Insolvency Laws in India:
Insolvency laws in India underwent a significant overhaul with the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. The IBC aimed to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner.
One of the key features of the IBC is the time-bound process for insolvency resolution. Another significant impact of the IBC was the shift in focus from liquidation to resolution. The IBC aims to rescue viable businesses and maximize the value of assets, rather than simply liquidating the company. This has led to a more creditor-friendly regime, with a focus on reviving the company and preserving jobs and promoting economic growth.
These are older laws that are still applicable in certain regions of India (like Mumbai and Kolkata) for insolvency proceedings involving individuals and partnerships.
Insolvency laws provide a structured process for creditors to recover debts from insolvent entities. This process helps creditors in recovering at least a portion of their dues in an efficient and timely manner. Insolvency laws aim to rescue viable businesses by providing them with an opportunity to restructure and revive their operations.
Insolvency laws can contribute to financial stability by facilitating the orderly resolution of insolvent entities. This can help in preventing the spread of financial distress and systemic risks in the economy.
Overall, insolvency laws play a crucial role in promoting economic efficiency, protecting creditors’ rights, and preserving the stability of the financial system.
Note: It’s important to note that this is not an exhaustive list, and the specific applicability of these laws will depend on the individual circumstances of an insolvency case.
Welcome to the July – 2024 Edition !!
WISDOM OF COURTS:
BRS Ventures Investments Ltd. vs. SREI Infrastructure Finance Ltd. & Anr.,
Civil Appeal No. 4565 OF 2021
Supreme Court of India | Abhay S. Oka, Pankaj Mithal, JJ | 23.07.2024
Liability of principal borrower remains unaffected by the conclusion of CIRP of corporate guarantor through a resolution plan, allowing the creditor to recover the balance debt from the borrower even after a partial recovery from the guarantor.
Facts:
- SREI Infrastructure Finance Limited (FC) granted loan of ₹100 Crores to Gujarat Hydrocarbon and Power SEZ Limited [a subsidiary of Assam Company India Limited (ACIL)] CD for setting up a SEZ project. The loan was secured by mortgage and corporate guarantee.
- FC invoked corporate guarantee on default. As the guarantee was not honoured, FC filed Section 7 application against ACIL, and the same was admitted by AA in 2017.
- As per the approved Resolution plan, the Successful RA (Appellant) paid ₹38.87 crores to FC against the admitted claim of ₹241.27 crores.
- Thereafter, FC filed Section 7 application against CD. Its claim of ₹1428 crores, which is claimed to be the balance amount payable under the loan facility of ₹100 crores. AA admitted this application.
Observations/ Settled principles on the law of guarantee:
- The liability of the surety and the principal debtor is co-extensive. The creditor has remedies available to recover the amount payable by the principal borrower by proceeding against both or any of them. The creditor can proceed against the guarantor first without exhausting its remedies against the principal borrower.
Consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, section 60 of the IBC permits separate or simultaneous proceedings to be initiated under Section 7 by a financial creditor against the corporate debtor and the corporate guarantor.
- The creditor can still proceed against the principal borrower to recover the balance amount and the liability of the principal borrower to pay the balance amount remains unaffected in below cases:
- If the creditor recovers a part of the guarantee amount from the surety and agrees not to proceed against the surety for the balance amount;
- A compromise/ settlement between the creditor & surety, even if without the consent of the principal borrower;
Where a company furnishes a corporate guarantee for securing a loan taken by another company and if the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. The corporate guarantor’s liability may end in such a case by operation of law. However, such a resolution plan of the corporate guarantor will not affect the liability of the principal borrower to repay the loan amount to the creditor after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan.
- Doctrine of subrogation is a creature of equity. If the surety pays the entirety of the amount payable under guarantee to the creditor, Section 140 of the Contract Act provides a remedy to the surety to recover the entire amount paid by him in the discharge of his obligations. Therefore, the surety gets invested with the rights of the creditor to recover from the principal debtor the amount which was paid as per the guarantee. If the surety pays only a part of the amount payable to the creditor, the equitable right the surety gets under Section 140 will be confined to the debt he cleared.
