JUDICIAL CONSTRUCTION OF INSOLVENCY AND BANKRUPTCY CODE

20161

CHAPTER I: INTRODUCTION
The insolvency laws iin India have evolved over the years just like every other law in the
world. The changing needs of the economy and sectors involved lled to such changes.
The recent major change was brought iin the form of the INSOLVENCY AND
BANKRUPTCY CODE 2016 which rrepealed all the earlier existing legislations and
provisions with respect tto the INSOLVENCY & BANKRUPTCY.
As soon as the legislature comes into force usually it is seen that a conflict arises
regarding tthe violation of any provision of the Act. But there are times when there is the
need for interpreting certain part of the Act before reaching to a decision. So we can say
that the rrole of judiciary starts with respect to its interpretation as soon as legislation is
enacted. The words used in any enactment, has to be construed with the objective of the
enactmentt and therefore minor words which do not seem to be of much importance are
often put before courts for proper interpretation.
The Insolvency and Bankruptcy Code (IBC), 2016 has been enacted to merge the current
laws relating to bankruptcy and insolvency. Bankruptcy is a state in which financial
troubles off an organization are such it can't maintain its business at its present pace.
Bankruptcyy is the status of a man who is legitimately announced as incapable for paying
their obligations and dues The Code plans to smoothen the procedure and to make it clear
and certain. The IBC includes standard steps which is suitable and justifiable. In this way,
everybody, be it creditors, debtors, organizations, or investors etc. shall have a standard
performm for any issues relating with insolvency.
Introduction of Insolvency and Bankruptcy Code 2016 (hereinafter referred to as IB Code
2016) iss welcome advance and need of an hour being a part of simplicity of doing
business iin India. It will boost up extensive winding up process and diminish the time
and good alternative option in the event that business couldn't get achievement. In present
situation, winding up of a Company is beside difficult and took 10-15 years time and still

1
Mayuri Agarwal, 5th year, BCOM LLB (H), Amity Law School, Noida

1
 the Company couldn't be disintegrated and during this long period of time no one for all
intents and purposes could get anything, the asset lost its importance and regardless of
whether ssomething is understood the secured creditor gets something and unsecured
creditors, employees of company and others get nothing.

There are nnumerous laws and options are accessible with the lender but because of lot of
lawful issues and lack of regulatory machinery and execution, winding up of corporate
isn't an ssuccess in India. Under the arrangements of Companies Act, 1956 procedure is
long andd time consuming and not fruitful due to piling of winding up cases with the
Official Liquidator. Sick Industrial Companies Act is additionally disappointment
because of its slow administration and non restoration of industries.2
In Debt Recovery Tribunals, because of high number of cases heap up in Courts, justice
is ppostponed. The provisions of SARFAESI are strict and draconian in nature yet the
lender are not frequently again utilizing the provisions to acquire the assets of the
borrower. Further, the unsecured can't approach SARFAESI.3

2
Companies Act, 1956
3
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002

2
 Chapter II: KEY HIGHLIGHTS

1. Corporate Debtors: Two-Stage Process

To start an insolvency procedure for corporate debtors, the default ought to be in any
event INR 100,000 (USD 1495) (which thee limit might be expanded up to INR
10,000,000 (USD 149,500) by the Government). The Code proposes two free stages:

Insolvency Resolution Process, during which ffinancial creditors assess whether the
debtor's business is viable to proceed and tthe alternatives for its safeguard and
recovery; and

Liquidation, if the above process (i.e. iinsolvency resolution process) fails or financial
creditors decide for winding down aand to distribute the assets of the debtor.

(a) The Insolvency Resolution Process (IRP)

The IRP gives a collective instrument to moneylenders to deal with the overall troubled
position of a corporate debtor. This is aa critical takeoff from the existing legal
framework under which the primary onus to start a reorganization procedure lies with the
debtors, and lenders may pursue distinctt actions for recovery, security enforcement and
restructuring. 4

The Code conceives the following stepss in the IRP:

(I) Commencement of the IRP

A financial creditor (for aa defaulted monetary obligation) or an operational

lender (for an unpaid operational obligation) can start an IRP against a corporate
indebted person at the National Company Law Tribunal (NCLT).

4
Section 7, Insolvency and Bankruptcy Code, 2016

3
 The defaulting corporate debtor, its investors or representatives, may likewise initiate
voluntary insolvency proceedings.

(ii) Moratorium

The NCLT orders a moratorium onn the debtor's activities for the time period of the IRP.
This works as a 'quiet period' during which no legal procedures for recovery,
implementation of security interest, sale or transfer of assets, or end of fundamental
contracts can occur against thee debtor.

