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Introduction to Case
On 31 August 2017, the Supreme Court of India released the first detailed judgement on the implementation and workings of the Insolvency and Bankruptcy Code, 2016, in the case of Innoventive Industries Limited v. ICICI Bank Limited[1]. In the very first application under the Insolvency Code, the Court said it is pronouncing its thorough judgment, so that all courts and tribunals may notify a paradigm shift in the law.
Facts of Case
Innoventive Industries Ltd. based in Pune, Maharashtra had taken working loan, term loan and external commercial borrowing facilities from ICICI Bank Ltd. collateral default occurred on 30 November 2016 in respect of the partial loan for the cumulative outstanding balance of Rs. 1,019,177,034/-. Consequently, the financial creditor launched an application for corporate insolvency settlement proceedings against the corporate debtor under section 7 of the Law. The corporate debtor argued that they were issued with a “relief pledge” by the Maharashtra Government under the terms of the MRU Act.
According to the corporate debtor, for a period of one year from 22 July 2016 to 21 July 2017, the affairs of the industrial undertaking shall be conducted to aid as a measure of preventing unemployment. Moreover, it was contended by them that, as a result of the undertaking the rights, privileges, obligations, or liabilities accrued or incurred prior to 22 July 2016 and any remedy for the enforcement of the same shall remain suspended, and all proceedings relating thereto pending before any Court, Tribunal, Officers or Authority shall be stayed, for the said time period. Rejecting the contentions of the corporate debtor, the National Company Law Tribunal (NCLT) admitted the application of the financial creditor and made an order for moratorium and public announcement as necessary under Section 238 of the Code.
On appeal, although the National Company Law Appellate Tribunal (NCLAT) did not disturb the findings of the NCLT, on the point of law, it did not find any repugnancy between the Code and the Maharashtra Act. The Innoventive Industries Ltd., therefore, filed an appeal against the order of the NCLAT.
Issue Raised in Case
- Whether there was any conflict between the Code and the Maharashtra Act?
- What is the scope and extent of enquiry at the admission of an insolvency application?
Contentions/Arguments
The main contentions raised by Innoventive in the appeal against the order of NCLT were:
- The order was passed sans giving notice to Innoventive and was thus violative of the principle of natural justice as provided under Section 424 of the Companies Act, 2013. It was also argued that since NCLT was established under the Companies Act, 2013, it is bound by section 420 of Companies Act, 2013, which mandated ‘reasonable opportunity of being heard’ to be given to the parties before delivering an order.
- It was argued that the provisions of Maharashtra Relief Undertaking (Special Provisions Act, 1958 will prevail over the Code as it was a beneficial piece of legislation.
- It was argued that the financial creditor did not get consent of the Joint Lenders Forum to initiate the proceedings.
The main contentions raised by Respondents were:
- It was argued that the object of this Code is that the needs of all stakeholders, namely owners, borrowers, and employees, should be balanced and that the old notion of sick management, which cannot meet its financial debts, should still continue to be busted in the Code’s management position.
- It was argued that under the Regulation, however, a full suspension is to immediately apply the moment an appeal is accepted by the NCLT, and the company administration is then taken over by a qualified temporary resolution. Obviously, the moratorium under the Maharashtra Act and the management of the State Government cannot stand along with the moratorium levied by the Central Act and the temporary resolution legal control of the administration. Therefore, according to him, no case is settled, and the appeal should be dismissed, both for reasons of sustainability and merits.
Decision of the Apex Court
The Supreme Court dismissed the appeal filed on behalf of Innoventive Industries Limited and confirmed the decision of the National Company Law Appellate Tribunal (NCLAT), which in turn had affirmed the order passed by the National Company Law Tribunal Mumbai (NCLT) admitting the insolvency petition filed by ICICI Bank Limited against Innoventive Industries Limited.
Analysis
Section 7 states about the initiation of corporate insolvency resolution process by financial creditor. As per the amendment, any amount raised from an ‘allottee’ of a ‘real estate project’ shall be deemed to be an amount having the commercial effect of borrowing, and he is a financial creditor under the Section 7 of the IBC.