Decision: Dismissing the appeal, the Court held that—
- The FC had to take a haircut because of the involuntary process by operation of law. On the payment of ₹38.87 crores, only the liability of ACIL under the corporate guarantee, and not of the principal borrower, to repay the loan to the FC has been extinguished.
- By the involuntary act of the creditor of accepting part of the amount from the surety in the discharge of the entire liability of the surety, even if Section 140 is attracted, it will confer on the guarantor/ Appellant the right to recover only the amount paid by guarantor.
- Notwithstanding the subrogation to the extent of the amount paid on behalf of the corporate guarantor by the resolution applicant, the right of the FC to recover the balance debt payable by the CD is in no way extinguished.
Read the full judgment here.
Sanjay Dhingra vs. IDBI Bank Limited & Ors. [W.P.(C) 8131-2020 & CM APPL. 26390-2020]
Delhi High Court | Mini Pushkarna, J. | 02.07.2024
Interim Moratorium imposed u/s 96 applies to all debts, including debts (herein, security interest) created under a personal guarantee.
Facts:
Insolvency Proceedings have been initiated against Sanjay Dhingra (Petitioner), in his capacity as a personal guarantor, under Section 95(1) of the IBC, 2016, by Union Bank of India, before NCLT, New Delhi. Thus, the interim moratorium in terms of Section 96 of the IBC, 2016, is in force.
The petitioner has given a personal guarantee in favour of IDBI, Dubai (R2) on behalf of a company based in Dubai (R3), secured by a mortgage on his immovable property, whose original documents were handed over to IDBI Bank, New Delhi (R1). The Petitioner is aggrieved by the steps initiated by R1 under the SARFAESI Act for loan facilities granted by R2 to R3.
Issues:
- Impact of the interim moratorium u/s 96 on the SARFAESI proceedings?
- Whether IDBI, New Delhi, can invoke the SARFAESI Act, on behalf of IDBI, Dubai, for a loan sanctioned by IDBI, Dubai and if there is no debt due to R1 under Indian Law?
Observations & Decision:
- Moratorium:
- Sections 95 & 96, in Part III of IBC, deals with insolvency resolution and bankruptcy for individuals and partnership firms. Section 96(1) provides that when an application is filed u/s 94 or 95, an interim moratorium shall commence on the date of the application ‘in relation to all the debts’.
- The phrase ‘in relation to all the debts’ means that the interim moratorium shall apply to all the debts of the petitioner, including the mortgage of the property in question. Any legal action or proceeding pending in respect of any debt of the petitioner, shall be deemed to have been stayed, upon commencement of the interim moratorium u/s 96.
- Pursuant to Section 238, once IBC proceedings have commenced, any further action by the bank under the SARFAESI Act is prohibited. Mere fact that possession of the property in question has been taken over by R1 under SARFAESI proceedings, prior to the commencement of IBC proceedings against the petitioner, would have no effect on the interim moratorium.
- Thus, R1 cannot continue the proceedings under the SARFAESI Act.
- Jurisdiction: The issues regarding the jurisdiction of IDBI Bank, Delhi to invoke the SARFAESI Act should be decided by the DRT.
- Any person who has a grievance against any notice issued under Section 13(4) of the SARFAESI Act, or action taken under Section 14 of SARFAESI Act, can apply to the DRT under Section 17(1) of the said Act. Thus, once the interim moratorium is lifted, the petitioner’s contention (that R1 cannot invoke SARFAESI provisions, as there is no debt due to R1 under Indian Law. Debt, if any, is due to R2, in terms of the UAE laws) can be raised before, and be decided by, the DRT.
- Since, where a remedy is available under Section 17 of the SARFAESI Act, this Court ought not to entertain writ petitions under Article 226 of the Constitution of India, the Court has not given any findings on the merits of this Issue no. 2.
Read full judgment here.
Swan Energy Ltd. Vs. Chandan Prakash Jain, RP of E-Complex Pvt. Ltd. and Ors.