(iii) Appointment of Resolution Professional

The NCLT appoints an iinsolvency expert or 'Resolution Professional' to manage the IRP.
The Resolution Professional's primary function is to take control over the administration
off the corporate borrower and operates its business as a going concern under the broad
directions of a committee of creditors. This is like the methodology uunder the UK
insolvency laws, but different from the "debtor in possession" approach under Chapter 11
of the US bankruptcy code. Under the US bankruptcy code, the idebtor's management
retains control while the insolvency professional only oversees thei business keeping in
order to prevent asset stripping on the part of the promoters. 5

Therefore, the Code’s thrust is allowing a shift of control from the defaulting debtor's
management to its creditors, where the creditors drive the businessi of the debtor with the
Resolution Professional acting as their agent.

(iv) Creditors Committee and Revival Plan

The Resolution Professional identifies the creditors andi constitutes a creditors

committee. Operational creditors above a certain threshold are allowed to attend meetings
of the committee but do not having voting power. Every decision of the creditors

5
Chapter 11 of the US bankruptcy code

4
committee requires a majority voting of 75%. Decisions of the creditors committee are
mandatory to followed by the corporate debtor and all its creditorss (i.e. binding in
nature).

The creditors committee considers recommendations for the revival of the debtor and
must choose whether to continue with a revival plans or liquidation within a time of 180
days (subject to ai one-time expansion by 90 days). Anybody can present a revival
proposition, but it must necessarily provide for payment of operational debts to the
degree of the liquidation cascade.

The Code does noti expand on the kinds of revival plans that might be adopted, which
may include Fresh finance, sale of assets, hair styles, change of administration and so on.

(b) Liquidation

Under the Code, a icorporate debtor might be put into liquidation in the accompanying
situations:

(I) A 75% majority iof the creditor's committee resolves to sell the corporate debtor at
any time during the insolvency resolution process;

(ii) The creditor's icommittee does not approves a resolution plan inside 180 days (or
within the extended 90 days);

(iii) The NCLT rejects the resolutiion plan submitted to it on technical grounds; or

(iv) The debtor icontradicts the agreed resolution plan and an affected individual makes
an application to the NCLT to liquidate the corporate debtor.

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Once the NCLT ipasses a order of liquidation, a moratorium is imposed on the pending
legal proceedings against the corporate debtor, and the assets of the debtor (including the
proceeds of liquidation) vest in the liquidation domain.
Need of Claims

The Code ialtogether changes the need waterfall for distribution of liquidation continues.

After the expenses of insolvency resolution (includes any interim finance), secured debt
together with workmen dues for the preceding two years rank most elevated iin priority.
Central and state Government dues remain beneath the claims of creditors, iworkmen
dues, employee dues and other unsecured financial creditors. Under the earlier
administration, Government levy were instantly beneath the claims of isecured creditors
and workmen in order of need.

Upon liquidation, a secured creditor may understand his security and iget proceeds from
the sale of the secured assets in first priority. In the event that the secured creditor
enforces his claims outside the liquidation, he should contribute any iabundance proceeds
to the liquidation trust. Further, in the event of any shortage in recovery, the secured
creditors will be junior to the unsecured creditors to the degree of the shortfall.

2. Insolvency Resolution Process for Individuals/Unlimited Partnerships

For persons and unlimited partnerships, the Code applies in all isituations where the base
default sum is INR 1000 (USD 15) and more (the Government imay later modify the base
amount of default to a higher limit). The Code visualizes two distinct procedures if there
should be an occurrence of insolvencies: automatic new beginning and insolvency
resolution.

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 Under the automatic new beginning procedure, qualified idebtors (basis gross income)
can apply to the Debt Recovery Tribunal (DRT) for release from specific obligations not
exceeding a specified limit, enabling them to begin once iagain6.

The insolvency resolution process comprises of iplanning of a repayment plan by the

debtor, for approval of creditors. Whenever approved, the DRT passes an order binding
the debtor and creditors to the repayment plan. iIn the event that the arrangement is
dismissed or fails, the debtor or creditors may apply for a bankruptcy order.7

6
The Recovery of Debt Due to Banks and Financial Institution Act, 1993
7
Insolvency and Bankruptcy Code, 2016

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8
CHAPTER III: INTERNATIONAL PERSPECTIVE

Nowadays, municipal laws are framed keeping iin mind the views of the International
bodies to promote cooperation and promotes igood relations among states. International
bodies not only include the states but ialso the International organizations, non-
governmental organizations or any other ientity considered as international body by the
states. International bodies such as isuch United Nations or WTO are the biggest
International Organizations having ialmost all nations as there members and therefore
there laws and views are considered as principles which are taken into account while
framing of laws.