Section 7 provides that a financial creditor may submit to the Adjudicating Authority, either on their own or jointly with other financial creditors, a request for the initiation of a corporate insolvency resolution process against a corporate debtor when a default occurs.
Explanation.-For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.
(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.
(3) The financial creditor shall, along with the application furnish-
(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;
(b) the name of the resolution professional proposed to act as an interim resolution professional; and
(c) any other information as may be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).
(5) Where the Adjudicating Authority is satisfied that-
(a) a default has occurred and the application under sub-section (2) is complete, and there are no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or
(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application: Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.
(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).
(7) The Adjudicating Authority shall communicate-
(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;
(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, as the case may be.
Sec. 8 of IBC states about insolvency resolution by operational creditor.-
(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.
(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;
(b) the repayment of unpaid operational debt-
(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.
With respect to the first question, the Supreme Court, having regard to Article 254 of the Constitution, delved into case law and procedural rules concerning repugnance between central and state laws. It maintains that the MRUA is repugnant to IBC because under the MRUA, the State Government may take over the management of the undertaking and implement the moratorium in much the same way as the IBC. It held that the plan / scheme that could be enforced under the IBC would be directly impeded and/or obstructed by giving force to the MRUA and that, under the two laws, a direct clash would occur between moratoria. The Supreme Court further held that IBC ‘s non-obstant clause would prevail over the MRUA ‘s non-obstant clause. On the issue of suspension of debt due to the MRUA relief order, it held that no right of the corporate debtor under any other law could be in the way of the IBC due to the non-obstante clause in the IBC.
The Supreme Court contrasted the provisions of the IBC relating to financial and operational creditors applications. It holds that, pursuant to Section 8(1), an operating creditor is required to give a notice of claim on the occasion of a default and, pursuant to Section 8(2), the corporate debtor may carry to the creditor ‘s attention the presence of a dispute or the pending record of a pre-existing suit or arbitration proceeding. The existence of such a dispute will render the operational creditor application inadmissible.
Throughout the light of the nature and duration of the enquiry on the entry of an insolvency applicant, the Court, according to Section 7, considered that, in the case of a corporate debtor that performs a financial debt default, the adjudicating body merely needed to look at the documents of the financial creditor ‘s knowledge value or other facts to convince itself that a default had occurred. Consequently, the purpose of the enquiry before the adjudicating body is limited to reviewing the financial creditor’s documents in order to persuade itself that the default has occurred.
However, Section 7(5) provides that where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority.
While the decision deals mainly with Section 7, the Court also made some remarks regarding Section 8 of the IBC. Importantly, it states that, according to Section 8(2), the corporate debtor may alert the operating creditor of the presence of a conflict or record of the pendency of a suit or arbitration proceedings, and that any conflict must pre-exist, i.e., pre-exist until the corporate debtor receives the notice of claim or receives the invoice. These observations of the Hon’ble Supreme Court may be viewed as a broad affirmation of the NCLAT ruling in Kirusa Software Case where it was held that a ‘dispute’ pursuant to Section 8(2) must not be pending in a suit or arbitration proceeding; however, the same must be ‘pending’ and cannot be raised by the corporate debtor for the first time while it is pending.
The Court also makes certain observations on Section 8 of the IBC. Importantly, it states that, according to section 8(2), the corporate debtor may inform the operating creditor of the presence of a conflict or record of the pendency of a claim or arbitration proceedings, and that any conflict must pre-exist, i.e., pre-exist until the corporate debtor receives a notice of demand or receives an invoice.
Conclusion
The decision is, therefore, genuinely positive, forward-looking, and ground changing, and will pave the way for the efficient and successful application of the Insolvency Code by adhering to the deadlines laid out in the Insolvency Code and pace of the resolution process. The judgment accepts that the Code brought about a fundamental change in law and economic policy.
References:
[1] Innoventive Industries Ltd v. ICICI Bank Ltd (2018) 1 SCC 407 (India).