Company Appeal (AT) (Insolvency) No. 313 of 2024
NCLAT, Principal Bench, New Delhi | Ashok Bhushan, J. | 25.07.2024
The CoC exceeded its authority by modifying an approved Resolution Plan to replace the SRA, and the AA erred in approving this modified plan.
Facts:
- Despite the CIRP of the CD having come to an end in 2021, the CoC continued for 2 years by holding several CoC meetings with an object to modify the Resolution Plan and change the SRA into another entity. Such steps are taken by the CoC & RP after filing the application for approval of the Resolution Plan.
- Relying on the judgment of the Hon’ble Supreme Court regarding the commercial wisdom of the CoC, AA approved the modified Resolution Plan which substituted Invent Assets Securitization & Reconstruction Private Limited (“Invent”) with ‘Westend Investment and Finance Consultancy Private Limited’ as Successful Resolution Applicant (SRA).
Issue:
We are of the view that the present is not a case where the commercial wisdom of the CoC is sought to be impugned by the Appellant. Rather the instant case, entails the following issue— Whether the CoC could modify an already approved resolution plan? Whether the CoC had the jurisdiction to substitute the SRA after the approval of the resolution plan?
Observations:
- The CoC had no jurisdiction to modify the Resolution Plan (to substitute the SRA with another SRA who was not part of the CIRP) already approved by the CoC and submitted before the AA for approval under Section 30(6) with a caveat that in appropriate cases, under order of the AA or COC on its own can pass a resolution for modifying the Resolution Plan to make it compliant of Section 30(2). Such actions are not in conformity with the IBC & the CIRP Regulations 2016.
- AA committed error in approving the Resolution Plan which was modified Resolution Plan substituting Invent as SRA.
Decision:
- The appeal was allowed, and the order approving the modified resolution plan was set aside.
- The CoC was directed to issue a fresh Form-G and complete the process within 90 days.
Read the full judgment here.
Jet Aircraft Maintenance Engineers Welfare Association v. Mr. Ashish Chhawchharia Resolution Professional of Jet Airways (India) Ltd.
Company Appeal (AT) (Insolvency) No.1705 of 2023 & I.A. No. 6137 of 2023
NCLAT, Principal Bench, New Delhi | Ashok Bhushan, J. | 19.07.2024
No personal liability can be attached to the RP for payments made after CIRP with CoC approval.
Facts:
Operations of Jet Airways ceased in April 2019 and its CIRP commenced in June 2019, prompting claims from workmen, employees and other stakeholders. An Asset Preservation Team (APT) of 103 employees was formed to ensure various compliances required on behalf of CD, who requested and received lump sum payments approved by the CoC due to various uncertainties. These employees later left the team. The appeal challenges the NCLT’s order of September 26, 2023, which rejected the applicant’s plea for clarification and liability regarding payments made to 103 employees in APT during CIRP, as well as their claims reflected in the creditor lists.
Contentions of the Appellant:
The appellant argues that the RP should be held personally liable for any illegal payments made to these employees and that no further payments should be made to them. It is submitted that Respondents are obliged to bring settlement, as the settlement with 103 employees was not in accordance with law. Any payment to 103 employees towards arrears of salary shall amount to double payment to them.
Reply of the Respondent:
Respondent submitted that an amount of ~INR 5.4 crore was paid to the said 103 APT members as lumpsum payment and the total claim of ~INR 7.9 crores was waived off by the said l 03 APT members. Further, the payments were made with the approval of the CoC.
Observations:
- Any payment after CIRP having been made by the RP with the approval of CoC, no personal liability can be fastened on the RP.
- The apprehension that Appellants’ 103 employees shall receive double payment has also been clarified and those 103 employees, who have been paid lumpsum payment, have agreed to give up their claim of unpaid salary and consequently shall not be entitled to receive any payment from the approved Resolution Plan, except payment of gratuity and provident fund as per the judgment of this Tribunal dated 21.10.2022. The interest of other workmen regarding their entitlement, the Resolution Plan is in no way affect their right.
Decision:
The tribunal found no reason to doubt the affidavit, noting that the payments were CoC-approved, thus absolving the RP of personal liability. The appeal was dismissed, affirming that the NCLT’s decision to reject MA No.3387 of 2019 was justified.