Articles 51 of the Constitution of India provide a ray of hope for saving the world from
the impending nuclear iand environmental catastrophe. It reads as follows:

“There should be Promotion of international peace and security” and the State shall
endeavour to

(a) promote international peace and security;

(b) maintain just and honourable relations between nations;

(c) Promote respect ifor international law and obligations of treaty in the dealings of
organised peoples iwith one another; and encourage settlement of international disputes
by arbitration PART IVA FUNDAMENTAL DUTIES”8

And for the same ireasons while deciding the matter, the bench had the following view9:

“Before going into the contentions of fact and law argued by both counsel, it is a little
important to itrace the background of this path-breaking legislation viz. ithe Insolvency
and Bankruptcy Code, 2016.” The starting point is the UN General Assembly’s
Resolution, Resolution No.59/40, passed on 2nd December, 2004, by iwhich it was
stated:

8
Article 51 of The Indian Constitution
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“Legislative Guide on Insolvency Law iof the United Nations Commission on
International Trade Law The General iAssembly, Recognizing the importance to all
countries of strong, effective and iefficient insolvency regimes as a means of encouraging
economic development and iinvestment, Noting the growing realization that
reorganization regimes are critical to corporate and economic recovery, the development
of entrepreneurial activity, the ipreservation of employment and the availability of
finance in the capital market, Noting also the importance of social policy issues to the
design of an insolvency regime, Noting the satisfaction of the acceptance and adoption of
the Legislative Guide on kInsolvency and Bankruptcy Law of the United Nations
10
Commission on International Trade Law by the Commission at its thirty-seventh
session, on 25 June 2004, iBelieving that the Legislative Guide includes the text of the
Model Law on Cross-Border Insolvency and Guide to Enactment recommended by the
General Assembly in its iresolution 52/158 of December 15 in year 1997, contributes
significantly in the establishment of a harmonized legal framework for insolvency laws
and will be useful both toi States that do not have an effective and efficient insolvency
regime and to States that are undertaking a process of review and modernization of their
insolvency regimes, iRecognizing the need for cooperation and coordination between
international organizations active in the field of insolvency law reform to ensure
consistency and ialignment of that work and to facilitate the development of international
standards, Noting that the preparation of the Legislative Guide was the subject of due
deliberations iand large consultations with Governments and international
intergovernmental and non-governmental organizations active in the field of insolvency
law reform,

1. Expresses iits appreciation to the United Nations Commission on International Trade

Law for the accomplishment and adoption of its Legislative Guide on Insolvency Law;

2. Requests ithe General-Secretary to publish the Legislative Guide and to make all
efforts to ensure that it becomes generally known and available;

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 3. Recommends that all States give due consideration to the Legislative Guide when
assessing ithe economic efficiency of their insolvency regimes and when revising or
adopting legislation relevant to insolvency;

4. Recommends that all States continue to consider implementation of the Model iLaw on
Cross-Border Insolvency of the United Nations Commission on International Trade
Law.”

5. The purpose of the Legislative Guide for various nations was stated as ifollows:

“The aim of the Legislative Guide on Insolvency Law is to assist the iestablishment of an
efficient and effective legal framework to address the financial idifficulty of debtors. It is
intended to be used as a guide by national authorities and ibodies of legislatives when
preparing new laws and regulations or reviewing the adequacy of existing laws and
regulations. The advice provided in the Guide of the ilegislative aims at achieving a
balance between the need to address the debtor’s financial difficulty as quickly and
efficiently as possible and the interests of the various iparties directly concerned with that
financial difficulty, principal creditors and other parties with a stake in the debtor’s
business, as well as with public policy concerns.11 The Guide tells about issues central to
the design of an effective and efficient iinsolvency law, which, despite numerous
differences in policy and legislative treatment, are recognized in many legal systems. It
focuses on insolvency proceedings commenced under the insolvency law and conducted
in accordance with that law, with an iemphasis on reorganization, against a debtor,
whether a legal or natural person, that is engaged in economic activity. Matters specific to
the insolvency of persons not so engaged, such as consumers, are not addressed.” In
stating some of the key objectives iof effective and efficient insolvency law, the
Legislative Guide goes on to state:

“When a debtor is not capable to pay iits debts and other liabilities as they become due,
most legal systems provide a legal mechanism to address the collective satisfaction of the
claims outstanding from assets i(whether tangible or intangible) of the debtor. A series of

