ICDR) Regulations, 2018 since Indus had proffered to make a Qualified Initial Public Offering (“QIPO”). Subsequently, Kotak had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 seeking initiation of corporate insolvency resolution process against Indus Biotech since it had failed to redeem the OCRPS. In the same matter, Indus Biotech had filed an interim application under Section 8 of the Arbitration and Conciliation Act,1996 to refer the dispute to arbitration along with an application seeking dismissal of Section 7 of the IBC proceedings.

The NCLT allowed the Indus’ application filed under Section 8 of the Arbitration and Conciliation Act and as a corollary dismissed Kotak’s application filed under section 7 of the IBC. The NCLT in the light of the factual matrix of the case noted that the principle issue was with the valuation of shares and conversion formula that was to be applied by the parties for conversion of the OCRPS since Kotak claimed that it would be entitled to 30% of the total paid up share capital of Indus Biotech, while according to Indus Biotech, it should be only 10%.  Therefore, NCLT was of the opinion that invocation of arbitration was justified as disputes in the present case were all arbitrable. Furthermore, given that the corporate debtor was a “solvent, debt-free and profitable company” the NCLT observed initiating CIRP against Indus Biotech would be inappropriate.

The Supreme Court had to deal with two petitions- a special leave petition by Kotak against the NCLT order and arbitration petition under Section 11 by the Indus Biotech for appointment of arbitrator on behalf of Kotak. The Apex Court upheld the order passed by the NCLT and correspondingly appointed an Arbitral Tribunal. The Supreme Court while delivering the judgement rightly pointed out, since there had been no determination with respect to the conversion formula of the OCRPS, it would be incorrect to conclude if “default” had actually occurred within the meaning of the Section 3 (12) of the code. Another important observation made by the Apex Court was that mere filing of Section 7 IBC application would not make the proceedings in rem and consequently it would be very much within the scope of arbitrability. The proceedings become “in rem having the erga omnes effect” only upon admission and that marks the initiation of CIRP.  However, the Supreme Court emphasized that even if there were an application under Section 8 of the Arbitration Act pending before the adjudicating authority, the authority ought to have first decided the Section 7 application of IBC and adjudged on the matter related to the occurrence of “default” inasmuch as it has a non-obstante clause having an overriding effect on all other laws. This would bolster the objectives of the code since arbitration could not be used as a sham to delay the IBC proceedings and defeat the timelines prescribed under the code.

GHANASHYAM MISHRA AND SONS PVT LIMITED VS. EDELWEISS ASSET RECONSTRUCTION COMPANY LIMITED [(2021) ibclaw.in 54 SC, dated 13.04.2021]

In the instant case, the State Bank of India, the financial creditor filed an application under Section 7 of the Insolvency and bankruptcy Code, 2016 to initiate corporate insolvency resolution process against the Orissa Manganese & Minerals Limited, the corporate debtor. Upon admission of the application by the NCLT, a Resolution Professional was appointed who initiated the resolution process. Subsequently, three resolution plans were received from Edelweiss Asset Reconstruction Company Limited (“EARC”), Orissa Mining Private Limited (“OMPL”) and Ghanashyam Mishra & Sons Private Limited (“GMSPL”), respectively.

The NCLT approved the plan of GMSPL rejecting all other applications, which was also approved by the Committee of Creditors by a voting share of about 89.23%. Thereupon, EARC filed an appeal against the rejection of its claims before the NCLAT.  The appellate authority emphasized that although the plan of GMSPL had better potential, there could be a chance of agitation before the alternative forums by the parties whose claims were not included in the resolution plan. Consequently, an appeal was filed by GMSPL before the Supreme Court against the impugned order of NCLAT.

The Supreme Court merged four matters together as they involved common questions of law. The Apex Court determined two major issues- whether an approved resolution plan would bind all the creditors including the Central Government, State Government or any local authority and whether any creditor would be entitled to initiate proceedings against the corporate debtor in respect of claims which are not covered in the resolution plan after the same gets approved. The Supreme Court also pointed out an important question of law that whether the amendment to Section 31 would have retrospective effect or not.

The Supreme Court while addressing the above mentioned issues observed that Section 31 unequivocally states that once a resolution plan is approved, it would be binding on all the creditors (including the Central Government, State Government or any local authority), corporate debtors, its employees and other stakeholders. Furthermore, it was observed by the Supreme Court that all the claims that were not included in the resolution plan shall stand extinguished and all the creditors would be barred from recovering any of the dues from the corporate debtor accruing before the transfer of the management of the corporate debtor to the successful resolution applicant. The Apex Court also observed that the amendment to Section 31 is “clarificatory and declaratory” in nature and thus it would have a retrospective effect.

In the light of the aforementioned observations, the Supreme Court held that the NCLAT’s observation that EARC could take recourse to alternative remedies as are available to it in law is prohibited in law. This decision of the Supreme Court will prevent multifarious litigations and provide an opportunity to the corporate debtor to start with a clean slate with no burden of past liabilities.

LALIT KUMAR JAIN V UNION OF INDIA AND OTHERS [(2021) ibclaw.in 61 SC, dated 21.05.2021]

In the instant case, the petitioners challenged the validity of the notification issued by the Ministry of Corporate Affairs on November 15 2019, which brought into effect Part III of the Insolvency and Bankruptcy Code, which dealt with personal guarantors of corporate debtors. The petitioners, in the capacity of promoters, directors, or in some other roles had provided personal guarantees to banks and financial institutions, as a result of which they were facing insolvency proceedings that are at various stages. The provisions of Part III established a comprehensive mechanism for creditors that enabled them to initiate insolvency proceedings against personal guarantors of the corporate debtors. The legislative intent was to make directors, managing directors, promoters or the chairperson liable for the loans availed by their firm on their personal guarantee.

The impugned notification was challenged before various High Courts. Therefore, in order to settle the protracted saga with respect to personal guarantors, the Supreme Court exercised its power under Article 139A and presided on the matter.

The bone of the contention was that the impugned notification was ultra vires of the powers delegated to the Central government under Section 1(3) of the code and asserted that the executive did not have the power to bring into effect the provisions of the code selectively and in a phased manner only to the extent that they administer personal guarantors of the corporate debtors and therefore the notification was ultra vires of the. Another issue that was before the Supreme Court was whether the approval of a resolution plan of a corporate debtor discharges all the liabilities of the personal guarantor to the corporate debtor.

The Supreme Court upheld the legal validity of the impugned notification and held it is intra vires of the powers of the Central Government. The Hon’ble court while determining the scope of delegated legislation, observed that the Central Government was well within its powers and the notification was not an occasion of excessive legislative exercise. It also opined that the intention of the legislature was never to enforce the provisions of the code all at once. The Supreme Court also held that the approval of a resolution plan would not ipso facto discharge or release the liabilities of the personal guarantors to the corporate debtors.