Read the full judgment here.
Compliance Corner:
| Compliance Particulars | Description |
| Registration and Authorization | IPs must be registered with the Insolvency and Bankruptcy Board of India (IBBI) and hold valid authorization for assignments. |
| Code of Conduct | Adherence to ethical standards and professional conduct is must. |
| Appointment and tenure of interim resolution professional. | The Adjudicating Authority shall appoint an interim resolution professional on the insolvency commencement date. The term of the interim resolution professional shall continue till the date of appointment of the resolution professional under section 22. |
| First Meeting of Creditors (CoC) | The first meeting of the Committee of Creditors (CoC) in India must be held within 7 days of the committee’s constitution and within 30 days of the commencement of insolvency. The interim resolution professional (IRP) is responsible for convening the meeting after filing a report with the Adjudicating Authority certifying the committee’s constitution. |
| Submission of Resolution Plan | As per section 12(1) of the Code, the CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum time within which CIRP has to be mandatorily completed, including any extension or litigation period, is 330 days. |
Official REleases:
What’s NEW @ IBBI Tracker
| Sl. | Particulars | Link |
| 5th National Online Quiz on Insolvency and Bankruptcy Code, 2016 [1st- 31st August, 2024] | Click here |
Insolvency News Bulletin:
- NCLT orders liquidation of Biyani-led Future Retail as resolution eludes
The National Company Law Tribunal (NCLT) has ordered the liquidation of Kishore Biyani-led Future Retail. This decision comes after the company failed to find a resolution plan within the stipulated timeframe of the Corporate Insolvency Resolution Process (CIRP).
Key Points:
- No Resolution Plan: Despite efforts, the resolution professional couldn’t secure a viable resolution plan for Future Retail.
- CIRP Expiration: The maximum period allowed for the CIRP ended without a successful resolution.
- Liquidation Order: The NCLT, following the recommendation of the Committee of Creditors (CoC), has ordered the liquidation of the company.
- Liquidator Appointed: Sanjay Gupta has been appointed as the liquidator to oversee the liquidation process.
Implications:
- Creditors’ Loss: This outcome is likely to result in significant losses for the company’s creditors.
- Retail Landscape: The liquidation of Future Retail marks the end of an era for a once-dominant player in India’s retail sector.
- Job Losses: The liquidation process is expected to lead to job losses for a large number of employees.
- Information Source: Click Here
Worldwide Bulletin:
- Australia’s largest online bookseller Booktopia enters voluntary administration
Booktopia, Australia’s largest online bookseller, has unfortunately entered voluntary administration. This means the company is facing significant financial difficulties and is seeking a way to restructure its debts or potentially sell the business.
Key Points:
- Financial Struggles: Booktopia has been facing financial challenges for some time, including job cuts and cost-saving measures.
- Potential Sale or Restructuring: The administrators will be exploring options to sell the business or restructure its finances to avoid liquidation.
- Impact on Authors and Customers: The situation has caused uncertainty for authors who rely on Booktopia for distribution and customers who rely on it for book purchases.
- Information Source: Click Here
List of Abbreviations:
| Abbreviated Form | Expanded Form |
| CIRP | Corporate Insolvency Resolution Process |
| AA/ NCLT | Adjudicating Authority/ National Company Law Tribunal |
| NCLAT | National Company Law Appellate Tribunal |
| CD | Corporate Debtor |
| FC | Financial Creditor |
| OC | Operational Creditor |
| CoC | Committee of Creditors |
| IRP | Interim Resolution Professional |
| RP | Resolution Professional |
| RA | Resolution Applicant |
| SRA | Successful Resolution Applicant |
Disclaimer: The content of this newsletter is intended to provide a general guide to the subject matter. Every effort has been made to keep the information cited in this edition error-free. Suggestions and feedback to improve the task are welcome. The contents are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. The opinion may vary according to one’s interpretation of the law. It should not be relied upon as the sole basis for any decision which may affect you or your business. Any hitherto amendments and updates not covered herein will be incorporated in the upcoming edition.