11
Insolvency and Bankruptcy Code, 2016

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interests needs to be accommodated by that law mechanism: those of the parties affected
by the proceedings including ithe debtor, the owners and management of the debtor, the
secured creditors to varying idegrees (including tax agencies and other government
creditors), employees, guarantors of debt and suppliers of goods and services, as well as
the commercial, social and legal institutions and practices that are relevant to the design
of the insolvency law and irequired for its operation. Generally, the system must strike a
balance not only between ithe different interests of these stakeholders, but also between
these interests and the relevant social, political and other policy rules that have an effect
on the economic and legal igoals of insolvency proceedings.”12

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CHAPTER IV: INDIAN PERSPECTIVE

India's majority rule igovernment deals with three organs, in particular the legislative, the
judiciary and the executive. All these are the principle working organs of the
administration and ithey don't meddle in the working of one another somewhat they are a
greater amount of complimentary to one another. They additionally keep an eye on one
another's working.

The task of the ilegislature is to frame laws in confirmation of the constitution which is
considered as ithe law of the land. The responsibility of executive is to execute the laws
enforced and perform the task and obligations which is obligated to be performed by
them as per ivarious laws framed by the legislature. The judiciary is considered as one the
most important organ of the democracy as it interprets the laws framed and helps in its
implementation with the help of the executive.

All the ithree organs have played there assigned role in the case of defamation. The
legislature has considered as both civil and icriminal wrong and has passed legislation for
the same. The executive, on receipt of iany complaint regarding defamation, takes such
actions as necessary and reports the matter to the magistrate as required by law. The
judiciary, then on being satisfied orders isuch decision as is in interest of the justice.

The civil remedy for a suit of defamation is covered under Law of Torts. In civil
defamation, a victim can move high icourt or subordinate courts for seeking damages in
the form of monetary compensationi from accused. For better understanding and to
answer whether defamation should bei struck off or not and to analyze the views of the
organs.

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 A. LEGISLATURE’S PERSPECTIVE

The legislature recently made imajor changes in the insolvency and bankruptcy laws
prevailing by enacting a specific legislation for the subject, i.e. the Insolvency and
Bankruptcy Code 2016.13

History of IBC

The legislative history of ilegislation relating to indebtedness goes back to the year 1964
when the 24th Law Commission recommended amendments to the Provincial iInsolvency
Act of 1920. This was followed by the Tiwari Committee of 1981, which iintroduced
the Sick Industrial Companies Act, 1985. Following economic liberalization ini the
1990s, two Narsimham Committee reports led to the Recovery of Debts and Bankruptcy
Act, 1993 and the SARFAESI Act, 2002. Meanwhile, the Goswami Committee Report,
submitted in 1993, condemned the liquidation procedure prescribed by the iCompanies
Act, 1956 as unworkable and being beset with delays at all levels – delaying tactics
employed by the management, delays at the level of the Courts, delays in idetermination
that the commencement standard has been met may involve consideration of whether the
debt is subject to a legal dispute or offset in an amount which is equal to ior greater than
the amount of the debt. The existence of such a set-off may be a ground ifor dismissal of
the application making auction sales etc. This then led to the Eradi Committee Report of
1999, which proposed amendments to the Companies Act and proposed the repeal of
SICA. This Committee echoed the findings of the Goswami iCommittee and
recommended an overhaul of the liquidation procedure under the Companies Act.

It was for the first time, in 2001, that the L.N. Mitra Committee of thei RBI proposed a
comprehensive Bankruptcy Code. This was followed by the Irani Committee Report, also
of the RBI in 2005, which noted that the liquidation procedure ini India is costly,
inordinately lengthy and results in almost complete erosion of iasset value. The
Committee also noted that the insolvency framework did not balance stakeholders’
interests adequately. It proposed a number of changes including ichanges for increased

13
Insolvency and Bankruptcy Code, 2016

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 protection of creditors’ rights, maximization of asset value and better management of the
company in liquidation. In 2008, the Raghuram Rajan iCommittee of the Planning
Commission proposed improvement to the credit infrastructure in the country, and finally
a Committee of Financial Sector Legislative Reforms in i2013 submitted a draft Indian
Financial Code, which included a “resolution corporation” for resolving distressed
financial firms.

All this then led to the Bankruptcy Law Reforms iCommittee, set up by the Department
of Economic Affairs, Ministry iof Finance, under the Chairmanship of Shri
T.K.Viswanathan. This Committee isubmitted an interim report in February 2015 and a
final report in November of the same year. It was, as a result of the deliberations of this
Committee, that the present Insolvency and Bankruptcy Code of 2016 was finally born.

Objective of the insolvency law

The Code intends to achieve these objectives such as to consolidate and amend the laws
relating to reorganization and iinsolvency resolution of corporate persons, partnership
firms and individuals in a itime bound manner, to promote entrepreneurship and
availability of credit and to improve the ease of doing business and facilitate more
investments leading to higher ieconomic development.
The Insolvency and Bankruptcy Code, 2016, in its brief history has created quite a shake-
up in the corporate sector. iNo doubt that the enactment of the Code has been well
intentioned. Due to the growing menace of loan defaults, it had long been felt to have
some sort of disciplined iinsolvency and bankruptcy legislation to address this loan
default issue, the problem which most of the banks are plagued with. The code has led to
filing of various cases in thei tribunal as a result of dispute between the parties.14

14
Insolvency and Bankruptcy Code, 2016

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 Chapter V: BRIEF HISTORY LEADING TO THE CASE15

The corporate insolvency iresolution provisions of the Insolvency and Bankruptcy Code,
2016 (IBC) came into iforce on December 1, 2016. After a period of Nine months later,
the Supreme Court hasi passed a detailed judgment in the matter of M/s Innoventive
Industries Ltd. vs. ICICI Bank16 noting that the paradigm shift in law which was
brought about by the iIBC and putting to rest certain interpretational issues that had
arisen thereunder.

The ruling has its igenesis in an application filed by ICICI Bank Limited (ICICI) before
the National Company Law Tribunal, Mumbai (NCLT) to initiate corporate insolvency
resolution processi (CIRP) of Innoventive Industries Limited (Innoventive). Interestingly
this was the first application filed under the IBC and has seen some twists and turns in its
journey.

The application iunder the Insolvency and bankruptcy code was filed by ICICI as a
financial creditor iof Innoventive, under Section 7 of the IBC17, on account of default
made by Innoventive in non-payment of amounts which was due under certain credit
facilities which iwas availed from ICICI.

It was inter alia iargued by Innoventive that as its liabilities stood suspended pursuant to a
relief order ipassed by the Government of Maharashtra under the Maharashtra
Relief Undertaking (Special Provisions Act) 1958 (MRUA)18 no amounts were due
and payable iby it to ICICI and hence, Section 7 application cannot be admitted.

15
Finally, Supreme Court on IBC – Innoventive v. ICICI,by Pooja Mahajan, Availavle at:

https://barandbench.com/supreme-court-ibc-innoventive-vs-icici last visited on: 19.09.2018

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AIR2017SC 4084
17
Section 7 of IBC Act
18
Government of Maharashtra under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA)

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Rejecting the argument inter alia on the basis that the IBC had an overriding effect over
the MRUA, iNCLT admitted ICICI’s application, declared moratorium and appointed an
Interim Resolution Professional (IRP).

The NCLT iorder was challenged by Innoventive before the National Company Law
Appellate Tribunal (NCLAT). In a similar order passed by NCLT, it dismissed the appeal
holding that iwhile deciding Section 7 applications, NCLAT is only to look at Section 7
ingredients– i.e. presence of debt and default, CIRP application being complete and no
disciplinary iproceedings being pending against the IRP. It was also held that there is no
repugnancy ibetween IBC and MRUA as they both are operating in different fields.
However, since IBC has an overriding effect, it shall prevail over the provisions of
MRUA.

Against the iorder of NCLAT, an appeal was filed before the Hon’ble Supreme Court by
Innoventive. iOne of the preliminary issues addressed by the Supreme Court was whether
the appeal is imaintainable as it had been filed by the erstwhile directors (in the name of
Innoventive). iThe Supreme Court held that once an IRP is appointed to manage the
company, the ierstwhile directors, who are no longer in the management, cannot maintain
the appeal on company’s behalf – and since in the present case, Innoventive was the sole
applicant – thei appeal was not maintainable.

Interestingly, the Supreme Court refused to dismiss the appeal on this score alone, noting
that it is idelivering a detailed judgment so that all courts and tribunals may take notice of
the paradigm shift in the law.

After ianalysing major sections of the Code and the matters of issues under which
insolvency proceedings can trigger, the court proceeded on capturing what amounts to the
irepugnancy under Article 254 of the Constitution of India, 1950, analysing hitherto
judgments dealing with repugnancy. So at last Finally, after analysing the provisions of
the Maharashtra Relief Undertakings (Special Provisions Act), 1958, and the I&B Code,

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 the court declared that the parliamentary enactment viz, the I&B Code will rule over the
iMaharashtra Relief Undertakings (Special Provisions Act ), 1958.19

iAs a result of it, the appeal was come to be rejected, and this judgment is a major legal
step in insulating insolvency proceedings from the test of repugnancy.

19
Article 254 of the Constitution of India, 1950

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 CHAPTER VI: CASE STUDY ON INNOVENTIVE INDUSTRIES Ltd. V. ICICI
BANK & ANR.20

HON'BLE JUDGES / CORAM:

JUSTICE Rohinton Fali Nariman

JUSTICE Sanjay Kishan Kaul

ISSUES

The broad issues were:

(i) what is the meaning of default under the Insolvency Code and how it can be
ascertained

(ii) what is the extent and scope of enquiry at the time of admission of a insolvency
application;

(iii) consequently what are the chances of hearing to be provided to a corporate debtor;
and

(iv) whether the protection granted under the Maharashtra Relief Undertaking Act (MRU
Act) renders an application under the Insolvency Code not maintainable.

The two major questions before the Court were:

 whether the petitioner can seek relief under the Maharashtra Act at the cost of the Code.
 whether both the laws are repugnant to each other.

The court naturally went into elaborate details of constitutional law to answer the second
question.

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AIR2017SC 4084

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 METHODOLOGY ADOPTED BY THE SUPREME COURT OF INDIA

Indeed, even iin the wake of presuming that the interest documented for the sake of the
Innoventive iIndustries Limited by its previous executive after the bankruptcy goals
proficient that been selected to deal with the organization, isn't viable in the underlying
piece of thei judgment itself, the Supreme Court still continued to analyze the
administrativei history and the plan of the Insolvency Code in detail and held that
adherence to icourses of events determined in the Insolvency Code and speed of the goals
procedure are basic to the viability of the Insolvency Code.

In the wake of contrasting the arrangements of the predominant indebtedness laws in UK

and US, the iCourt arrived at the end that UK Law viz. the Insolvency Act of 1986 has
filled in as ai model for Insolvency Code. The Court noticed that the vital distinction
between thei US Law and UK Law is that whist the indebted person stayed under lock
and key iin the previous under the last the account holder cleared a path for a head once
bankruptcy was started.21

While discussing and determining the above issues, the Supreme Court observed 22:

i. Insolvency Code brings a paradigm shift in law including a need to removei the
management of a corporate debtor which defaults on its debts. Thus, entire managements
are no longer allowed to continue in case of non-payment of debts.
ii. The concept of default under the Insolvency Code is very wide. It is simply a inon-
payment of debt when the same (i.e. debt) becomes due and which includes inon-
payment of even a part thereof. Even non-payment of a disputed financial debt wheni due
payment would constitute a default under the Code. In other words, as long asi the
payment (i.e. debt) is not paid it does not matter if the same is disputed.
iii. The Court noticed that the difference in the scheme of initiation of insolvency
proceedings at the instance of a financial creditor (under Section 7) and by an
21
the Insolvency Act of 1986
22
Available at, https://corporate.cyrilamarchandblogs.com/2017/09/innoventive-industries-limited-v-icici-bank-
limited-paradigm-shift-insolvency-law-india/. Last visited on 10.09.2018

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 ioperational creditor (under Section 8) of the Insolvency Code. Under Section 7 of the
Insolvency and Bankruptcy Code, 2016 the Court found that, in the case of a corporate
idebtor who commits a default of a financial debt, the adjudicating authority has merely
to see the information records utility or other evidences which are produced by the
ifinancial creditor to satisfy itself that a default has occurred. The scope of enquiry
infront of the adjudicating authority is therefore restricted to assessing the records
provided by the financial creditor to satisfy itself that the default has occurred.23
iv. It is of no matter that the debt is disputed so long as the debt is “due” i.e. it is payable
iunless it is directed by some law for non-payment of the same or has not yet become due
iin the sense that it is payable at some future date. It is only possible when this is proved
to the satisfaction of the adjudicating authority that the adjudicating authority can reject
an application and not otherwise. The adjudicating authority may therefore can only
dismiss an application on a defence taken by the corporate debtor that the debt was not
due and not otherwise.
v. Whilst noticing the provisions of the Section 7 of the Insolvency Code, the Court found
ithat “The speed, within which the adjudicating authority is to ascertain the existence of a
default from the information records utility or on the basis of evidence furnished by the
ifinancial creditor, is important. This should be done within 14 days of the receipt of the
application.
vi. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a
idefault has occurred, that the corporate debtor is entitled to point out that a default has
not happened in the sense that the “debt”, which may also include a disputed claim, is not
due. A debt cannot be due if it is not payable iin fact or in law. The moment the
adjudicating authority is of the view that a default ihas occurred, the application must be
admitted unless it is incomplete, in which case iti may give notice to the applicant to
correct (i.e. ractify) the defect within 7 days of receipt of a notice from the adjudicating
authority.”24
vii. After noticing the scheme of the Insolvency iCode in detail, the Court found that the
scheme of the Insolvency Code, therefore, is toi make an attempt, by divesting the entire

23
Section 8, of the Insolvency Code
24
Section 7(5) of IBC CODE

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 management of its powers and vesting its powers in a professional agency, to continue
the business of the corporate body as a going iconcern until a resolution plan is drawn up,
in which situation the management is handed iover to a professional agency under the
plan so that the corporate body is able to pay back its debts and get back on its feet. All
this is to be done within a period of six months ior with a maximum extension of another
Ninety days (i.e. another three months) or ielse the chopper comes down and the
liquidation process begins.
viii. On the question of whether both the NCLT and NCLAT had erred in refusing to go into
the other contention of Innoventive that it was ibecause the creditors did not disburse the
payments under the MRA that Innoventive was iincapable to pay its dues (i.e.
outstanding liability), the Court held that the NCLT and the NCLAT were right in there
decision into this case (i.e. dispute) for the very ivalid reason, first that the period of
Fourteen days within which the application is to be decided was long over by the time the
second application was made before the NCLT and ithe application clearly shows to be
an after-thought for the reason that the corporate idebtor was fully aware of the fact that
the MRA had failed and it can easily pointed out these facts in the first application itself.
ix. The Court said that even otherwise, it was satisfied that the obligations of the corporate
debtor under MRA were unconditional and did inot depend upon infusing of funds by the
creditors into the appellant company.
x. On the aspect of whether the provisions of the MRU Act will prevail over the provisions
of the Insolvency Code, the Court held that iMRU Act operates in the same field as that
of the Insolvency Code and is repugnant to Insolvency Code and that the IBC non-
obstante clause (Section 238) of the iParliamentary enactment (Insolvency Code) will
also prevail above the limited non-obstante clause which is contained in Section 4 of the
Maharashtra Act.

The judgment recognizes that the iInsolvency Code has brought down a paradigm shift in
law and policy of economic. The ijudgment looks like truly progressive, advanced
looking and path breaking and should pave the way of efficient and effective
implementation of the Insolvency Code through adherence to the timelines specified
under the Insolvency Code and the irate of speed of the resolution process.

22
Key Takeaways

The Supreme Court ruling reinforces the primacy being accorded to the IBC by various
stakeholders, including ithe government and the Reserve Bank of India While the
NCLAT had already iopined on principles of Section 7 (which have been upheld), there
are some new principles laid down by the Supreme Court which merit attention.

Supreme Court has iopined that Section 7 application can be filed by a financial creditor
for default on another financial debt. So far, such cases have not been filed in NCLTs.
Given the imoratorium on recovery actions, so long as a financial creditor is being paid
on time, ithere is no incentive for such creditor to file for CIRP on account of default of
another ifinancial debt. The incentive would only come if its debt is due later but the
creditor ifears that the company will not be able to service the debt when the time comes.
It remains to be seen whether the Supreme Court ruling will give rise to increased
applications by financial creditors for default on another’s debt.

On account of Court’s finding that the erstwhile directors icannot maintain an appeal on
behalf of the company, appeals against admission orders iof the NCLT will now need to
be filed by the erstwhile management in their individual capacity (as shareholders or
erstwhile management, aggrieved with the order). One iinteresting question that is likely
to come up in coming weeks is the fate of existing appeals before the NCLAT and even
decided applications where appeals have been filed by the erstwhile directors or
promoters in the name of the company.

While the ruling primarily deals with Section 7, the Court also makes certain
observations on Section 8 of the IBC. Importantly, iit observes that under Section 8 (2),
the corporate debtor can bring to the notice of ithe operational creditor the existence of a
dispute or the record of the pendency of a suit or arbitration proceedings and that such
dispute must be pre-existing, i.e. existing ibefore receipt of demand notice or invoice by
the corporate debtor. These observations ofi the Hon’ble Supreme Court can be viewed as
a broad affirmation of the NCLAT ruling iin Kirusa Software Private Limited vs.
Mobilox Innovations Private Limited iin which NCLAT held that a ‘dispute’ under
Section 8 (2) need not be pending iin a suit or arbitration proceeding; however, the same

23
 must be ‘pending’ and cannot ibe raised for the first time by the corporate debtor while
replying to a demand notice.25

Lastly, interestingly the Court iholds that debt may not be due if it is not payable in law
or in fact and that debt is “due” i.e. payable unless interdicted by some law or has not yet
become due in the sense that it iis payable at some future date. However, at the same
time, it rejected the argument of iInnoventive on its debt being suspended as per MRUA
on the basis that any right of the corporate debtor under any other law cannot come in the
way of the IBC on account of ithe wide non-obstante clause in the IBC.

DOCTRINE OF REPUNGNANCY EXAMINED

Apart from certain iissues related to corporate law, the Court heavily dealt with the
classical iconstitutional law doctrine of repugnancy.

This doctrine stems from the operation of Article 254 of the Constitution. As per this
doctrine, whenever central and state laws iare framed on the same subject and are
contradictory to each other, it is the centrali law which prevails and the state law is
rendered void.26

In the scheme of the Indian Constitution, iboth Central and State Governments are free to
make laws on matters mentioned in the Concurrent List of the 7th Schedule of the
Constitution. A plain reading of Article 254 gives an impression that if both central and
state governments frame laws on a same entry under the concurrent list, only then the
Central law will prevail.

25
Section 8 (2) of IBC CODE
26
Article 254 of the Constitution of India.

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 CHAPTER VII: PRINCIPLES LAID DOWN IN INNOVENTIVE VS ICICI

The Supreme Court undertook an in-depth examination of IBC provisions dealing with
corporate insolvency resolution and inter alia laid down the following principles:

On Section 7

Supreme Court held that for explaining ithe meaning of Section 7 (1) of the IBC, a
default could be in respect of default of financial debt owed to any financial creditor of
the corporate debtor it need not be a debt owed to the applicant financial creditor.27

The Supreme Court contrasted the provisions of the IBC which are related to applications
made by financial and operational icreditors. It held that under Section 8(1), an
operational creditor has been required ito deliver a demand notice on the arising of the
event of a default and under Section 8(2), the corporate debtor can bring to the notice of
the creditor, presence of a dispute or ithe record of pendency of a suit or proceedings of
arbitration, which is pre-existing. Existence of such dispute will result the application of
operational creditor inadmissible.28

On the other side, under Section 7 of iInsolvency and Bankruptcy Code, 2016, the point
at which NCLT is satisfied that a idefault has occurred, the application of the financial
creditor must be admitted (unless it is incomplete). The corporate debtor is authorised to
point out that a default has not arised in the sense that the “debt”, which may also include
a disputed claim, is not due. A debt cannot be made due if it is not payable in law or in
fact. Supreme Court held that it is iof no importance that the debt which is disputed so
long as the debt is “due” i.e. payable unless interfered by some law or has not yet become
due in the sense that it is payable at some future date.

27
Section 7 (1) of the IBC
28
Section 8(2)of IBC

25
 On repugnancy

The Supreme Court delved into icase law and constitutional principles surrounding
repugnancy between Central and iState laws in the context of Article 254 of the
Constitution. It held that the MRUAi is in conflict to IBC as under the MRUA, the State
Government may take over the management of the undertaking and impose moratorium
in the same manner as just like in ithe IBC. It held that by effecting the MRUA, the
scheme which may be adopted underi the IBC will directly be obstructed and/or hindered
and that there would be direct conflicti between moratoriums under the two statutes.29

Supreme Court further held that the inon-obstante clause of IBC will prevail above the
non-obstante clause in the MRUA. Oni the matter of suspension of debt on account of the
relief order which is granted under the iMRUA, it held that on account of the non-
obstante clause in the IBC, any other iright of the corporate debtor under any other
existing law cannot come in the way of the IBC.

29
Article 254 of Constitution of India

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 CONCLUSION

Law is evolving in nature. Judiciary is one of the organs of the government which has the
power to interpret the law which is made by the legislature.

One such instance of interpretation of judiciary can be observed in the case of

INNOVENTIVE INDUSTRIES Ltd. V. ICICI BANK & Anr30., whereby judiciary
interprets the provisions of IBC, 2016 just after its enactment.

The interpretation of words sometimes seems to be unimportant but plays an important

role and has a great importance during interpretation. One such instance has been
observed in this case where the word “default” was interpreted under the IBC, 2016.

If there is any need of interpretation, which arises in future then Judiciary is always there
for solving such problems.

This case was the first case filed under the IBC, 2016. Through this case we understood
the real or the true objective of the Insolvency and Bankruptcy Code, 2016.

The appeal of this case was filed in the Supreme Court, which must be dismissed but
Hon’ble Supreme Court held that the IBC code was recently enacted and the
interpretation of IBC was necessary at the time when this case was appealed in the
Supreme Court.

30
AIR2017SC 4084

27